Fraser of Allander Institute update

Budget speculation, the economy returns to growth, the impact of cuts, and the disability employment gap

Three weeks still to go, and speculation about what will be in the Budget on 30^th October continues (writes Fraser of Allander Institute’s MAIRI SPOWAGE, SANJAM SURI and EMMA CONGREVE).

Will the Chancellor change her fiscal rules? It looks likely that there will be some movement on this, whether in the definition of debt or something more fundamental, however much that could undermine their commitments in the manifesto.

Will there be increases in Capital Gains Tax? The speculation on this has reached fever pitch, with some stories suggested rates from 33% to 39% are being considered. (Interestingly, when we look at the ready reckoners from the HMRC, changes of this magnitude in some forms of CGT actually may result in less revenue when behavioural effects are taken into account). There certainly seems to be expectations out there in the economy that the rate may change, with lots of signs that disposals have increased hugely in anticipation.

Will there be increases to employer national insurance contributions? There has been much discussion about this, given the commitment of the UK Government not to “raise taxes on working people”, and due to the fact that the PM would not rule this out this week. A 1 percentage point rise in employers NICS would raise almost £9bn according to the ready reckoner (although we think that doesn’t include the additional costs to departments).

We’ll be going into the detail of some of these issues in the run up to the Budget, so there will be plenty for you all to chew over as we wait… and wait… for the Budget.

UK Economy Returns to growth in August

Data released this morning showed that the UK economy posted its first monthly GDP increase since May 2024. ONS reported this morning that monthly real GDP grew 0.2% in August 2024.  There were no revisions made to the “no growth” months of June and July.  While monthly numbers were in line with consensus forecasts, they show an economy that has slowed down from the beginning of 2024.

The good news is that growth in August came from all key sectors- with services rising by 0.1%, and production and construction rising by 0.5% and 0.4% respectively. Crucially- August was also the first time all three sectors positively contributed to growth since March 2024.

A more granular breakdown of service sector growth indicates that the biggest positive contribution came from the professional, scientific, and technical activities subsector- where monthly change in output was +1.6% from the previous month.  Despite overall growth in services sector- seven subsectors saw decline in economic activity- with arts, entertainment, and recreation falling 2.5% over July 2024.

The production sector grew by 0.5% in August after hefty decline of 0.7% in July. Despite a rebound in August, the production output is essentially flat since the end of May 2024. The biggest contributor to production sector came from 1.1% rise in manufacturing activity- driven by transport equipment manufacturing However, mining and quarrying output declined 4.0% over July 2024- continuing their downward trend since end of December 2023.

What is the impact of cuts in spending?

When the Scottish Government presented their Fiscal Statement to parliament in early September, the Cabinet Secretary for Finance said that impact assessments had been done to understand the impact that the announced cuts could have on different groups.

These assessments were not published at the time, but finally were published last week. We welcome the publication of these, and although there are lots of criticisms that could be made of the assessments, it is good to see this transparency. One area of weakness is assuming that if funding was maintained at previous levels, there will be minimal impact, which assumes that previous levels was the correct level… so why was the budget being increased in the first place?

One of the main things to note though is the lack of analysis of cumulative impact on groups. A number of “minimal impacts” could still add up to something significant if they are affecting the same group.

Final report of the parliamentary Inquiry into the disability employment gap published

In 2016, the Scottish Government published A Fairer Scotland for Disabled People, which outlined how the government intended to shape policy – especially labour market policy – for disabled people living in Scotland.

One of the key goals this report outlined was reducing the gap in the employment rate between disabled and non-disabled adults. In 2016, 80.4% of non-disabled working aged adults were employed in Scotland, compared to 42.8% of disabled working aged adults, making for an employment gap of 37.5 percentage points. The government’s goal was to cut this gap in half by 2038.

In 2023, the Economy and Fair Work Committee in Scottish Parliament launched an inquiry into how this policy goal was going. In fact, in 2023, it seemed like it was going quite well.

The gap was down to 30.3 percentage points, which was actually ahead of schedule: if progress were linear, the disability employment gap would drop by about 0.85 percentage points each year, meaning that it would be 31.5 percentage points in 2023.

However, the inquiry turned up less-than-optimistic findings, which have been published in a report out today from the Scottish Parliament.

Two of our economists at the FAI, Allison Catalano and Christy McFadyen, contributed to this inquiry through a fellowship with the Scottish Parliament Information Centre (SPICe). Their work, which we published back in January, found that the majority of the change in disability employment is due to a rise in disability prevalence, rather than any specific policy.

Their report also highlighted some significant data issues: people with different types of disability have vastly different capacities for employment, vastly different support needs within employment, and vastly different rates of employment. Yet, in Scottish data and policymaking, disabled people are often treated as a singular entity, meaning that it is not possible to understand where policy interventions might be most effective.

The final inquiry publication highlights our work and a variety of other issues which will need to be addressed in order to improve work access for disabled people, all of which can be found here. They have produced 44 recommendations to improve employment prospects for disabled people.