Shona Robison presented her first budget to parliament this afternoon. In a half-hour-long statement, she set out the tax and spending plans for 2024-25. In the past couple of weeks, we have set out the challenges the DFM was likely to face today. In this blog, we set out our initial reaction to the statement this afternoon – but there will be more to come in the following days.
New “Advanced” band for income tax
The big news of the Budget (for good or ill!) is likely to be the introduction of the new tax band between £75,000 and 125,140, with a marginal tax rate of 45%. In a less well-trailed move, the SG has also decided to raise the top rate by a further penny to 48%.
Table: Scottish Income Tax rates and bands
Source: Scottish Government
In spite of the coverage these changes are likely to generate, the implications for the overall budget are relatively modest: the addition of the 45% Advanced band raises £74m, and the extra penny on the Top rate raises £8m.
Of course, for those taxpayers who earn more than £75,000, the changes are more consequential. For someone earning £100,000, these changes today meant they will pay £750 more in tax than they would have otherwise. This is on top of already significant differences between Scotland and the rest of the UK on income tax policy. In total, now, someone earning £100,000 pays £3,350 more than if the UK rates prevailed in Scotland.
Chart: Difference in income tax liability (Scotland- UK)
Source: FAI Calculations
Changes at the margins…
The introduction of this additional band has also complicated the marginal income tax schedule in Scotland. This is the rate someone pays on each additional pound they earn.
Interestingly, the marginal rate someone faces at £75,000 in Scotland is now the same as people earning £125,140 or above in the UK, at 45%.
Chart: Marginal rates of tax, Scotland and UK
Source: FAI calculations
When is an Inflationary uplift not quite what it seems?
The DFM said in her speech:
“We will increase the Starter and Basic rate bands by inflation to £14,876 and £26,561 respectively.”
You might think that this means (e.g.) that the point at which you start to pay the Basic (rather than the starter) rate has increased by inflation, so it would mean that if you were only paying the Starter rate, and your pay went up by inflation, you would remain only paying the Starter rate.
However, the word “band” here is very important. When the Scottish Government lays the legislation each year to set the income tax bands, it sets out the size of the income tax bands above the personal allowance.
So, for the starter rate last year they set out that the 19% rate would be charged on the first £2,162 of income above the personal allowance.
It is this £2,162 that has been increased by inflation, to £2,306, resulting in the threshold increasing from £14,732 to £14,876 – which is only an increase in this threshold of 1%. Similarly, the change for the intermediate rate threshold represents an uplift of 3.4%.
Whilst the Scottish Government will no doubt say that they were clear it was the bands that were increasing by inflation (not the thresholds), this means someone who was paying only the starter rate before who has an inflation-linked pay rise could now be paying the basic rate on some of their income. It feels like this is pretty misleading, and mixing in the thresholds in the statement we’ve quoted doesn’t help with that impression.
Council Tax Freeze – has it been fully funded?
Well, it depends, but the amount announced today is unlikely to settle the matter for Scottish Councils.
The Scottish Government continued to claim it was ‘fully funding’ the freeze in rates for next year, and allocated £140m on the basis of a 5% increase. While this is about right for an average 5% increase in rates, we know some councils were planning on increasing rates by more than 5%, and are unlikely to receive compensation for that.
This funding also excludes compensation for the planned increase in multipliers for higher band properties, which was consulted on over the Summer and many councils would have assumed in their planning, and which would have required an additional £180m.
Little relief for business ratepayers
On non-domestic rates, the Cabinet Secretary resisted calls from those in the Retail, Hospitality and Leisure sector to replicate the 75% relief that has been in place in England this financial year and extended to next year. £230m of Barnett consequentials were generated by the Autumn Statement, but the DFM chose to dedicate only some of this funding to NDR.
Overall, the main announcement was that the basic poundage was frozen, at a cost of £199m – but this was coupled with an increase in poundage for higher properties, which raises £170m extra. The only place for which a targeted hospitality relief was announced was for the Scottish Islands, at a cost of £4m.
Overall, the cost of these measures to the Government was £34m, which represents about 40% of the additional revenue raised from the income tax changes.
A tight spending envelope materialises
Less clear from the Budget Statement was where some of the relatively large cuts to funding would fall. For that, we have been going through the detailed tables released alongside the Budget.
We were happy to see more easily accessible outturn figures at Level 2 (so more granular than portfolio level) going back to 2014-15, and which will be helpful in future for comparisons, especially if there are reorganisations of responsibilities among Cabinet Secretaries.
The overall outlook for spending is a tough one. Overall funding has gone up by 2.6%, but two-thirds of this increase goes towards social security spending, which in 2024-25 will be around £1 billion higher than in 2023-24. With local government resource spending also going up by £470m and health spending growing in real terms, pretty much all else bears the brunt of the funding constraints. For example, the Scottish Funding Council sees its funding permanently cut by over £100m, and this will include reductions in first year university places for Scottish-domiciled students, although it is not clear on the extent of this reduction.
Capital spending in particular is hard-hit, with a 4% cut in real terms – which translates into an actual cut in cash terms by £170m. While there are some areas for which funding grows, others see large falls in allocations. Local government capital grants will be £150m lower next year compared with their 2023-24 budget – a 21% real terms cut. The Affordable Housing Supply Programme has been reduced by £196m, and this means a 37% reduction in the past two years. Even areas of important commitment by the Scottish Government such as the Just Transition Fund have been severely restricted, with the allocation cut by 75% for 2024-25.
Stay tuned for more analysis in the days to come!
Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.
João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK's public finances and on the effect of economic developments and fiscal policy on the UK's medium-term outlook.
Calum is an Associate Economist at the Fraser of Allander Institute (FAI) and a Researcher at the Centre for Inclusive Trade Policy (CITP). He specialises in economic modelling and trade, and holds an MSc in Economics from the University of Edinburgh.