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Scottish Budget

The day after the Scottish Budget before

After a few weeks of build-up, and a lot of work on our Budget Report ahead of it, we had the main event of the Scottish Budget yesterday. We published our initial reaction, but we have now had a bit more time to digest more of the information that the Scottish Government and Scottish Fiscal Commission have put out.

In the new year, we will be taking a step back and looking at the how this Budget fits with the long term ambitions of the Scottish Government. But for now, here are a few more insights that have emerged as the dust has settled.

The largest announcement in regards to social security was the confirmation of 6.7% uprating

Social security spending in Scotland includes spending on benefits that have been devolved to Scotland (mainly disability and carer benefits) and spending on new or top-up benefits, such as the Scottish Child Payment.

Uprating keeps the value of benefits in line with inflation. September 2023’s CPI inflation reading of 6.7% was slightly below the 6.9% forecast by the Scottish Fiscal Commission in December 2022, but higher than the 5.4% assumed in May.

This means, for example, that the payment rate for Scottish Child Payment is unchanged from the forecast a year ago (owing to the rounding to the nearest 10p), but is actually 35p more than the SFC thought it would be in May. And with inflation now forecast to be higher in the medium-term, the rate will be significantly higher – although of course, this only keeps up with the rate of price increases.

Chart: Successive Scottish Child Payment rate forecasts

Source: Scottish Fiscal Commission

The SFC have revised down their medium-term assumption for Adult Disability Payment recipients

Overall spending on ADP (including Personal Independence Payment (PIP), the legacy benefit it replaces) has been revised up by £8m in 2024-25 relative to December 2022, and by £62m in 27-28. But that is essentially driven by higher inflation, which increases average awards.

But the opposite happens to the forecast for the caseload on ADP. The SFC has said it has allocated “more weight to the role of the cost of living crisis” than before in explaining the high level of applications seen so far this year –  which the SFC expect to slow down as cost-of-living pressures ease. Their forecast sees only a small increase in recipients next year relative to their December 2022 forecast (3,800 people), and 4,500 fewer than anticipated in May.

By 2027-28, the SFC expect 40,000 fewer recipients of ADP than they did in May, a 6.3% reduction in the caseload. Compared with their December 2022 forecast, it’s a 23,000 (3.9%) reduction.

Chart: Successive forecasts of ADP caseload

Source: Scottish Fiscal Commission, FAI analysis

As part of the fiscal framework, the Scottish Government gets an addition to the Block Grant in line with OBR forecasts for comparator benefits in England and Wales, where PIP continues to exist.

In their November 2023 forecast, the Office for Budget Responsibility increased their view of spending on PIP over the medium term. Along with other changes, including uprating, this increased the Block Grant Adjustment (BGA) related to ADP by £451m in 2024-25 relative to December 2022, and by £548m by 2027-28.

Because spending in Scotland has been revised up by less (£398m in 2024-25, £380m by 2027-28), the net funding position has improved considerably in the SFC’s view.

The December 2022 forecast for 2023-24 was for the net position to be -£208m; the December 2023 forecast puts it at -£300m.But it then grows much slower – to -£358m in 2024-25, rather than -£411m as projected a year ago, an improvement of £53m. The improvement is even greater by 2027-28, reaching £167m.

Buoyant outlook for Scottish earnings drives large improvement to forecast

The Scottish Fiscal Commission have significantly revised up their outlook for Scottish earnings in the current year and in 2024-25. This matters because it directly impacts on the outlook for income tax, which in turn directly impacts the size of the Scottish Budget.

The SFC dedicated a large part of the report to discussing the data on earnings, and why evidence of faster earnings growth in Scotland (compared to the rest of the UK) has persuaded them that this is likely to continue into 2024-25.

To be fair, they point out that other independent forecasters (that is, other than the Office for Budget Responsibility) are forecasting earnings growth that is closer to the earnings growth the SFC are expecting in Scotland. Essentially, they think that the OBR may well revise up their forecast in future fiscal events to come closer to their estimates.

This could mean that the relatively very positive impression given by the current set of forecasts may not persist. The SFC flag this as a significant downside risk to the forecasts.

Back with more on uprating tax bands by inflation

Yesterday, we pointed out that the decision of the Scottish Government to uprate the starter and basic rate bands by inflation does not lead to inflationary uplifts in the thresholds.

To be clear, it is a choice for the Scottish Government as to how to uprate the bands and thresholds, and this way of uprating has been used before.

But it does mean, for example, that someone earning £14,700 in 2023-24 and with an inflation-matching pay-rise in 2024-25 (to £15,685) would now be brought into paying 20p on the last pound they earn next year. If the threshold had been indexed by inflation instead, they would still be paying 19p on the marginal pound they earned. Under what was announced yesterday, they will still be subject to fiscal drag.

The table below shows how thresholds for the starter, basic and intermediate bands will look next year, and how they would have looked like had they been indexed by inflation. In both cases, the top of the intermediate band – the higher rate threshold – is kept frozen in cash terms at £43,662, as the Scottish Government and Scottish Fiscal Commission were already assuming beforehand, and so moving the top of the basic rate band necessarily means narrowing the intermediate band.

Table: Starter, basic and intermediate rates in 2023-24, 2024-25 and if threshold had been indexed with inflation

Starter rate (19p) Basic rate (20p) Intermediate rate (21p)
2023-24 Starts at £12,571 £14,733 £25,689
Ends at £14,732 £25,688 £43,662
2024-25 (bands increased with inflation) Starts at £12,571 £14,877 £26,562
Ends at £14,876 £26,561 £43,662
% increase in band 6.7% 6.7% -4.9%
% increase in threshold 1.0% 3.4% 0.0%
If threshold increased with inflation Starts at £12,571 £15,720 £27,410
Ends at £15,719 £27,409 £43,662
% increase in band 45.7% 6.7% -9.6%
% increase in threshold 6.7% 6.7% 0.0%

Source: Scottish Government, Scottish Fiscal Commission, FAI calculations

Since we’ve been asked, we have estimated that the approach by the Government of uprating the bands rather than the thresholds raises £35m, and brings about 95,000 people into higher tax bands than they otherwise would be in.

It seems sensible to assume that if there is uprating to the tax schedule by the Scottish Government in future, it will be the size of the band that is uprated rather than the threshold.

However, the impact that this has on the tax that people pay is not intuitive. Indeed, a lot of people have got in touch with us to say that they had interpreted an inflationary increase in the bands as an increase in the threshold, and thanking us for explaining it. Ideally, it would be the Scottish Government, rather than us, who explained what this policy decision means in practice.

Authors

Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.

João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK's public finances and on the effect of economic developments and fiscal policy on the UK's medium-term outlook.

Emma Congreve is a Principal Knowledge Exchange Fellow and Deputy Director at the Fraser of Allander Institute. Emma's work at the Institute is focussed on policy analysis, covering a wide range of areas of social and economic policy.  Emma is an experienced economist and has previously held roles as a senior economist at the Joseph Rowntree Foundation and as an economic adviser within the Scottish Government.