How to pay for a Minimum Income Guarantee

Conclusions and recommendations

In this report we have outlined a wide range of options that would be available for revenue-raising across different stages of a MIG, as well as providing detailed assessments of some scenarios that would most likely form key components of additional funding for a MIG. We have contextualised this within both the current Scottish fiscal positions, and how the UK compares internationally on revenue-raising.

From this analysis, we make 10 conclusions with a series of recommendations the Expert Group could consider when setting out the shorter and longer term revenue-raising options to pay for a MIG:

1. There are options open to the Scottish Government to increase available additional revenue without needing to increase tax rates. One possible way is Scotland to receive an increase in the Block Grant and/or for Scotland’s tax revenue per capita to increase relative to the rest of the UK. This change to the fiscal framework could help increase the spending capacity of the Scottish Government. In addition, ensuring that the introduction of a MIG can help support wider economic growth could help to organically grow existing tax receipts. However, changes to the fiscal framework or greater economic growth are unlikely to generate the additional revenue needed to fund the longer-term ambitions of a MIG.

2. The starting point is to recognise that a MIG in Scotland is a policy ambition with a long-term trajectory. This will most likely require a significant increase in revenue to fund aspects of the MIG. As a MIG develops over the long term, its objectives will require an expansion of the powers the Scottish Government has to raise revenue. A clear assessment of the scale of this will be required. The taxes with the broadest base generally raise the largest amounts, yet most of these (VAT, NICs and excise duties) would require significant devolution of powers.

3. Within the shorter term, the focus should be on what is possible before a significant devolution in tax powers is needed. As our modelling shows, making changes to Scottish Income Tax and council tax with existing powers could raise significant additional revenue. However, despite the possibility of raising additional revenue through these taxes quickly, there are short-term politically difficulties around these options, with the 2024 Scottish Government Tax Strategy committing to no major changes to Scottish Income Tax until at least May 2026.^[233]

4. The scenarios we have modelled will make a significant contribution to the revenue-raising estimates the Expert Group have provided for a MIG. Across all stages, the lower revenue-raising estimates are exceeded by the scenarios we modelled. This is also the case for the upper revenue-raising estimate at Stage 2, largely as a result of the significant revenue expected via our modelled reduction in the Scottish Income Tax personal allowance. At Stage 1, introducing our modelled changes to Scottish Income Tax and council tax using powers the Scottish Government already has would contribute more than 80% of the Stage 1 upper revenue-raising estimate. In the longer term, our modelled scenarios suggest the Scottish Government could raise around two-thirds (64%) of the £10bn upper estimate to implement a ‘full’ MIG. However, it is important to note that the scenarios we present are just one possible way additional revenue could be raised from these tax bases, and there are also other taxes we have not modelled that the Scottish Government could reform or introduce to raise revenue. Moreover, we have only shown static estimates, and our modelling does not account for potential behavioural changes or wider fiscal implications for BGA.

5. Drawing on international experience is important. All of the countries we explored in previous research that have a MIG-type scheme have a tax-to-GDP ratio above that of the UK and the OECD average. As a result, raising upwards of £10bn to implement a ‘full’ MIG would not put Scotland out of line with the level of tax raised in other countries with generous MIG-type policies. Moreover, international comparisons show that those countries that raise more in taxes than the UK often do so by having a broader tax base across different types of taxation, including VAT and employer social security contributions, as well as higher personal tax rates on lower- and middle-income earners than is currently the case in the UK.^[234] Funding a MIG may require the Scottish Government to consider the wider nature of the Scottish tax base.

6. The Expert Group should be aware that the raising of additional revenue to fund a specific policy objective, such as a MIG, is not common. Governments do not often tie increases in spending to specific tax changes. It is also not plausible to make an argument to align certain tax changes to spending changes, which could undermine confidence and support for both the tax rise and the policy objective being funded.

7. The Expert Group should be mindful that not all tax increases that the Scottish Government could introduce would necessarily be directed to the MIG. There are other important areas of public policy that will require greater public spending to support reform if Scotland’s revenue-raising powers increase. It is important to be mindful of the competing demands for government spending and where any additionally generated revenue is directed when considering the ambition and scope of the MIG, especially into the longer term.

8. Distributional impacts should be considered in a holistic fashion, with a focus on the impact and generosity of MIG policies alongside any changes to tax policy to generate the required funding. We have not included this as part of our analysis here. An undue focus on the progressivity of taxation alone can often mask issues within the overall tax and benefit system’s generosity and progressivity.

9. Accounting for behavioural changes is an important element when considering the expected revenue raised and sustainability of changes to tax policy. This is especially the case for taxes on income compared to taxes on consumption or property. Our scenario modelling has provided only static estimates for the revenue raised. The Scottish Government has committed to exploring the behavioural impacts of tax policy changes in more detail as part of the 2024 Tax Strategy.^[235] However, we should be mindful that evidence of behavioural change is built on assumptions that carry a degree of uncertainty.

10. Administrative feasibility also matters when considering which tax changes to introduce. For example, the largest source of devolved taxation, Scottish Income Tax, is mostly collected by HMRC rather than Revenue Scotland. As such, the Scottish Government would need to develop a more robust infrastructure for collecting revenues if any expansions in tax-raising powers were to occur.