Tag: finance

First Minister outlines his ambitions for Scotland’s economy

The First Minister has set out his ambitions for Scotland’s economy during a speech in Glasgow.

Speaking at the Barclays Campus in Glasgow’s financial district on Friday, First Minister John Swinney outlined his government’s approach to economic policy making.

Mr Swinney said poor decision-making at UK level, typified by Brexit and immigration policy, means the Scottish Government must work even harder with its limited powers to help businesses and workers thrive.

The First Minister stated his determination to bring hope and optimism and said he will “go all out” to encourage economic investment.

John Swinney said policy making will be governed by:

  • Moderate left of centre, progressive values
  • A partnership approach with unions and business
  • A focus on actions
  • Problem solving based on evidence

The First Minister will highlight significant announcements in Scotland’s renewable energy sector this week and actions the Scottish Government is taking to boost high growth businesses.

The First Minister said: “My goal is to help people live happier and healthier lives with higher living standards and to help businesses boost profitability.

“The evidence shows that independent countries that are comparable to Scotland are wealthier and fairer than the UK.

“Scotland has the talents and resources to match that performance with independence but in the here and now and in the face of Brexit we must work even harder to help Scotland’s economy with the powers we have.

“I will go all out to encourage investment in Scotland and I will ensure people know my government is a firmly pro-business administration.

“A partnership with trade unions and business will be at the core of my approach and through that approach and given our resources, not least incredible renewable energy, we should look to the future with hope and optimism.” 

ANALYSIS: FRASER of ALLANDER INSTITUTE

New FM – new approach on the economy?

Today, the new First Minister John Swinney set out his broad economic aspirations for Scotland (write MAIRI SPOWAGE and EMMA CONGREVE).

In a speech at the impressive Barclays Glasgow Campus (which he said embodied the ambition he wished to have for the economy), he set out the vision he had for Scotland to have a strong, successful, innovative and dynamic economy.

For people who were after specific policy actions, the speech was light on detail, but it was not perhaps fair to expect the FM to outline these sorts of specifics in a speech like this.

The FM also had a difficult line to tread, given (as he himself pointed out) that he has been a Minister in government for 16 of the last 17 years and wanted to talk about successes in a record he is “immensely proud of”. At the same time, he needed to recognise that there were failings in the previous administration that had led to him being in office as First Minister.

Economic Growth is front and centre

The First Minister had said as he took office that eradicating child poverty was his key policy objective. This morning he was keen to set out that there is no conflict between eradicating child poverty and boosting economic growth – rather, they go hand in hand. He set out that boosting the economy will create opportunities for people and raise living standards and that reducing poverty raises spending power and boosts productivity. This is to a large degree true, but there will at times be trade-offs that will require one to be prioritised over the other.

Given the key stakeholders from businesses and business organisations in the room for his speech today, he was very keen to set out that his government was going to work collaboratively with businesses and other organisations to design and implement policies to strengthen the economy. Even more broadly, the FM said that he wished to bring more consensus building back into Scottish politics to try to achieve outcomes – to “build up, not tear down” as he put it.

There was a clear “Scotland is open for business” from the FM today. Supporting more investment in Scotland (particularly related to the Energy Transition and Housing) is clearly a priority for this new administration. This featured heavily in this speech and has been supported by some of the policy announcements made earlier this week.

We will do, rather than write strategy documents

A widely welcomed aspect of the speech is likely to be the FM’s acknowledgment that his government could probably do with carrying out “more concrete actions and fewer strategy documents”.

We have been on record a number of times as saying that the Scottish Government produces too many and too weighty strategy documents. So this is a crowd pleaser to a room of people who are likely to want to see action rather than just warm words and have seen endless strategies come and go.

However, it is important to remember what the problem sometimes was with these documents. Sometimes, in the case of recent economic strategy documents, the problem is that they aren’t really strategies – if they set out high-level principles that no one can disagree with, but don’t provide a meaningful framework for prioritisation and dealing with trade-offs, then they aren’t particularly useful.

