MIDDLE-CLASS Scots face paying more income tax next year for little tangible benefit as the cash is used to offset Westminster cuts and plug gaps in a faltering economy, according to the country’s most respected economic think tank.

Downgrading its growth forecasts for the next two years, the Fraser of Allander Institute said Scotland's economy had been “stuck in a cycle of weak growth” for a decade, and tax hikes were a "sticking plaster" that wouldn't address its deep-seated problems.

It predicted “downbeat” revenue forecasts for current devolved taxes could cancel out new income tax hikes finance secretary Derek Mackay is expected to announce on Thursday.

A recent SNP government discussion paper suggested new bands and higher rates could raise another £290m in 2018/19 to help pay for public services, with those earning over £31,000 a year in line for bigger bills.

But the Fraser of Allander suggested this was unlikely to translate into the sort of concrete improvement voters might expect to see in return because of the weak economy.

It said: “It is not inconceivable that weaker revenue forecasts... could offset, at least in part, some of any tax hike proposed by the Scottish Government.”

Holyrood currently sets income tax, land and building transaction tax and landfill tax.

The Institute said that with the block grant from Westminster for day-to-day spending also falling in real terms for two years, Mr Mackay will be “forced to take some big decisions” on how to pay for SNP manifesto commitments, such as an extra £500m for the NHS.

It warned the squeeze in areas not ring-fenced from cuts looked “stark” and criticised ministers for producing single year budgets, instead of medium-term spending reviews.

It said: “With devolved finances continuing to be squeezed and expensive manifesto commitments to be paid for in health and education, one-year sticking plasters in the form of tax rises can only help for so long. A strategy for managing demand, prioritising where money is spent and growing the economy is now needed more than ever.”

In its latest economic commentary, the Institute said Scottish GDP had grown by an average of just 0.7 per cent a year for a decade, roughly a third of the UK rate.

It said: “It cannot be overemphasised how deeply disappointing this is. The fact that this poor

performance is not the focus of more attention remains hugely surprising.”

It revised down its September forecast for Scottish GDP growth by 0.16 per cent to 1.2 per cent for 2018, and by 0.3 per cent to 1.4 per cent for 2019.

While employment rates remained high in Scotland, productivity had fallen for seven consecutive quarters, pointing to ingrained weaknesses in the economy.

The fragile economy, uncertainty over Brexit and weak demand, meant it was vital for the SNP government to support long-term growth and entrepreneurship, it said.

Professor Graeme Roy, the director of the Strathclyde University-based Institute, said: “Whilst much of the political reaction will centre on the government’s proposals for taxation, the Budget provides a vital opportunity for Scottish Ministers to set out their plans to grow the economy and boost productivity.

“The Scottish Government undoubtedly faces delivering a tight budget settlement on Thursday.

“The Scottish Government’s resource block grant is on track to decrease by over £200m in real terms next year. On top of this, it is likely that the Scottish Fiscal Commission will revise down their estimates of the outlook for devolved taxes.

“With major manifesto commitments to pay for in health, education, childcare and policing – not to mention a more generous pay settlement for public sector workers than those in England – ‘non-protected’ areas will be in line for an extremely tough settlement.”

David Eiser, Head of Fiscal Analysis at the FAI, added: “The government has been open about its aspirations to raise revenues through increasing income tax.

“Even one of its ‘bolder’ options on income tax – e.g. one that adds a penny to all tax rates and either protects or reduces the tax burden on lower earners – is likely to only be just enough to offset the cut to the Westminster block grant next year.

“Despite the recognition from across the political spectrum of the need for a long-term approach to managing public service delivery, budget planning remains remarkably short-sighted.

“This means there is a lack of awareness both of recent trends in the distribution of government spending, and how best to address the long-term challenges that our public services face.”

Tory MSP Murdo Fraser urged Nicola Sturgeon to reveal what her Council of Economic Advisers thought of higher income taxes in Scotland relative to England.

He said: “Almost every business group in Scotland – even the pro-SNP ones – have said they oppose income tax rises.

“They say it would be bad for business and bad for the economy.

“The SNP is increasingly isolated on this matter, which is why the views of the Council of Economic Advisers are so critical.

“If it wasn’t created for decisions like this, people will wonder why it was established at all.”

Scottish Labour leader Richard Leonard said: “People across the UK should not be fooled by progressive posturing on tax from the SNP – it has taken Tory cuts and sharpened them for Scottish communities.

“The poorest and most vulnerable Scots need a radical budget on Thursday – no one should be fooled into believing that tinkering around the edges of Scotland’s tax system delivers the real and radical change Scotland needs.”

A Scottish Government spokesperson said: “As well as continuing to protect public services, the 2018/19 Budget will prioritise economic growth and innovation to enable Scotland to grasp the opportunities presented by a rapidly changing global economy.

“Our ambition to create an economy that works for Scotland will be driven by investment in infrastructure, capital, research and in our people. We are proud of our entrepreneurs and appreciate that the risks they take in order to innovate, require investment.

“The UK Government is cutting our discretionary block grant by £2.6bn in real terms over the 10 years to 2019-20. The serious economic threat posed by Brexit, coupled with continuing UK Government austerity following the UK Government’s budget last month, means we are seeing increasing pressure on our public services. Following a careful and considered conversation around income tax, we will publish a balanced package of tax and spending proposals as part of the draft budget on 14 December.”