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Scottish Budget, UK Budget

UK Budget 2023 – Our first look at what it means for Scotland

After the frenzied Autumn 2022 of UK Budget Statement chaos, we all expected a much calmer outing for the UK Chancellor today. However, it wouldn’t be a UK Budget without few big announcements.

Pretty much all the announcements had been trailed before the statement, and there were no rabbits coming out of any hats today. But the signal of intent on childcare and changes to disability benefit rules are significant, even if they will take a while to come into effect.

Underneath the surface, there are some interesting implications for Scotland, including some crunchy Fiscal Framework implications to work through on social security and a fairly hefty inflationary increase in alcohol duty for non-draught products due to take effect in August.

As usual though, there is a real lack of detail in the published documents on the implications for the Scottish Budget with respect to Barnett consequentials. This is something we will need to return to.

OBR forecasts

The backdrop to the budget and the decisions made are the forecasts provided by the Office for Budget Responsibility (OBR). These tell the Chancellor what the outlook is for the economy and the extent of fiscal headroom available for new announcements.

GDP Growth

The big news is that the forecasts no longer point to a (technical) recession this year. As a reminder, a technical recession is defined as 2 consecutive quarters of negative growth – instead, during 2023 there will be contraction in the first quarter only.  However, it’s hardly a forecast full of economic tidings and joy. GDP is expected to fall by 0.2% this year. So no recession, but not much growth either expected for the year ahead.

Inflation

Less surprising is that inflation is forecast to come down quite significantly. The forecasts are for inflation to fall from 10.7% in the final quarter of 2022 to 2.9% by end of 2023.

How much of this would have happened anyway?

According to the Chancellor ¾ of a percent of inflation is due to the measures outline. Not to be sniffed at, but hardly the deciding factor.

Next year, it works the other way with the OBR saying that the effects of subsequent increases to fuel and alcohol duties and the other measures add 0.4 percentage points to CPI inflation in 2024-25. On fuel duty though, we have to remember that, given recent form, the UK Government are unlikely to actually carry this increase through in reality

The Public Finances

The deficit is expected to fall year on year, meeting the Chancellor’s fiscal rule of being under 3% for the final three years of the forecast. In addition, the UK is forecast to have a current budget surplus (i.e. borrowing only for capital spending) in the final 2 years. Debt begins to fall as a proportion of GDP by the end of the forecast horizon – although still sits at 94.6% of GDP.

Next we turn to the announcements. We’ve been through all the information made available to see what it means for Scotland although we’re lacking all the information that would allow us to do a comprehensive analysis.

UK Government announcements that will apply in Scotland

Energy Price Guarantee (EPG) for consumers

This cap on energy bills will remain at £2,500 for the three months from April for a household with typical use. Beyond this, it is expected (based on current forecasts) that the OFGEM cap could fall back to around £2,100 or £2,200 for typical use.

Prepayment meters

Charges for prepayment meter (PPM) customers will be reduced from the 1st July 2023 until April 2024 with plans to bring in more permanent changes to bring down PPM costs over the long term. The details of how this will operate in the short term are a little sketchy, although the Budget document does state that it will save people on prepayment meters on average £45 a year. We’ll take their word for it.

Fuel Duty

As had been widely expected even at the time of the Autumn Statement, the planned 11p rise in fuel duty not going ahead. For a further 12 months, the previously announced 5p cut remains, and rates will be frozen. In short, the announcements today leave fuel duty rates at current levels.

Alcohol Duty

There are two parts to this:

  1. From August 2023, non-draught alcohol duties will be increased by 10.1%*.
  2. At the same time, there will be an increase in the Draught Relief that was already pencilled in for August 2023. The Chancellor gave this increase in relief the not-so-catchy name the: “Brexit Pubs Guarantee”. From what we understand, Draught relief still will only apply to containers of at least 20l that are sold in ‘on-trade’ venues[i]. Other products sold in pubs will not form part of the Brexit Pubs Guarantee it seems.

The timing is interesting for anyone who has been keeping up with the Deposit Return Scheme (DRS) goings-on in Scotland. The DRS is also scheduled to come into effect in August 2023. A 10+% RPI rise in duty plus a 20p deposit is certainly going to be noticeable (although not necessarily a reason to not go ahead with the DRS we should add!)

Corporation Tax

There are a few changes here that will impact on businesses in Scotland.

For three years from April 2023 (and with a commitment to make this permanent when ‘fiscal conditions allow’), businesses will be able to write off the full cost of qualifying plant and machinery investment in the year that the investment is made, in a bid to support business investment.

