Frantisek Brocek 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