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Fiscal Policy and Tax

What was in today’s Programme for Government?

It’s a new term at Holyrood, and a new Programme for Government – the first for the new First Minister Humza Yousaf.

In terms of content, however, there are not a lot of new ideas to get excited about. This isn’t necessarily a criticism – we all remember the meltdown generated by a certain “mini-budget” statement made by the UK Government about this time last year. In addition, the public finances don’t exactly have a lot of give in them at the moment.

However (and this a criticism!) there are a few big issues that have been kicked into the long grass, yet again, some of which could raise money, others that could prove critical to preventing additional spend in the future.

Here is our first glance summary of what is on offer for the next parliamentary year.

A focus on rebuilding trust with business

The First Minister’s New Deal for Business Group was mentioned several times as a way the Scottish Government plans to rebuild relationships with business after a rocky few months in the Spring.

The FM has said the PfG is “anti-poverty, pro-growth”. The data we published last week showed that the Scottish Government does have some way to go to build trust with business.

There is a specific commitment to “work with business to identify and remove regulations that are no longer required, if a good case can be made”. It will be interesting to see how this works in practice – particularly given the recent response to concerns about the short-term lets regulations.

More widely on the economy, there is a commitment to a new Green Industrial Strategy. While many may welcome a clear expression of how the Scottish Government plan to grasp the economic opportunity presented by net zero, the thought of another Government strategy document may also fill some with horror.

Childcare

Widely trailed, the expansion of childcare makes up a key plank of the commitment to reducing poverty.

However, in terms of detail, there isn’t a lot to go on. A vague commitment to phase in funded support to those two-year-olds “who will benefit the most”, developing some evidence on what might be required for future expansion for those over nine months and at primary school, and testing a new digital service for parents managing their childcare is the extent of it.

We may have to wait till the Budget until we have any more clarity on what the scale of some the spend and outcomes here could be. There appears to be no commitment to expanding the childcare entitlement to two-year-olds on the same basis currently offered to three- and four-year-olds, though we can only infer that from reading between the lines of the document.

A figure of 13,000 additional children and families accessing funded childcare is mentioned, but it’s not clear what this this relates to or what this will do to reduce poverty. Overall, these announcements are unlikely to add up to a significant impact on child poverty numbers unless they are deployed at a much larger scale.

There is also a specific funding commitment for the next budget year to increase pay in the early learning and childcare sector to £12 an hour, in line with the commitment for social care workers. Given the recent concerns from the childcare sector about the viability of their operations, it will be interesting to see if this alleviates their concerns.

What wasn’t in there

There is scant mention of the National Care Service, other than the Bill will continue (“subject to the agreement of Parliament” which sounds fairly ominous), but we had previously been promised an update “after the summer recess” on what the Government’s updated plans (and associated costings) are. The Programme for Government would have been an obvious place to provide that update, but we shall have to wait a bit longer to see

On Council Tax, there will be a ‘continuation’ of the Joint Working Group to identify further reforms to council tax (we have a few ideas) and some new levers to be handed over to local government for empty and second properties. Nothing substantive here and another year, it seems, of everyone avoiding dealing with the thorn in the side of any claims that Scotland has a progressive tax system.

Little detail on fiscal trade-offs

In May, the Deputy First Minister presented the Medium-Term Financial Strategy (MTFS), in which outlined three pillars to achieving fiscal sustainability – spending decisions focused on critical missions, supporting economic growth and a strategic approach to tax policy – set against the backdrop of spending commitments in excess of funding by £1bn in 2024-25, rising to £1.9 billion by 2027-28. At the time, the SFC expected a larger income tax reconciliation than has transpired, and the increased borrowing powers in the latest Fiscal Framework Agreement also help ease some of this, but we think the funding gap remains at around £600m – still a large number.

The Programme for Government adds little detail on how the Scottish Government will deal with this shortfall. There is a vague mention of “more effective targeting of existing provision and services to support those who need it most” in line with the MTFS, but no specifics on whether there will be cuts to programmes and if so, to which. The list of public service reform activities, while welcome (who could object to cataloguing assets or trying to save public funds on estates?), is hardly transformational, and unlikely to go a long way towards addressing the funding gap.

There is also no detail on the direction of travel of the taxes the Scottish Government does control, with a tax strategy promised for May next year instead – and of course we will know more about plans for 2024-25 come Budget time, even if being clear in advance and about longer-term intentions would be more in line with the aim of being strategic in tax policymaking.

The First Minister did outline the intention to introduce a new Building Safety Levy akin to that legislated for by the UK Government for England and which will apply from next year, with the intention to make developers contribute to the cost of cladding remediation work. But this is not part of current devolved powers, and so the Scottish Government would need to successfully negotiate that with the UK Government before even starting the lengthy process of introducing and designing a new levy. So it’s unclear when it could come into place, assuming the Scottish Government did get said powers.

As for revenues, clearly that depends on the tax rate – but that would have to be balanced against the Government’s intention to encourage further housebuilding. If it were to be levied at a similar rate to England, while it no doubt would raise welcome revenues, it would not be a major solution to the medium-term funding gap.

Looking ahead to the budget – on 14th December??

So, we’ll need to get the details on these trade-offs – and therefore the areas that will be bearing the brunt of any cuts – in the Scottish Budget itself. Given we’ve heard today that the UK Autumn Statement will be on 22nd November, the usual timing would mean the Scottish budget would be on 14th December. We’ll have to wait for confirmation from the Scottish Government on the timing, which hopefully will come soon!

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.

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.

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.