In other cases, even where strategies are set, they can often gather dust on a shelf rather than meaningfully drive activity in government.

All of this from the FM is likely to be broadly welcomed – it’s an easy sell to say there will be less bureaucracy. But let’s not forget that we still need a clear economic strategy from the FM and the DFM – and that a strategy is not a strategy unless it rules some things out and recognises trade-offs and carries through into day-to-day activity. This clarity and policy stability is what is likely to be required to inspire the confidence in investors that this new administration would like to see.

Looking forward, not back

Many of the questions from journalists in the room today were designed to get the FM’s views on what went wrong with economic policy under the previous leadership, In addition, he was asked what his government was likely to do on policies like rent controls, short term lets legislation, and tax increases (specifically income tax) that have been put in place at the past budgets. Essentially, people were keen to hear what, in these specific areas, might change under a John Swinney government.

The FM said clearly that he was “looking forward, not back” in response to the question about what went wrong under Humza Yousaf.

With regards to specific policies where regulation was impacting businesses, he said his Cabinet colleagues were looking at lots of areas of policy and that more details on specific policies would be following in the weeks and months to come.

On tax, he was more forthcoming – acknowledging that the higher tax rates on above-median earners in Scotland are an important component of raising revenue in straitened fiscal times, but also saying that “we can’t keep raising taxes”. It will be interesting to see how this approach to tax is reflected in the Government’s Draft Tax Strategy, which is due alongside the Medium Term Financial Strategy (date currently tbc). That is if these two documents survive the cull of strategies …

Evidence-based approaches

The FM today said a number of times that the government he leads will be more practical and will be driven by the evidence of “what works”. We are very supportive of this, of course, and hope it signals a shift of more meaningful appraisal and assessment of policy options within the Scottish Government, with the associated investment in evaluation.

In doing this, unintended consequences, whether economic or otherwise, are more likely to be identified and can be proactively mitigated, and/or it can allow the government to change course at an earlier stage.

In addition, progress and continuous improvement can only happen in a culture of meaningful evaluation and being prepared to learn from what worked and what didn’t work.

For example, how well has the policy on rent freezes and caps worked to date? It would initially appear from rental costs that it has had the opposite effect on rents than the government presumably desired, and it would also appear to have had an impact on investor confidence in the sector. Given the FM’s focus on housing in his speech today, and his commitment to be evidence-based, it will be interesting to see how this policy area progresses.

Is this a meaningful shift in approach?

With his speech today, that is certainly what the FM is trying to convey. He was saying many of the right things to hearten those who want to see the government focus on economic growth.

However, the proof will be in the policy action that is actually taken. So, let’s wait for these details in the weeks to come.

Cash injection for millions as National Insurance cut hits payslips

  • Millions of workers checking payslips tomorrow will see a tax cut
  • As the economy turns a corner, the government is rewarding hard work, with over £900 a year boost for typical worker
  • Marks another step in long-term ambition to end unfair double tax on work

There are 27 million employees in the UK, and today [Tuesday 30 April] millions of them on monthly salaries will wake up with a little more cash in their pockets, as the UK government’s Spring Budget cut to National Insurance appears in April’s pay-packets.

Since Autumn 2023, National Insurance Contributions (NICs) for workers have been slashed by a third – the largest cut to employee and self-employed NICs in history.

The main rate of employee National Insurance has been cut for 27 million workers from 12% to 8%, saving the average employee on £35,400 over £900 a year. An average full-time nurse will save £1053, a typical junior doctor £1508 and an average teacher £1270.

These cuts are possible because the economy is turning a corner, thanks to the government’s decisive action that has helped bring inflation down from 11.1% to 3.2% and ensure borrowing costs start to fall. Because of this progress, the government can now cut taxes to reward work and grow the economy.

This marks another step towards the longer-term ambition to end the unfair double tax on work and abolish employee and self-employed NICs altogether.

These tax cuts – worth over £20 billion a year – have been achievable while protecting spending including keeping the Triple Lock and the government has commitment to going further only when it’s possible to do so.

