Taxes for Scotland’s highest earners will rise by £164m next year to help fund pay rises for public sector workers, modest tax cuts for lower earners and £400m extra for the NHS.

Derek Mackay, the Scottish finance secretary, used the Scottish parliament’s recently strengthened tax powers to raise the higher and top rates of tax by 1p to 41p and 46p, boosting funding for public services.

He said Scotland’s lowest earners would have a new starter rate of 19p, while the basic rate would be frozen at 20p from April 2018. There would be a new 21p intermediate rate of tax for those earning more than £24,000, increasing the taxes paid by middle and higher-rate employees.

To the delight of Scottish National party backbenchers and the irritation of the Tories, Mackay said his proposals meant the lowest earners in Scotland would pay less tax than their counterparts in the rest of the UK.

He said the new starter rate meant no one earning less than £33,000 a year – about 70% of Scottish taxpayers – would pay more tax. But the Fraser of Allander Institute, an economics thinktank, quickly took the shine off his announcements by saying the most any taxpayer would gain was a cut of £20 a year.

Mackay said the budget was being delivered “in the most challenging circumstances” but would “build a fairer Scotland and put the progressive values of this government into action. It invests in public services and supports businesses to develop and thrive.”

The Scottish Fiscal Commission, a body recently set up and similar to the Office for Budget Responsibility in London, said that combined with last year’s freeze in Scotland’s higher tax threshold, the new tax rates increased Scottish government funding by £366m.

That meant Mackay was able to propose a 3% pay rise for all public sector workers earning less than £30,000 and a 2% rise for those earning more than £30,000, after 10 years of pay freezes and a cap on pay rises for about half a million public sector employees. Public sector executives earning more than £80,000 will have their pay rise capped at £1,600.

But Mackay’s proposals, which need to win support from at least one other party to get passed at Holyrood, were soon attacked by potential allies, including the Scottish Greens and trade union leaders at the Scottish TUC, after it emerged he was not directly funding all the public sector pay rises.

The fiscal commission also cast a shadow over Mackay’s upbeat speech by warning that the Scottish economy faced a continuing squeeze: it would grow by less than 1% a year until 2022, compared with average UK growth forecasts of 1.5%.

Susan Rice, the commission’s chair, said: “Our forecasts point to a subdued outlook for economic growth in Scotland, driven by slow productivity growth and exacerbated by demographic challenges.” That would cut future tax revenues.

Mackay said council funding would be protected in cash terms, with £84m extra next year. Patrick Harvie, the Holyrood leader of the Scottish Greens, said he was delighted by the new progressive tax regime but council funding meant an unacceptable real-terms cut. That made it far harder for councillors to fund a pay rise for local government workers.

Mackay will need the Greens’ six votes at Holyrood to get his budget passed but Harvie said: “It is clear the Scottish government is going to have to make changes to its local government settlement” to win Green support. Labour said the council cuts were equal to £135m in real terms.



With several public sector unions threatening strike action over pay, the Scottish TUC warned Mackay he faced continued unrest. Grahame Smith, the STUC’s general secretary, said every public sector worker deserved an inflation-linked pay rise, not just the lowest paid.

“He can expect to see a sustained campaign from public workers to begin a real process of restoring their livelihood. The issue of public sector pay will not disappear,” said Smith. Dave Watson, the Scottish head of policy for the public sector union Unison, said: “An unfunded pay policy is of no value for council workers.”

Mackay again attacked the UK government for cutting Holyrood’s budget for day to day spending by £200m in real terms next year, although the Treasury has increased his capital budgets by £509m and financing for home-ownership by £1.1bn over the next three years.

Holyrood is largely protected from the deep cuts in public sector spending elsewhere in the UK by the Treasury’s funding formula. Overall spending in Scotland, including UK government departments, meant spending of £1,436 more per head than the UK average last year.

The budget announcement included:

• Increasing the school attainment fund to improve outcomes for poorer pupils to £179m.



• £60m for a climate change low-carbon innovation fund and £20m for low-carbon buses and cars.

• Funding for the arts agency Creative Scotland increased by £6.6m after arts organisations and famous writers attacked last year’s cuts.

• Scotland’s private schools to be made to pay business rates, excluding special schools for those with additional needs.

• The threshold for the Scottish levy on home buying, the land and buildings transaction tax, to rise to properties costing £175,000, with £756m for building affordable homes.

Mackay’s efforts to protect the SNP’s position as Scotland’s dominant centrist party were rewarded when Labour and the Tories attacked his tax plans from the left and the right.

Murdo Fraser, the Scottish Tories’s finance spokesman, accused him of introducing a “Nat tax” which would leave about 1.2m Scottish workers who earned £26,000 or more paying more tax than their counterparts in the rest of the UK. Scottish government figures showed someone on £35,000 a year would pay £90 more in tax than someone in England, Wales or Northern Ireland.

Richard Leonard, the recently elected pro-Corbyn leader of Scottish Labour, accused him of being “Tory lite” for refusing to introduce a new 50p top rate of tax. He said the council cuts were equal to £135m in real terms.