UK Budget 2018: Additional spending but tax dilemmas for the Scottish Government

The 2018 budget was yet again underpinned by some fairly underwhelming projections for economic growth over the next few years – the outlook for which has not changed materially since spring.

But Mr. Hammond’s budget was boosted by the fact that economic growth has proved relatively more ‘tax rich’ recently than had been forecast.

The Chancellor has spent all of this spending windfall, whilst achieving early his ‘fiscal mandate’ – that the cyclically adjusted deficit should remain below 2% of GDP from 2021, and his ‘supplementary target’ (that debt should fall as a percentage of GDP 2020/21).

From the perspective of the upcoming Scottish budget, which will be presented by Derek Mackay on 12 December, the UK Budget contained two major announcements.Continue reading

October 29, 2018

The Fiscal Commission’s forecast evaluation

Last week, the Scottish Fiscal Commission (SFC) published its Forecast Evaluation Report.

As with all SFC publications, there was a significant degree of interest in its content.

In particular, it showed that Scottish income tax revenues were some £550m lower than expected. It also addressed the gap between the SFC’s pessimistic forecasts for growth and recent economic indicators.

This blog summarises some of the key issues from the report – with a focus on GDP and income tax. A more in depth discussion (including for the other devolved taxes) will appear in November’s Scotland’s Budget Report 2018.

Continue reading

September 10, 2018

How serious is Scotland’s demographic challenge?

Frantisek Brocek is an undergraduate economics student at the University of Strathclyde. This post summarises some of his recent research on demographic trends, and the implications for fiscal sustainability.

It is widely understood that Scotland, like the rest of the UK, faces a challenging demographic outlook. Rising life expectancy combined with declining fertility rates mean that the ratio of Scotland’s population of pension age relative to its working age population is increasing.

One of the big challenges that this creates is in terms of the outlook for the public finances. People above the state pension age tend to have lower incomes and expenditure than those of working age, and hence pay less tax per person. But at the same time, levels of public spending on this group are substantially higher than for the population of working age. Chart 1 shows the profile of public spending and tax receipt over the lifetime for a typical individual. (The profile is based on UK data but is not substantially different for Scotland).

But how does the demographic pressure facing Scotland in the coming decades compare to the effects of population in the recent past? How does Scotland’s demographic challenge compare to the outlook for the UK as whole, or other European countries? And what can or should the Scottish Government do?Continue reading

September 5, 2018

Examining the economic case for a reduction in Air Departure Tax

Daniel Borbely is a PhD student in the Department of Economics. In this post he examines the potential economic impacts of a reduction in the rate of Air Departure Tax in Scotland.

Following devolution of Air Passenger Duty (APD), the Scottish Government has set out its plan to introduce a new Scottish version of the tax, the Air Departure Tax (ADT).[1] The ADT would be levied on passengers departing from Scottish airports.

As part of this, the Government has committed to reduce ADT by 50% by the end of this parliament, and abolish it, in the long-run, “when finances allow”. The aim is to increase the connectivity of Scottish airports and to make them more competitive.

But there remains debate over the evidence base to support (or argue against) the notion that cutting ADT will deliver the expected economic, budgetary and environmental benefits hoped for.Continue reading

August 14, 2018