And it’s almost here! After a long wait and a record amount of pre-Budget briefing, Rachel Reeves will present her first Budget as Chancellor tomorrow.
While you wait, we’ve put out plenty of content for the fiscally inclined among you, focussing on some of the big questions being discussed in the run up to the budget. We’ve looked at fiscal rules, whether employer NICs is a tax on “working people” (more on this below), and a historical look at how first Budgets define Chancellors.
There are short and long reads for these, and even a podcast for the final one for you to fill today and tomorrow morning before the Chancellor gets to her feet in the Commons.
One of the most curious things in the last couple of weeks of the run-up, particularly because an increase to employer NICs now looks certain, has been the contortions that various Cabinet Ministers have got into in trying to define a working person.
Normally, from a statistical point of view, this would be defined by someone who is in work, whether employed or self-employed. But the definition that the Government has come up with over the last few weeks have included someone who gets a pay slip (so is an employee) or someone who can’t “write a cheque” when they have an issue, which would rule out any business owner (no matter how small) and anyone with savings.
Much of this is because they want to claim, dubiously, that employer NICs is not a tax on working people, and therefore not a manifesto commitment broken. If this hadn’t been the case it is likely that this phrase may have morphed more into people on or around average earnings or something similar; and if that is what they meant, perhaps they should have just said that.
Here are the main things we’ll be looking out for in the budget tomorrow.
Despite the rates not changing, income tax is going up
The fiscal projections set out by the previous Chancellor included threshold freezes in income tax, including the Personal Allowance (so, what you have to earn to start paying tax), and the Higher Rate Threshold (what you have to earn to start paying the Higher Rate of Tax).
As Rates and Bands are devolved to Scotland, the decisions that the Chancellor makes on the Higher Rate are not relevant to Scots (although it is worth noting that the Higher Rate Threshold is lower in Scotland – so we start paying the Higher Rate at a lower Income AND has been frozen for many years AND that the rate is higher). However, the Personal Allowance is reserved so this is relevant to Scottish taxpayers.
What this means is that, as our wages rise over the next 5 years, more people will be brought into tax, and more people will be brought into higher rates of tax. Fiscal drag, as it is known, will mean that everyone’s effective tax rate goes up.
Expect the Chancellor to extend this to the final year of the forecast when the budget is presented tomorrow. As technical as it sounds, it raises a huge amount of money – nearly £4 billion in that final year. Watch the UK Government claim that this is not a tax rise on *checks notes* “working people”.
The fiscal rules will change, but why?
In the election campaign, Labour said they would sign up to the Conservative fiscal rules, which were:
- That debt would be falling between the 4th and 5th year of the forecasts;
- That borrowing would be less than 3% of GDP, essentially committing to borrowing being only for investment.
The Chancellor will change the definition of debt used in her rule from Public Sector Net Debt (the current measure used excludes the Bank of England) to a wider measure called Public Sector Net Financial Liabilities (PSNFL). This includes financial assets (like the student loan book) and liabilities (like funded public sector pension schemes) held by the government.
This is not without risk. Financial assets and liabilities such as those included in PSNFL can be subject the revaluation; sometimes due to the changing outlook for interest rates and sometimes due to other technical changes on valuation assumptions. These could go either way for the Chancellor, so although this gives her more flexibility now, that may not always be the case. It may be that in future years these technical changes change the outlook for debt without any real change in the underlying health of the government’s finances.
And while Public Sector Net Debt subtracts liquid assets, there is a reasonable case that these could be disposed of in a financial crisis to support government finances. This is not the case for an illiquid asset like the student loan book, for example.
It will be interesting to see the justification for this change in the measure of debt, why this, rather than the simpler measure of public sector net debt, or the wider measure of Public Sector Net Worth (which has even more issues with valuation than PSNFL, but if your argument is that assets and liabilities should be included, then why not all?)? IF the answer is simply because it gives her the headroom she needs in this Budget, then that is a little unsatisfactory for the meaningfulness of this as a rule.
A larger problem with the debt rule is of course that it sets out that debt, whichever measure is chosen, will be falling between the fourth and fifth year of the forecast, not that it will be falling over the course of the parliament. So it is a strange moving target that one never has to hit.
What will the Chancellor do on fuel duty?
The question we ask every Budget since 2011, as the Fuel Duty Escalator (which assumed automatic increases in fuel duty every year) has been cancelled in every Budget.
The reason this is important is because in every forecast that the OBR have produced since its inception in 2010, it is assumed that the Fuel Duty Escalator will be applied, which means that revenues are included in future years which everyone knows are unlikely to come in practice. The Treasury Select Committee looked at this in a report recently and concluded that the “Fuel duty fiction clouds fiscal forecasts”.
Will the Chancellor let fuel duty rise? Or use some of her precious headroom to freeze it? Keeping it at the level it is currently at would cost £2.5 billion in 2025-26 and nearly £1 billion in each subsequent year.
If she lets it rise by 5p (reversing the previous cut) plus the Fuel duty escalator (as is currently assumed in the fiscal forecasts), there may well be political attacks on the impact of this on working people.
What will the OBR say about the impact of policies on growth?
The new UK Government has been keen to emphasise that the Budget will be for growth: in the medium term, growth is the answer to the fiscal difficulties the government finds itself in.
So we will be examining the impact that the OBR think announcements will have on growth. For example, if capital gains tax is put up, what impact is that likely to have on economic activity?
What does all this mean for the Scottish Budget?
One of the first thing we look for when the budget is presented are the Barnett Consequentials: that is, the changes to the Scottish Budget that result from the announcements that are made by the Chancellor.
Chart 1: Scottish Government resource and capital funding forecasts
Source: Scottish Fiscal Commission
This is the outlook for current and capital spending from the current set of forecasts (produced in December 2023). We can see that the outlook for capital in particular looked very difficult.
The impact is very much determined by which services the UK Government choose to spend money on and the extent to which these services are devolved. We’ll be trawling the doldrums of the Budget document for details, but reports from Northern Ireland suggest that the equivalent for Scotland in 2024-25 might be as much as £1 billion. But given the focus on investment spending in the rhetoric from the UK Government, we could well be in a situation where the outlook for capital spending improves, but (given the rumoured changes to departmental spending) the resource spending outlook is even tighter than the current outlook.
One piece of analysis we’ll do after then Budget is on the size of the Scottish Block Grant. There’s been coverage in the press in the last few days about this, with claims that the Scottish Block Grant is “at the lowest share of UK spending in a decade”. These figures popped up earlier in the year, and we wrote a blog about them, pointing out that the presentation of them wasn’t very sensible. These figures have been updated, with no information released about the actual analysis this time round. We’ll provide the analysis publicly so we all can judge the size of the Block Grant in a historical context.
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.