Impact of SG tax changes on household incomes

The Scottish Government says that income tax policy changes since 2016/17 have been ‘highly redistributive’ and have ‘protected low income earners’. But how much of this affect can be attributed to the Scottish Government’s rates and band changes, and how much to the UK Government’s Personal Allowance changes? And how does the story about the distributional impact of recent policy decisions change if we incorporate other taxes (council tax) or social security spending?Continue reading

March 2, 2020

Budget 2020-21 – preliminary analysis

The fourth budget of this parliamentary term has, as expected, led to a healthy increase in the resources available to the Scottish Government.

So what were the key points from today?

The overall outlook for public spending

Spending on public services is up by around 3.6% in real terms in budget 2020/21 compared to budget 19/20 – excluding new responsibilities on social security and farm payments.

This uplift is nearly all due to increases in the block grant as a result of Barnett consequentials flowing from spending increases by the UK Government. Arguably, not quite all of this uplift represents an increase in actual spending power – some of it reflects funding implications of higher pension costs for public bodies.

But nonetheless this is the largest increase in the block grant since pre-austerity days. The block grant is now just under 3% lower than in 2010/11.

As well as increases to the block grant, the Scottish Government has also chosen to maximise spending in 2020/21 by using its new resource borrowing powers to mitigate the effect of forecast error that it knew were coming down the line.

Recall, the budget faced a £200m reconciliation this year to reflect the fact that the 2017/18 budget was based on a set of income tax forecasts that subsequently turned out to be too optimistic. But rather than meeting the costs of that reconciliation in 2020/21 they have chosen to borrow, meaning that the next Scottish Government after the election will have to repay the money.

The expected reconciliation for next year has become slightly less negative – now around £550 million – but is still a very large future risk to be managed.

The outlook for earnings – which underpins the forecasts for income tax – has improved marginally since the SFC’s last assessment in May. As a result, the outlook for tax revenues is also now slightly better than might have been anticipated 6 months ago.

But the overall economic outlook remains weak.

The budget effects of the Scottish tax policy – which raises over £500m more in revenues for the government than if UK policy were implemented – has been all but wiped out by weaker earnings growth in Scotland in the past couple of years, and there is nothing in the forecasts to suggest any bounce-back in the next few years.

The budget for capital spending is also up significantly – the block grant from Westminster is increasing by 12% in real terms. On top of this, the government plans to make full use of its capital borrowing powers in 2020/21. This will take capital investment in real terms back to its pre-austerity peak.Continue reading

February 6, 2020

Budget 2020/21 – key issues to watch for

On Thursday, Mr Mackay will present his fourth budget – the penultimate budget before next year’s elections.

The budget will be delivered against the backdrop of the UK’s recent departure from the EU, significant frictions between both governments on issues ranging from constitutional change to budget timing, devolution of major new social security powers, and a weak outlook for the economy.

So what are the key points to look out for?Continue reading

February 5, 2020

The timing of the Scottish budget 2020/21: implications, uncertainties and risks

So now we know: the UK Budget will be presented on 11 March, having been postponed from its original date of 6 November.

What are the implications for the Scottish budget?

It seems now inevitable that the Scottish budget will have to be published in some form before 11 March.

One option is to seek to finalise all elements of the budget before the UK budget. An alternative, (with the agreement of Parliament) would be to push some final elements of the legislative process back to the second half of March, potentially allowing for last minute adjustments.

Either scenario is undoubtedly sub-optimal for the Scottish Government, Parliament, and a range of other organisations, from local authorities to Revenue Scotland.

But the idea that the Scottish budget can be delayed in full until mid to late March seems unrealistic.

Publishing a Scottish budget before the UK budget does carry uncertainties and risks, however. But what options are open to the Scottish Government to try to mitigate these challenges?Continue reading

January 8, 2020