Demographic projections and income tax revenues under the fiscal framework: implications for the Scottish budget

Frantisek Brocek[1] and David Eiser

Under Scotland’s fiscal framework, Scotland’s budget will be better off (than it would have been without tax devolution) if income tax revenues per capita grow more quickly than they do in the rest of the UK (rUK).

Some have argued that demographic projections for Scotland mean that the Scottish budget will almost inevitably lose out from this arrangement.

This is because Scotland’s old age dependency ratio (the ratio of those above working age to those of working age) is projected to grow more rapidly than rUK’s over the period to 2050. Seeing as those above working age pay less income tax per capita, a more rapid growth in this group will act to slow the growth of total income tax revenues per capita, relative to rUK.

But in this blog we show that the issue is more nuanced than this. This is because, as well as there being a difference between the average revenues per capita for those of working age compared to those above working age, there is also significant variation in income tax revenues per capita by age group within the working age population.

When demographic projections by age group are taken into account on a more granular basis, it turns out that the operation of the fiscal framework might actually work in Scotland’s favour. Although Scotland’s old age population is projected to grow relatively more rapidly, its population of children and young adults (who pay little tax) is also projected to decline more rapidly. This more than offsets the impact of a faster growing older population in reducing the growth of income tax revenues per capita.Continue reading

December 4, 2019

2019 General Election: a review of the manifestos from a Scottish perspective

Inevitably, the defining feature of all the manifestos this election is the spectre of constitutional change.

For the UK-wide parties this is an issue of Brexit (or stopping Brexit), whilst in Scotland there is the added question of independence.

Beyond these major constitutional debates, reading UK election manifestos can feel a strange business from a Scottish perspective. Most of the policy pledges relate to areas that are devolved, with the next Holyrood election not for another 18 months.

Nonetheless, these pledges will still have major implications for Scotland’s budget, whilst also framing the view of what policies might be politically viable here. This is true for spending commitments, but it is now increasingly true of tax policy too.

The choices facing the electorate are stark, not just on the constitution but also day-to-day tax and spending choices. It is no surprise that with so much uncertainty, Derek Mackay has shelved plans for a pre-Christmas Scottish Budget

So what do the manifestos imply for Scotland and the Scottish Budget?Continue reading

December 2, 2019

The Scottish budget 2020/21: postponed for now… but til when?

The Scottish Government had been due to publish its draft budget for 2020/21 on 12th December.

The postponement of the UK Government’s budget – which had been scheduled for 6th November – had already thrown the status of the Scottish budget date into doubt. But the announcement of the General Election on the 12th December clearly necessitated a postponement of the Scottish budget. The Scottish Government announced last week that the Scottish budget will not be published until after Christmas.

But given that we don’t know when the next UK budget will be, when should we expect the Scottish budget? Is it even possible for the Scottish budget to be published before the UK budget, and what would be the implications if it was?Continue reading

November 18, 2019

Presentations from Scotland’s Budget Report 2019 Event

On Tuesday we published our fourth annual Scotland’s Budget Report. This was accompanied by an event at the National Museum of Scotland.

Alongside the FAI analysis, Paul Johnson, Director of the Institute for Fiscal Studies, Andy King from the Office for Budget Responsibility, Caroline Gardner, Scotland’s Auditor General, and Charlotte Barbour, director of taxation for ICAS, also spoke at the event. All discussed the current fiscal environment which is made all the more uncertain by the General Election and the flurry of announcements by all political parties on future spending commitments.

These presentations can be found below.

 

November 15, 2019

Key points from our Scotland’s Budget Report 2019

Today we published our 4th annual Scotland’s Budget Report.

The latest report shows that the Scottish Government’s resource budget in the past three years has evolved more healthily than was anticipated at the start of the parliamentary term in 2016, due to both UK government spending increases and Scottish government tax decisions.

Following announcements of further spending increases this year – and via the Barnett Formula – the outlook for Scotland’s resource block grant from Westminster has improved even further this year and next.  Real terms increases of around 2% per annum are anticipated for the next two years, the first time period of consistent real terms increases since the start of the ‘austerity’ period.

But two issues, both relating to devolved income tax, will offset some of this increase:

1. The block grant in each of the next two years will be reduced to take account of the fact that outturn Scottish income tax revenues in 2017/18 and 2018/19 turned out to be lower than forecast. The Scottish Government will be required to repay £200m in 2020/21 and potentially as much as £600m in 2021/22.

2. On the basis of the latest official forecasts, Scottish income tax revenues are on track to disappoint relative to the rest of the UK.

As a result, despite the block grant from Westminster growing by 2.1% in 2020/21, the resources available to the Scottish Government may still only grow by less than 1% in real terms.

All this comes at a time of heightened political and economic uncertainty. Financial responsibility for £3.5bn of social security spending will transfer to the Scottish budget in April 2020, bringing new pressures and risks.

Continue reading

November 12, 2019