As a result of the pandemic, Scottish income tax revenues in 2020/21 were much lower than had been forecast. But the operation of the fiscal framework – and the fact that the pandemic affected tax revenues in the UK as a whole as much as in Scotland – nullifies any negative impact on the Scottish budget. Moreover, the outturn statistics for 2020/21 are significantly more positive from the Scottish government’s perspective than had been anticipated just a few weeks ago. This provides a modest boon for the spending outlook in 2023/24 relative to what had been pencilled in at May’s Spending Review.
2020/21 income tax revenues and reconciliations
Last week HMRC published income tax outturn statistics for the 2020/21 financial year.
Unsurprisingly given the effects of the Covid-19 pandemic and related restrictions, Scottish income tax revenues in 2020/21 were significantly lower than had been forecast at the time the 2020/21 budget was set. Specifically, Scottish income tax revenues were £417m lower than had been forecast (£11,948m outturn v. £12,365m forecast).
The impact of income tax on the Scottish budget depends not only on revenues raised in Scotland, but on the corresponding income tax block grant adjustment (BGA). The BGA is deducted from the Scottish block grant. It is calculated by taking into account the growth rate of comparable income tax revenues in the rest of the UK.
Of course as well as reducing Scottish income tax revenues relative to forecast, the pandemic also caused rUK income tax revenues to come in lower than forecast. As a result, the outturn BGA was £468m lower than had been forecast at the time the Scottish budget had been set.
With revenues £417m lower than forecast and the BGA £468m lower than forecast, there will be a positive reconciliation for the Scottish budget of £50m in the 2023/24 budget year.
So although outturn Scottish income tax revenues were much lower than had been forecast, rUK outturn income tax revenues were also lower than forecast, by a proportionately similar amount. The effect on the Scottish budget of lower than forecast tax revenues is more than offset by a lower than forecast BGA.
This illustrates one of the key principles of the Scottish fiscal framework in action – the framework protects the Scottish budget from UK-wide fiscal shocks.
Income tax and BGA forecasts, outturn and reconciliations, £m, 2020/21
|Revenues||Block Grant Adjustment||Net Budget Position|
|Forecasts as of Scottish Government Budget 2020-21||12,365||12,319||46|
|Outturn (July 2022)||11,948||11,852||96|
Disappointment and relief
What else can we infer from the outturn income tax statistics?
Scottish income tax in 2020/21 raised £11,948m. This is £96m more than what was deducted via the income tax BGA (£11,852m). The Scottish budget in 2020/21 was therefore £96m ‘better off’ as a result of income tax devolution than it would had income tax devolution not occurred.
For the Scottish government these numbers provide both some disappointment and some relief.
The disappointment is that, whilst the Scottish government will welcome the news that it had £96m more to spend in 2020/21 than it would have done without income tax devolution, it will be disappointed that this number is not higher. Its tax policy choices raise around £500m compared to what would be raised if UK government tax policy prevailed. The fact that the ‘net tax’ position is only £96m and not £500m reflects the fact that the income tax base in Scotland grew relatively more slowly in the initial years of tax devolution.
However the government will be relieved because the outturn numbers published last week look significantly more positive than the numbers that had been pencilled in when the government published its Medium Term Financial Strategy in May. Those numbers implied that the Scottish budget would be £175m worse off in 2020/21 as a result of income tax devolution, and face a reconciliation of negative £221m in its 2023/24 budget.
The fact that the government will face a positive reconciliation of £50m in next year’s budget, as opposed to the £221m negative reconciliation that had been baked into its MTFS and Spending Review assumptions, is clearly welcome news for the government.
The explanation for the unexpected improvement in the ‘net tax’ position compared to just a couple of months ago seems mainly due to rUK revenues coming in lower than anticipated, rather than Scottish revenues coming in better than expected. It may also in part reflect slightly stronger than expected relative performance of revenues from self-assessment returns – these are extremely difficult to predict, since (unlike with income received through PAYE), no interim data is available ‘in-year’ .
Future analysis from the two forecasting organisations involved – the SFC and OBR – should shed further light on the explanations. The Scottish government will hope that the explanation points to a better outlook for Scottish income tax revenues in 2021/22 and subsequent years than the latest forecasts imply.