Today’s Scottish Budget: A brief review

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This short blog provides a summary of key points from today’s budget.

On Monday, we’ll be providing a detailed briefing. To register, please follow this link.

The economic and budget outlook

As we highlighted here, hopes that Scotland’s economy might be about to rebound from its recent weak performance have been left deflated by today’s forecasts from the Scottish Fiscal Commission.

Economic growth – according to their forecasts – remains below 1% until 2022. This is more pessimistic than our outlook.

But there is a twist, whilst the SFC have revised down their assessment of the level of tax revenues raised in each and every year, the projections for their future growth – particularly those from income tax – are relatively buoyant.

The intricacies of the fiscal framework mean that Mr. Mackay therefore had more room to manoeuvre than he might have expected.

On top of this, the government’s income tax measures raised a further £160m, implying that Scotland’s real terms resource budget was actually increasing slightly.

Spending Priorities

In this context, Mr. Mackay was able to meet his government’s commitments to maintain real terms spending on the police and provide £180m for the Attainment Fund.

An additional £400m resource spending on the NHS will see health spending break the £13bn barrier for the first time. The announcement is equivalent to a 2% real terms increase.

Whilst this is more than enough to keep the government on track with its manifesto commitment on health, the NHS will be expected to meet the government’s pay policy (a 3% pay award limit for those earning below £30,000 and less generous awards for those earning more). And with health spending needing to increase by 1% per year just to keep up with population increase and demographic change, the spending pressures on the NHS will not disappear. Mr Mackay will be waiting to see if the Chancellor offers some additional support over the coming months for NHS pay in England (which will carry consequentials for Scotland).

Given the overall budget envelope that Mr Mackay was able to announce today, the settlement to local government was arguably less challenging than might have been anticipated.

But the combination of the core General Revenue Grant and Non-Domestic Rates Income – the key elements that local government rely on for discretionary spending – is still on track to fall in real terms. Whilst the cut is relatively modest in the context of recent budget settlements for local government, town halls will be under pressure to match the pay award announced today for central government.

Councils have the opportunity to offset some of this with the option of setting a maximum three percent rise in council tax.

The budget also contained a raft of measures on the economy, largely focussed on the use of capital budgets. And despite recent debates over their usefulness – the government is making extensive and innovative use of the financial transactions (FT) allocated in November’s UK Budget.

For example, the Enterprise and Energy budget rose by nearly £200 million with over 90% in the form of capital or FT’s. The Scottish Government has repeatedly tried to establish a business bank/national investment bank and it now looks as though this will be possible with the announcement of capitalisation of £340 million over the period 2019-21. Unsurprisingly given recent political attention, a £600 million procurement was launched today for superfast broadband. There was also additional funding for City Deals.

Time will tell whether these investments, taken with the renewed approach to the Enterprise and Skills budgets, will address the productivity challenges that the SFC, and our own, analysis highlights.

As expected, the government was able to distribute a relatively generous increase in capital for next year. A key beneficiary was housing with that capital budget increasing by 30%.

Taxation

In the end, the decision on income tax was arguably less about raising significant amounts of revenue but more of a desire to begin to establish a different tax structure in Scotland compared to the rest of the UK.

So-called ‘winners’ and ‘losers’ from the tax policy change will see little meaningful impact in their overall tax bill (at least relative to income).

Although it didn’t get much attention, the budget also contained a tax cut of nearly £100 million for businesses in Scotland. This included a decision to increase business rates by a lower rate of inflation than in the past and to introduce a new ‘Growth Accelerator’ scheme which will ensure that new properties are only liable for rates after first occupation.

Of course, these are just initial proposals from the Scottish Government and they will require the support of at least one other party in Holyrood.

December 14, 2017