A range of changes to reliefs are set out, but one that looks particularly relevant to Scotland is a new Video Games Expenditure Credit, replacing a previous EEA tax relief.

Pensions

There was no announcement on changes to the pension age, but there will be changes to the amount that can be paid in, tax free, each year to pensions, and the removal of the lifetime cap. The changes to the NHS Pensions to ‘remove barriers for staff returning from retirement’ look to only occur in England and Wales.

Universal Credit

Much needed reforms to ensure that UC payments to cover childcare can be claimed upfront (i.e. when childcare providers ask for the payment) have been announced, to be effective from summer 2023. There will also be an increase in the maximum amounts that can be claimed for childcare through UC.

Other changes worth a mention are increased conditinality for primary carers of children, Parents of older children asked to increase the number of hours they search for work.

The way that premiums are determined for disabled people within Universal Credit have also been announced as part of a new White Paper. The Chancellor stated today the Work Capability Assessment will be abolished and the existing assessment for receipt of Personal Independence Payment (PIP) will be used instead as a passport.

The devil will be in the detail on this, and there could well be other reforms proposed at the same time. Quite how this will work in Scotland, where PIP is being replaced by a new benefit called Adult Disability Payment (ADP), is yet to be revealed. If ADP has more generous eligibility criteria than PIP then the Scottish Government could be expected to pay for any additional UC premium under the spillover rules in the Fiscal Framework. It’s not really within the spirit of the rules however, and there could be a ‘no detriment’ argument made that prevents SG from facing a higher bill due to UK reforms. Whatever happens, it won’t be until the next parliament, so there is plenty of time to argue about it and hopefully find a resolution.

Elsewhere

We had an announcement that at least 1 proposed investment zone will be in Scotland. The English zones will ‘have access to’ interventions worth £80 million over 5 years. We don’t know what the devolved version will be or whether SG will also get involved in the initiative.

Fans of the Cloddach bridge will be glad to have got a mention from the Chancellor. The Edinburgh festival has also received £8.2m from the UKG coffers

UKG announcements that won’t apply in Scotland (a.k.a. what are the consequentials)

One of the big announcements today for England is the expansion in childcare policy.

This is a devolved area of policy and it operates very differently in Scotland.

Both Scotland and England have a 30-hour per week childcare offer for 3 and 4 years olds. The difference in Scotland is that this is available to all parents, regardless of whether they are in work. In England, parents must be in work to get the full 30 hours and, if not, they get 15 hours of free childcare.

The announcement today from the UK Chancellor extends this 30-hours a week entitlement to children from the age of 9 months. However, the in-work criteria remains (all adults must be working in 16 hours) and it will be rolled out in stages.

  • April 2024: 15 hours for 2 year olds
  • September 2024: 15 hours for children over 9-months
  • September 2025: 30 hours for all children

Scotland will receive significant Barnett consequentials and although we will expect SG to commit to further childcare expansion off the back of this, we may not see a carbon copy of the UK policy. For example, if SG wants to retain the principle of universal childcare in Scotland, it will need to find additional funds, beyond these direct consquentials, to ensure all parents are covered.

There was some immediate money to increase funding for current provision plus some wrap around care announcements for primary school aged children. Schools and local authorities will be funded to increase their provision with the hope that all children will be able to access wrap around care to cover the period 8am to 6pm. This will help the parents who work 9-5, but not those who have less conventional shift patterns.

There are other areas where we think there will be Barnett consequentials. For example, support for swimming pools and leisure centres, a pothole fund, a new supported employment scheme, and support for the third sector. At the time of writing unfortunately, there is no clarification on the total level of consequentials or their profile.

The £320 million of money coming to Scotland mentioned in the Chancellor’s speech is for 2023-24 and 2024-25, but that’s all we’ve been told. Given that these figures will have been worked out in advance, there is surely no reason why these figures can’t be released in full at the same time as the rest of the Budget documents.

As and when we do get more information, we will provide an update and in time we will see how the Government here in Scotland respond.

 

[i] https://www.gov.uk/government/publications/reform-of-alcohol-duty-rates-and-reliefs/reform-of-alcohol-duty-and-reliefs

*we have updated the figure used to determine the uplift in alcohol duties after receiving clarification from the OBR – see Weekly update – we’re back after combing through the Budget docs… for more information

Authors

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.

Picture of Mairi Spowage, director of the Fraser of Allander Institute

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.