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Budget 2021/22: initial reaction

Budgets are always trailed as being the most important of their time. But the 2021/22 budget can lay a genuine claim to this title. Ten months since the first Covid restrictions, society remains firmly locked down, with economic activity still 7% below pre-pandemic levels – well below what we would normally think of as being the trough of a deep recession.

In this context, Kate Forbes delivered a sober budget statement, refreshingly devoid of buzzwords.

The SFC’s economic forecasts had a predictable air of gloom. Unemployment is forecast to top out at over 7% in 2021, and economic activity will not recovery its pre-pandemic levels until 2024.

The budget’s main policy measures had a distinct air of predictability. The health portfolio will see some of the largest budget increases, both in terms of core health services and suppressing covid. Elsewhere there will be a strong emphasis on the economic recovery – with funding increases for business support and skills and employment initiatives.

But that this was a pre-election budget was also clear, with several tax cuts featuring.

The government reduced the non-domestic rates ‘poundage’, enabling it to say that businesses in Scotland face lower NDR rates than counterparts in England, a policy that cost £63m.

There will be a strong onus too on local authorities to freeze council tax in 2021/22. Financial support will be provided to those who do so, costing the government £90m, equivalent to the revenue that would have been raised from a 3% rise.

Income tax thresholds will increase in line with inflation, effectively a ‘revenue neutral policy’. This means that taxpayers earning less than £27,000 in Scotland will continue to pay fractionally less than those on equivalent incomes in rUK, whilst raising close to £500m from those earning more than £27,000.

But despite council tax and NDR cuts, the government chose not to meet its 2016 Manifesto pledge to increase the tax exempt amount of income to £12,750. There are good reasons for that decision. The policy would cost around £80m, and would not be particularly well targeted at low earners. As to the reasons why the government chose not to implement this cut, but went ahead with a council tax freeze, these were not articulated.

On tax therefore, the budget entrenches the position that has emerged this parliament – additional revenues from higher income tax rates in Scotland than those prevailing in rUK are largely offset by lower rates of council tax. Combined with its policy on business rates, the prevailing view of the Scottish Government as a tax-raising government can be debated.

The biggest surprise on tax came from the government’s announcement that rates relief for businesses in the tourism, retail and hospitality sector will be extended for the first three months of 2021/22. It seems inevitable that the UK Government will similarly extend the relief in England in due course. But it was a surprise that the Scottish Government felt able to strike out on this course before the UK Government’s position had been confirmed. The policy is costly (£180m) and the UK Government decision, once it is confirmed, will unlock additional resources for the Scottish budget.

Politically speaking, the government’s decisions on NDR were shrewd, undermining what was likely to have been a key attack line from the Conservatives, that uncertainty around NDR reliefs were damaging for business.

As anticipated, Kate Forbes used her budget statement to highlight the challenges she has faced in setting a Scottish budget, knowing that the outlook for the Scottish block grant is very likely to change following the UK budget in March.

The severity of the issue was somewhat over-egged, but the Cabinet Secretary’s solution was sensible. The Scottish Government has baked in an assumption that its Covid-related resources will increase by a further £500m when Rishi Sunak lays out the UK budget in March. Under the circumstances, this seems a prudent strategy. It also gave the Cabinet Secretary the opportunity to renew her calls for changes to the fiscal settlement.

As well as this assumption of a forthcoming £500m increase to the Scottish block grant, the Cabinet Secretary’s budget plans were dealt a favourable hand by the SFC forecasts in two ways.

First, Scottish income tax revenues, whilst clearly impacted negatively by the pandemic, are not forecast to be affected as negatively as income tax revenues in rUK. Under the terms of the fiscal framework, this means that income tax revenues contribute an additional £300m to the Scottish budget in 2021/22 than was the case in 2020/21.

Second, and somewhat paradoxically, Scotland’s GDP is forecast to grow more weakly than rUK’s in the initial part of 2021. This unlocks a technical clause in the fiscal framework known as a ‘Scotland specific shock’, enabling the Scottish Government’s drawdown limits from its Reserve, and its forecast error borrowing powers, to be expanded.

As to the paradox of why Scotland’s income tax outlook can move favourably vis-à-vis the UK, whilst its GDP outlook moves negatively compared to rUK, this relates to differences in the timing over which the two forecasts relate.

There was more money in this budget for local government, but coinciding with further spending pressures, we can expect further debate on the adequacy and sustainability of the local government settlement in the longer term context.

More than ever before, the budget produced today can be considered very much the starting point for what will become an emerging picture. Amendments may emerge during the Scottish parliamentary process as the government seeks to navigate the budget through the legislative process. More significantly, further change can be anticipated following the UK Budget on 3 March and subsequently throughout the year as policy responds to the evolution of the pandemic.

Authors

David leads the FAI's work on fiscal policy and the Scottish budget.

 

 

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