Prime Minister Rishi Sunak said: ““At the start of last year I made to pledge to half inflation. And because of the difficult decisions we have taken, inflation has more than halved and we are now able to reward work, and cut taxes for millions of workers who are seeing the benefit in their pay checks today.

“We have now cut National Insurance by £900 because it’s unfair that workers pay double tax on their income. We need to make it much simpler and much fairer and we are going to continue cutting this tax until it’s gone – while continuing to protect pensioners with the triple lock and providing record levels of funding to the NHS.”

Chancellor of the Exchequer Jeremy Hunt said: “We’re on the right track – we’ve been able to slash National Insurance to return hundreds of pounds back into the pockets of hard-working Brits because of the decisions we’ve made to manage the economy responsibly.

“Over the years ahead we want to get rid of National Insurance completely for workers – it is an unfair double tax on work and we’ve shown we can protect spending on public services while eliminating it.”

The tax cuts to date mean that for single individuals on average salaries, personal taxes would be lower in the UK than every other G7 country, based on the most recent OECD data.

The smart nature of the tax cuts will also help grow the economy by bringing more people into the labour market. The Office for Budget Responsibility (OBR) expects that, as a result of these combined cuts, total hours worked will increase by the equivalent of almost 200,000 full-time workers by 2028-29.

To mark the record cuts to NICs, HMRC launched an updated online tool earlier this month to help people understand how much they personally could save in National Insurance this year.

These cuts to reward work follow a raft of changes that came into force on 1 April and could save households up to £3,850 a year to help those struggling with cost-of-living while igniting the economy.

This includes a record increase in the National Living Wage from £10.42 an hour to £11.44, and a 12.3% drop in energy bills from the previous quarter.

In addition, households can benefit from a separate increase to the Local Housing Allowance that will mean some of the poorest families on either Universal Credit or Housing Benefit will gain £800 a year on average.

Who does this help?

The combined cuts to National Insurance mean:

  • A ‘hard-working’ family with two earners on the average salary of £35,400 each will be better off by £1,826.
  • An average full-time nurse on £38,900 will be better off by £1,053.
  • A senior nurse with five years experience on £42,618 will be better off by £1,202.
  • The average police officer on £44,300 will be better off by £1,270.
  • A cleaner working night shifts on £21,058 will be better off by £340.
  • A typical junior doctor on £65,000 will be better off by £1,508.
  • A typical self-employed plumber on £34,361 will be better off by £846.
  • The typical teacher on £44,300 will be better off by over £1,270.

‘Circle of good’ making a difference for Leith-based community bank

2023 has been a year of exceptional growth for Castle Community Bank headquartered in Leith. At the AGM it was reported that total membership has grown to over 46,000 at September 2023.

Chief Executive Adrian Sargent said: “I’m proud of our team, and the growth that we have achieved this year. We remain focussed on our social purpose of supporting communities, whilst helping our members to maximise their savings and manage debt as effectively as possible.

At the same time, our overall current Trustpilot rating of 4.8/5 shows we are getting the day-to-day experience right for our membership.”

Castle Community Bank aims to achieve sustainability through scale and is on track to do so with total assets now equal to £283m, making them one of the largest credit unions in the UK. Deposits have grown to £247m in 2023 and the loan book has increased to £225m in 2023.

Castle Community Bank Chair, Stephen Pearson said: “I like to think of our operating model as a ‘circle of good’.

“Savers like our top quartile interest rates and easy online joining process. Many of them also like the fact that we make their money go further by funding our affordable loan products, enabling people who struggle to access loans from mainstream banks to borrow what they need at affordable rates.

“In turn, prudent, commercial success enables us to grow our community programmes in Edinburgh and beyond: including providing debt advice support, sustainable food bank funding and ethical investment for charities and churches.

“Castle Community Bank is leading the way in expanding the credit union movement in the UK, delivering strong and sustainable growth, underpinned by sound risk management.”

