Demographic projections and income tax revenues under the fiscal framework: implications for the Scottish budget

Frantisek Brocek[1] and David Eiser

Under Scotland’s fiscal framework, Scotland’s budget will be better off (than it would have been without tax devolution) if income tax revenues per capita grow more quickly than they do in the rest of the UK (rUK).

Some have argued that demographic projections for Scotland mean that the Scottish budget will almost inevitably lose out from this arrangement.

This is because Scotland’s old age dependency ratio (the ratio of those above working age to those of working age) is projected to grow more rapidly than rUK’s over the period to 2050. Seeing as those above working age pay less income tax per capita, a more rapid growth in this group will act to slow the growth of total income tax revenues per capita, relative to rUK.

But in this blog we show that the issue is more nuanced than this. This is because, as well as there being a difference between the average revenues per capita for those of working age compared to those above working age, there is also significant variation in income tax revenues per capita by age group within the working age population.

When demographic projections by age group are taken into account on a more granular basis, it turns out that the operation of the fiscal framework might actually work in Scotland’s favour. Although Scotland’s old age population is projected to grow relatively more rapidly, its population of children and young adults (who pay little tax) is also projected to decline more rapidly. This more than offsets the impact of a faster growing older population in reducing the growth of income tax revenues per capita.Continue reading

December 4, 2019

Latests nowcasts of the Scottish economy

With official estimates of GDP growth in Scotland in Q3 2019 due to be released later this month, we’ve updated our nowcasts for the Scottish economy for Q3 and Q4 2019.

These estimates put growth in Scotland:

  • For 2019 Q3 growth at 0.21% which, at an annual rate, is 0.83%
  • For 2019 Q4 growth is 0.25% which, at an annual rate, is 0.99%

These estimates represent similar estimates to those released last month – and a continuation of the sustained period of weak growth experienced through much of the past few years.

In the last set of official estimates of growth in Scotland, growth in the year to Q2 was 0.6%, included in this estimate was the contraction in GDP in Q2 itself.

The positive growth estimate for Q3 implies that Scotland will not enter recession in 2019.

Taking our estimates for Q3 and Q4 (above) together with the official estimates for 2019 Q1 and Q2, implies economic growth in Scotland of 0.7% between 2019 Q4 and 2018 Q4, or on a 4 quarter on 4 quarter basis, growth is estimated to be 0.8% in 2019.

2019 General Election: a review of the manifestos from a Scottish perspective

Inevitably, the defining feature of all the manifestos this election is the spectre of constitutional change.

For the UK-wide parties this is an issue of Brexit (or stopping Brexit), whilst in Scotland there is the added question of independence.

Beyond these major constitutional debates, reading UK election manifestos can feel a strange business from a Scottish perspective. Most of the policy pledges relate to areas that are devolved, with the next Holyrood election not for another 18 months.

Nonetheless, these pledges will still have major implications for Scotland’s budget, whilst also framing the view of what policies might be politically viable here. This is true for spending commitments, but it is now increasingly true of tax policy too.

The choices facing the electorate are stark, not just on the constitution but also day-to-day tax and spending choices. It is no surprise that with so much uncertainty, Derek Mackay has shelved plans for a pre-Christmas Scottish Budget

So what do the manifestos imply for Scotland and the Scottish Budget?Continue reading

December 2, 2019

The Scottish budget 2020/21: postponed for now… but til when?

The Scottish Government had been due to publish its draft budget for 2020/21 on 12th December.

The postponement of the UK Government’s budget – which had been scheduled for 6th November – had already thrown the status of the Scottish budget date into doubt. But the announcement of the General Election on the 12th December clearly necessitated a postponement of the Scottish budget. The Scottish Government announced last week that the Scottish budget will not be published until after Christmas.

But given that we don’t know when the next UK budget will be, when should we expect the Scottish budget? Is it even possible for the Scottish budget to be published before the UK budget, and what would be the implications if it was?Continue reading

November 18, 2019

Presentations from Scotland’s Budget Report 2019 Event

On Tuesday we published our fourth annual Scotland’s Budget Report. This was accompanied by an event at the National Museum of Scotland.

Alongside the FAI analysis, Paul Johnson, Director of the Institute for Fiscal Studies, Andy King from the Office for Budget Responsibility, Caroline Gardner, Scotland’s Auditor General, and Charlotte Barbour, director of taxation for ICAS, also spoke at the event. All discussed the current fiscal environment which is made all the more uncertain by the General Election and the flurry of announcements by all political parties on future spending commitments.

These presentations can be found below.


November 15, 2019