Devolution reboot part 5: The case for a fiscal reset

IN THE LAST FEW WEEKS I’ve written articles about how the powers devolved to the Scottish Parliament could be used to improve the amenity of life in Scotland, and how this would boost prosperity. If schools are top quality, housing well designed and affordable, crime low and urban spaces attractive, skilled and mobile workers will choose to live in Scotland – and businesses will follow.

Most importantly, the chances of a happy and prosperous life for the least fortunate in Scotland will be vastly improved.

In mature economies like Scotland’s, competing in low-cost manufacturing doesn’t cut it. Developing countries in Asia and Africa can do better than we can at mass-producing low-cost goods. Scotland’s future prosperity will be built on its human capital – and that needs to be developed and nurtured.

But that doesn’t mean that business is impervious to the fiscal context in which it operates. On the contrary, skilled workers choose where to live based not just on the amenities to hand but on the financial rewards on offer. If you tax them too much, they’ll look elsewhere – and business investment will follow them.

In Scotland the SNP administration has effectively ignored this logic and increased income taxes above levels elsewhere in the UK. A family where both parents earn above about £45,000 – about the average for a managerial role – now pays some £3,000 more income tax than in England.

This is bound to have an impact on the choices made by skilled workers. Either businesses will have to pay more to retain staff in Scotland, or they’ll have to accept that their workers might prefer to live elsewhere. The choice of where to live is obviously determined by more than tax – but, all other things being equal, it is now preferable to live and work in England than in Scotland

This approach must be reversed before it is too late. The constitutional uncertainty, anti-business rhetoric and low economic growth that blight Scotland are already off-putting enough. If we’re to regain our reputation as a good place to invest, we must reduce taxes – and that means cuts to public spending.

Scotland enjoys a major fiscal dividend from its place in the UK

It is also important to recognise that Scotland already experiences much higher public spending than England. Despite this, outcomes in key devolved areas such as education and health are no better than elsewhere in the UK. As I have discussed in previous articles, school performance has fallen markedly behind England in recent years, according to respected international studies of pupil attainment such as PISA.

Every year, Scottish Government statisticians calculate comparative spending levels in Scotland and the rest of the UK. The results published as Government Expenditure and Revenue Scotland (GERS) showed in 2025 that as a whole spending in Scotland was 13% higher than the UK average – equivalent to £2,400 per Scot, or a total of £13.5bn.

So it is entirely reasonable to suggest that at least part of this surplus could be returned to Scots to spend as they choose, rather than being absorbed by the public sector with limited visible benefit. Clearly, the Scottish public sector suffers from significant productivity problems compared to its counterpart south of the border.

It is sometimes claimed that Scotland needs the extra public spending because of its difficult geography. But there is little evidence for this. If anything, the great concentration of Scotland’s population in the central belt should make service delivery easier, not harder.

In principle, then, there is no reason to suppose that if public spending in Scotland were at the same per capita level as in England, outcomes would be worse. Achieving this – where the whole of the £2,400 per head could be returned to Scots in the form of tax cuts – would require major increases in productivity in core areas such as the NHS and the schools system. This is clearly possible but would take time, sustained effort and bold reform.

In the meantime, returning part of the surplus to households – by aligning income tax with UK levels and going further, as Reform UK proposed last week – should be entirely feasible. Several billions of pounds are currently directed towards foreign policy, social, enterprise and environmental programmes that either duplicate UK Government activity or lack proven benefits.

Some commentators such as the Institute for Fiscal Studies have cast doubt on this, arguing that front-line services would need to be cut and pointing to difficulties in reducing capital budgets to finance tax cuts. But every year the SNP pulls various (largely pointless) rabbits out of the budget hat, costing hundreds of millions – all within the margins afforded by year-on-year increases to what is a huge budget.

There is no doubt that a determined, reforming administration couldn’t reduce taxes using the same flexibility. In addition, the Scottish Government wastes hundreds of millions on tokenistic budgets such as foreign aid and diplomatic representation that duplicate what is already done at the UK level. It also spends huge amounts on enterprise designed to stimulate business activity but logically does the opposite. If you tax people and pay civil servants to give the money back in grants to pet projects, you can only damage growth.

It is true that some of the most wasteful Scottish Government projects have a large capital element. But there is sufficient flexibility in what is overall a huge budget to maintain capital spending overall or agree adjustments with the Treasury.

So it is useful to bear the wider context in mind: Scotland enjoys a major fiscal dividend from its place in the UK.

The opportunity exists to return part of that dividend directly to Scots – through a combination of lower spending and lower taxes. The prize is a model that combines competitive, Anglo-Saxon levels of taxation with high-quality, European-style public services.

The result would be higher household incomes, stronger economic performance, and a more coherent moral case for using Scotland’s fiscal advantages to benefit the people who live here.