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Local Government, Poverty, Scottish Economy

Weekly update: council tax announcements, child poverty modelling and GDP figures

We are hurtling towards the UK Budget at speed, with Chancellor Jeremy Hunt due to present updated forecasts and policy measures on Wednesday. As we mentioned yesterday, much will be made of the final decisions after the numbers come from the OBR, but don’t be fooled – the decisions have now all been taken, and it’s all about taking people on the journey by raising some unhappy prospects before magically finding some “additional” money.

But while we the Treasury and the OBR prepare their documents, let’s go through some of the main goings-on in Scottish economic and fiscal circles this week.

A council tax stooshie

When the Scottish Government announced its package aimed at convincing councils to freeze council tax rates next year, the noises from councils weren’t particularly happy ones. The offer had apparently been upped from the £144 million in the Budget documents to £147 million, which is now quoted as the figure already allocated by the Deputy First Minister.

This week, another £62.7 million has been added, courtesy mainly of additional anticipated Barnett consequentials (£45 million) from English spending on social care, which the Scottish Government expects will be confirmed on Wednesday.

This seems to have got it over the line with a large majority of councils, which have now voted to freeze rates – although Orkney’s decision is conditional on the UK Budget, and will be revisited on 11 March. There are still two councils yet to vote (Aberdeen City and West Dunbartonshire, both due on the 6th) but there are two holdouts already: Argyll and Bute (10% increase) and Inverclyde (8.2% increase), with neither set to receive their allocated share of the £209.7 million compensation pot as a consequence.

An important point that the papers for Aberdeen City Council’s meeting make (pages 103-4, for those keen) is that freezing council tax in 2024-25 has an impact on how much money any rise in future years will generate, as it reduces the base from which future increases will be calculated. To compensate for this, East Lothian Council have pre-announced an indicative 10% increase for 2025-26. It will be interesting to see if any other authorities do this – there might well be an incentive to do so in advance given the difficulties in establishing an agreement over what rises might have happened in 2024-25 but for the Scottish Government’s intervention.

A child poverty modelling update

This week, the Scottish Government released new figures on child poverty modelling. Usually an update to modelling wouldn’t make much of a splash, but the FM convened a speech to talk about the new results, showing that 100,000 children will be lifted out of poverty in 2023-24 as a result of actions of the Scottish Government.

Away from the headlines, there have actually been some major changes to input data into the model. The input data comes from the Family Resources Survey (FRS), and this provides the baseline for levels of income and poverty across Scotland. During the pandemic, and particularly in 2020/21, a drop in survey respondents means that there are no ‘representative’ figures of incomes and poverty in that year in Scotland. Usually the model takes a sample of three years’ worth of FRS data and uses that to produce the baseline. The absence 2020/21 data however means that the model is instead having to use a 2-year sample of data. All sounds very dull and boring, but what it means for the model is quite substantial. It changes the baseline (projected forward to produce a counterfactual scenario) and changes the projected impact of the policies when added together.

The reason that the FM was crowing about the modelling is because these updates improved both the baseline, and the projected impact of the modelling in 2023/24 and 2024/25. As the civil servants make clear in their technical note, it could easily have been the other way round. Indeed, the long-term horizon out to 2026/27 suggests a worsening of the outlook for poverty compared to previous forecasts.

The key thing to remember here is that these changes are not because of any new policy having a positive or negative effect. It’s simply due to a necessary change to the input data. That wouldn’t have made a great headline for a speech though!

Q4 GDP for Scotland released, and it’s not great news

A couple of weeks ago, the headlines were dominated by the news that the UK had entered a technical recession – that is, GDP had contracted for two quarters in a row. The falls weren’t huge, and there might yet be revisions, but the bigger picture was two years of very poor growth combined with restrictive monetary policy to combat inflation.

Scottish GDP for the same time period has now been released. No technical recession here (GDP grew by an estimated 0.4% in quarter 3), but the contraction in quarter 4 was very sharp, at 0.6%. October in particular was pretty dismal, with GDP falling by 0.8% in just that month. Growth was 0.2% for the year – essentially stagnant.

Manufacturing output in Scotland continued to perform poorly, falling by 3.7% quarter-on-quarter. Sectoral output is still nearly 4% below pre-pandemic levels, and contracted by 3.5% over the course of 2023.

Electricity and gas supply is a very volatile sector, especially when it comes to wind power generation – even after attempting to account for seasonal patterns – and that did contribute to 0.1 percentage points of the quarterly fall in GDP, largely because September saw very high output. But more concerning is the even larger contribution of wholesale and retail, which fell 1.6% quarter-on-quarter after a 1.4% fall in quarter 3 – a sign perhaps of consumers remaining cautious over the second half of the year, and of discretionary spending being hit by cost-of-living pressures.

Authors

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.