What’s happening to the Scottish block grant in 2020/21?

Last month’s UK Spending Round announced increases in UK Government resource spending of 4.1% in real terms next year. Will the Scottish block grant increase by more or less than this, and why? And what will this mean for the Scottish budget?

Departmental spending plans of the UK Government affect the Scottish block grant via the Barnett formula. The block grant increases by a population share of increases in comparable spending by the UK Government in England (or England and Wales in some cases).

And whilst revenues from devolved taxes have an increasingly material impact on the resources available to the Scottish Government, the block grant remains the most critical factor in determining the overall size of the Scottish budget.Continue reading

October 2, 2019

The Fiscal Framework Outturn Report 2019

Yesterday afternoon the Scottish Government published its annual ‘Fiscal Framework Outturn Report’. It reports outturn tax and social security spend data for 2018/19 (2017/18 for income tax) and discusses the budget implications.

By necessity it is a dry report. But if you don’t want to battle your way through it, this blog summarises the key bits.

For each of Scotland’s new devolved/shared taxes, the FFOR tells us two things.

  • First, whether SG raised more from a given Scottish tax than was deducted from its block grant (block grant adjustment, BGA), for the latest year for which outturn data is available. In other words, is the Scottish budget better off or worse off as a result of tax devolution?
  • Second, how different the outturn data is from the forecasts that were made when the budget was set.

For income tax in 2017/18, £97m less was raised in Scotland than was deducted from the block grant. So the Scottish budget was a bit worse off than it would have been without IT devolution – despite an attempt to raise more revenues by freezing the higher rate threshold.

But the forecasts for budget 17/18 projected that IT revenues would be £107m more than the BGA. So, in effect, SG budgeted to spend £204m more than it had available to it (the difference between £107m and -£97m). That £204m will be deducted from the 2020/21 budget as part of the ‘reconciliation’ process.

Of course we’ve known all of that since July! What’s new is what the report says about LBTT and Landfill Tax.

  • In 2018/19, revenues from LBTT (£557m) were £7m higher than the BGA – partly as a result of higher LBTT rates than down south. This is slightly better than the forecast position when the 18/19 budget was set.
  • Revenues from LfT (£143m) were £37m higher than the BGA. Again, this is a bit better than the forecast position when the 18/19 budget was set – partly because Scotland sent more waste to landfill than anticipated.

For LBTT and Landfill Tax, most of any reconciliation required happens within the 2018/19 financial year, and thus has already been absorbed. Tiny reconciliations will apply to the 2020/21 budget, but this is so small as to be of no budgetary significance.

There is a similar story in relation to income from various other (very small) income streams – there are no significant budgetary effects from the reported figures.

The FFOR also considers spending on social security. In 2018/19, the Scottish Government spent £5m less on Carer’s Allowance than what had been added to its block grant to cover the new responsibility. (This of course excludes the effect of the Carer’s Allowance supplement that the SG began paying in 2018, which came with a price tag of £35m and that the government has to fund from its total budget).

Perhaps the most interesting bit of the FFOR is the revelation of a brewing stooshy between the Scottish and UK govs about how sums recovered under ‘proceeds of crime’ legislation (confiscation of money and assets that have been gained through criminal conduct) are budgeted for post-devolution.

Before sums raised from proceeds of crime legislation were officially devolved through Scotland Act 2016, the two governments had an agreement that the Scottish Government could retain sums raised through proceeds of crime in Scotland if these raised less than £30m in any year – which they always did. So HM Treasury never actually received any sums from proceeds of crime legislation in Scotland prior to their devolution.

But the devolution of PoC resulted in a formalised process by which the Scottish budget can be adjusted downwards to reflect the funding that the UKG has ostensibly foregone as a result of devolving these funds.

So in 2018/19, rather than being able to retain in full the £5m revenue from proceeds of crime in Scotland – as would have happened pre-devolution – the SG finds that most of this is being clawed back by HMT in the form of a reduced block grant.

The Scottish Government is miffed about this, and claims it breaches ‘no detriment’ principles. HMT’s response seems to have been to shrug and say ‘its what you signed up to’. (The Smith Commission report argued that Scotland’s block grant would need to be adjusted to accommodate the retention of PoC sums).

That the governments can have a stooshy about £4 or £5m – which is small beer for the Scottish Government and miniscule beer for the UK – perhaps gives an indication of the current state of inter-governmental relations.

Unfortunately we now have a full 12 months to wait until we have the thrill of reading the third annual FFOR.

September 27, 2019

The latest Addleshaw Goddard Scottish Business Monitor Q3 2019

The latest Addleshaw Goddard Scottish Business Monitor was published today.

The survey provides a snapshot of activity in the Scottish economy in advance of national statistics. The survey also monitors optimism in the economy and therefore acts as a gauge of future activity levels.

The latest results

The latest Scottish Business Monitor covers activity up to the end of Q3 2019.

The Addleshaw Goddard Scottish Business Monitor, the first to be produced in a partnership between the Fraser of Allander Institute and the international law firm, revealed –

Business Monitor Headline Table 2

Continue reading

September 26, 2019

Perception and independence of economic statistics

This afternoon, the Scottish Parliament will debate a proposal by the Economy, Jobs and Fair Work Committee for a Committee Bill on Pre-release Access.

This is unusual. Most bills are put forward by government rather than Committees. So this is an important event and covers an crucial aspect of the economic landscape in Scotland.

Back in 2017 & 2018, the Committee undertook an inquiry into economic statistics in Scotland

One of their recommendations (by split decision), was that the practice of pre-release access – where Ministers and certain political appointees are briefed about the content of ‘market sensitive’ statistics in advance of the public release of the figures – should be stopped.

So far, the Scottish Government has resisted such calls.

Continue reading
September 19, 2019

Today’s Scottish GDP figures: the stockpiling aftermath

Today, the Scottish Government published their growth estimates for the second quarter of 2019 – with the results suggesting that the Scottish economy contracted by -0.3% in Q2 2019.

These estimates broadly mirror the trends we’ve seen at the UK level, where over the same period, UK output contracted by -0.2%.

Recall that today’s figures come on the back of strong growth in Q1 of this year. Over the first three months of 2019, the Scottish economy grew by +0.6%.

As we argued back then, movements in Scottish GDP data have been impacted by the stockpiling that has been taking place as a result of Brexit.

Uncertainty surrounding a no-deal Brexit back in March led many firms to build up their supplies, leading to a boost in GDP in Q1. As the deadline of the UK’s departure from EU moved forward to October, and immediate no-deal panic preparations calmed, firms have since unwound these preparations leading to GDP in Q2 slipping back.

Two immediate reflections. Firstly, it is important in these times to focus upon longer-term trends and not the volatile quarter-to-quarter changes. Here again, we see Scottish growth remaining fragile and well below trend.

Secondly, we’ve seen emerging UK data suggest that activity has picked up over the summer months. This suggests that the likelihood of a technical recession over Q2 and Q3 of 2019 – i.e. two consecutive quarters of negative GDP growth – remains relatively small (but not impossible).

Continue reading

September 18, 2019