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.

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November 12, 2019

Latest data on earnings growth and possible implications for the Scottish budget

Today’s release of annual earnings data shows that average annual earnings grew slightly more quickly in Scotland than in the UK between April 2018 and 2019… (2.9% in Scotland v. 2.7% in UK; or in real terms, 0.8% v. 0.6%).

More strikingly, earnings in the top half of the distribution grew more quickly in Scotland than they did in the UK, whilst earnings in the bottom half of the distribution grew less quickly in Scotland than in the UK.

ASHE 2019 1

This is potentially good news for Scotland’s budget, given the importance of growth in Scotland’s income tax base relative to the growth in the rUK’s equivalent tax base in determining the resources available to the Scottish Government.

Perhaps that forecast income tax reconciliation of £600m in respect of 2018/19 will turn out to be not so large?

Before we get carried away however, there are a couple of caveats.

  • First, there are other sources of earnings data, and they don’t all pay such a positive picture. HMRC data on the pay of PAYE taxpayers shows that Scottish pay grew slightly slower on average than UK pay between 17/18 and 18/19.
  • Second, as well as employee earnings there are other important determinants of the tax base, like employment rates and income from pensions and self employment.

And whilst the trends observed this year might be good news for the Scottish budget, it does mean that earnings inequality – measured by the ratio of earnings at the 90th percentile to the 10th percentile – increased more quickly in Scotland than in the UK last year (but remains lower than in the UK).

The trends observed in 2019 are the exact opposite of what was observed between 2017 and 2018, when average earnings grew slightly more quickly in UK than Scotland, and when inequality declined more in Scotland than in the UK.

This is a reminder not to place too much attention on annual fluctuations.

The Scottish Gov has argued that its budget in 17/18 was disadvantaged by faster growing inequality in rUK, which drove relatively faster rUK income tax growth. It will be harder to make that argument in respect of revenues in 2018/19.

On average in recent years, Scottish annual earnings have generally performed in line with the UK. Trends in earnings inequality have also mirrored the UK.

The exception was in 2017, which is the main reason why Scottish tax revenues ending up being less than the BGA in 17/18. We won’t know the final position on Scottish income tax revenues until July 2020.

ASHE 2019 2

 

October 29, 2019

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

Spending Round 2019: what does it mean for the Scottish budget?

As had been widely expected, UK Chancellor Sajid Javid used today’s Spending Round to announce significant increases in UK Government resource spending – to fund day-to-day public services – in 2020/21.

The announcements amount to an additional £12bn of resource spending next year relative to the plans that his predecessor Phillip Hammond had already pencilled in. This including a substantial uplift to schools spending (£2.6bn), extra resources for social care (£1bn), and for the police (£750m).

Of course these figures relate to spending in England. But the increases in spending in England will generate an uplift to the Scottish block grant, via the Barnett Formula.Continue reading

September 4, 2019