Scotland’s Budget Report Preview 4 – The impact of employer national insurance rise on the public sector in Scotland

Ever since Budget day, there has been an ongoing conversation about the largest tax rise announced by the Chancellor on 30^th October. Many sectors of the economy have been calculating the cost of this employer national insurance increase, in many cases warning about the impact this may have on the sustainability of their  organisations and perhaps limiting their ability to create new jobs or offer pay increases.

As a reminder, the Chancellor increased both the rate of employer NICS (from 13.8% to 15%) and lowered the threshold at which employers have to start paying NICs from £9,100 to £5,000. IT depends on the level of pay, of course, but for the vast majority of workers the threshold change will have a bigger impact than the rate change.

From the public sector point of view, the UK Government said they would compensate public sector employers “for higher tax costs due to the measure” through higher budgets. It was confirmed by the Treasury on the day of the budget that compensation for the devolved administrations for these increased costs would be in addition to the uplifts in funding already announced. What has not been clear is how the amount of compensation was going to be worked out.

There are a few different ways that this could be approached.

A fair question to ask is why can’t the Scottish Government just calculate how much it would cost to change the National Insurance threshold and rate and give this number to the Treasury?

Unfortunately, it is not as simple as this. The Scottish public sector is made up of hundreds of different organisations, and the SG does not have access to the detailed pay bill information of all of these organisations. Perhaps this situation underlines that they should seek to have access to (and why not publish?) this information, but at the moment they do not.

The Scottish Government has collected information from across the Scottish public sector, asking bodies to estimate how much they think this will cost them, and they published this information last week. This came up with an estimate of around £550m in the cost to the public sector in Scotland, which included an estimate provided by COSLA for local government of £265m (more on this below).

Alternatively, we could look at the compensation that the UK Government has set aside, and take a proportionate share of it. The UK Government has set aside £4.7 billion to compensate public sector employers (although we do not know exactly how this was worked out). The size of the Scottish devolved public sector is 547,000, which is 9.2% of all public sector employment in the UK. This would suggest the Scottish share of this money should be £432m.

Finally, as was done when the Health and Social care levy was proposed in 2021, the level of funding for the devolved administrations could be worked out through the Barnett formula. So, as compensation is calculated for the Department of Health, Education, Local Government, Defence etc, the amount of funding generated would be linked to the level of funding provided to these departments and the extent to which responsibilities are devolved. The overall share of the compensation that was given in that case in 2021 was 7.7%. If it was something similar the compensation would be around £362m. But the devolved/reserved splits are always evolving so it may be that the number would be a bit different now on this basis.

The BBC had a story over the weekend that the Treasury have told the SG that the compensation would be between £295m and £330m. Given the size of this number, it seems likely that they are taking the Barnett share approach – but we are not sure.

One of the reasons for this large divergence in numbers is due to the larger public sector in Scotland (22% of employment compared to 17% for the UK) and the fact that it is relatively better paid.

Our estimates

We have examined data from the Annual Survey of Hours and Earnings, which is the most comprehensive data source on earnings, and includes a split between the public and private sector in Scotland. Looking at the distribution of earnings in the public sector, and accounting for those people near or below the new and existing threshold, we estimate that the change may cost £931 on average for each worker.

This suggests the following rough costs for each part of the public sector.

	Approximate cost (£m)
NHS	173
Civil Service	26
Police and Fire Services	25
Further Education Colleges	11
Other Public Bodies	21
Local Government	244
Public Corporations	7
Total Devolved Public Sector	509

 

These are by no means definitive estimates, as the actual costs will depend very much on the earnings distribution within each sector. So, if a sector or organisation have used actual pay bill information to calculate a number, then it will be better than using the approach above.

One of the main differences between our estimate and the SG numbers is driven by the COSLA number. Our understanding, from talking to COSLA, is that they have assumed the rate uplift will apply to the whole paybill (so assuming no one is below the threshold), although they have used 250,000 as the size impacted by the threshold change, which will account for some of this. We still think the £265m is likely to be an overestimate for 262,000 staff (although see what we’re saying about ALEOs below). Note also that our estimates are lower than the figures collected by the SG, so we look forward to getting more information about how these have been calculated.

The complication of Arms Length Organisations (ALEOs)

The boundary of the public sector is also quite tightly defined in the statistics above. The numbers above do not include Arms Length Organisations (or ALEOs) which are strictly in the public sector from a classification point of view but they are not included in these statistics.

There is not a recent source on how many ALEOs there are or how many people are employed in them (which is not ideal and should be addressed), but there are definitely dozens of them (maybe more than 100) employing low tens of thousands of people. The increased cost of these staff will ultimately fall on local government.

Looks like we’re in for a fight…

The briefing to the media over the weekend suggests that the two governments are very far apart in terms of what “compensating” the public sector means – the actual cost, or the actual cost if the size and paybill of the public sector in Scotland was proportionately the same as the UK.

Overall though, this has highlighted a real data gap, where even if the Treasury wanted to compensate for the full cost it is very difficult to work it out. This doesn’t seem good enough to us, so hopefully more of this data about the paybill can be centrally collected and made available to researchers like us.