The Scottish credit union was established in 2015 following the merger of two long established credit unions: Castle and North Edinburgh (above), along with the members of the Water of Leith Credit Union Study Group.

The study group was set up with the aim of establishing a Credit Union in Leith.

The difference between credit unions or mutuals and high street banks is they are owned and run by members, instead of shareholders, creating a shared financial community across the UK, which is accessible to everyone.

Holyrood Ministers call for UK Spring Budget to heed IMF advice against tax cuts

Chancellor urged to prioritise investment in public services

The Chancellor’s Spring Budget must provide Scotland with the increased funding needed for public services, infrastructure and cost of living support, Ministers have urged.

The UK Government should also heed the recent advice from the International Monetary Fund (IMF) against further tax cuts, Ministers added.

Deputy First Minister Shona Robison has written to the Chancellor ahead of the Spring Budget on 6 March, urging him to:

  • provide increased funding for public services and capital investment
  • increase cost of living support, including by ending the two-child limit, benefits cap, young parent penalty in Universal Credit, bedroom tax and Local Housing Allowance freeze
  • legislate for an essentials guarantee giving basic necessities and a social tariff for energy bills for those who need them most
  • transfer National Insurance powers so the Scottish Government can design a tax system fully suited to Scotland’s needs
  • urgently review the support needed for businesses that are continuing to struggle with bills which are too high, including through use of VAT powers
  • support measures to reduce carbon emissions, including by making it easier for existing buildings to be retrofitted with energy-saving materials

Separately, Public Finance Minister Tom Arthur wrote to Chief Secretary to the Treasury Laura Trott arguing that tax cuts funded by cuts to public spending would “further damage the services our most vulnerable rely on”.

The Deputy First Minister said: “When I presented our draft Budget for 2024-25 in December, I set out that the UK Government’s Autumn Statement had been a worst case scenario for Scotland’s finances.

“Our Block Grant has fallen by 1.2% in real terms since 2022-23 and the UK Treasury is slashing our capital funding by almost 10% in real terms between 2023-24 and 2027-28. Similar pressures are faced by the other devolved governments in Wales and Northern Ireland.

“With the UK Government’s Spring Budget it is vital that they change course. There is a clear need for increased investment by the UK Government in public services and infrastructure, as has been recognised by the IMF. I would urge the Chancellor to use whatever headroom may be available to prioritise investment in public services and infrastructure over tax cuts.

“The Scottish Budget has prioritised funding for social security and public services in line with our three missions. Yet our spending remains constrained by the decisions of the UK Government.

“The UK Spring Budget is a key opportunity to increase funding for our vital public services and the infrastructure that supports our economy and communities, as well as supporting people with the cost of living and investing in our net zero future.

“I urge the UKG to rise to this challenge.”

IMF warns UK government against further tax cuts – BBC News

Council funding crisis: COSLA seek urgent meeting with DFM

Following a special meeting yesterday (Friday 9th February) Council Leaders are seeking an urgent further meeting with the Deputy First Minister in relation to the Budget settlement for Scottish Local Government, highlighting the dire consequences of the Government’s current spending plans on communities throughout Scotland.

Commenting following the meeting the COSLA Resources Spokesperson Councillor Katie Hagmann said: “Leaders were clear today that an urgent meeting with the Deputy First Minister is a priority.

“Leaders expressed anger at the Budget setting timetable which has left Councils unable to set their budgets due to a lack of certainty from Scottish Government and as a result of having to wait until UK Government Spring Statement before knowing what additional funding could be passed on.

“In addition, there was a clear direction from Leaders to seek restoration of the £63m cut to the core Local Government budget on behalf of their communities and the essential services they rely on at the meeting with the DFM.

“Leaders also agreed that the council tax freeze should be on a voluntary basis with agreement that the £147m, already earmarked by Scottish Government for this purpose, is distributed to all Councils with flexibility to raise Council Tax by up to 5%. There should also be no penalty or reduction in funding in line with the principles of the Verity House Agreement.

“Leaders were clear that Councils should be given full flexibility of funding to deploy within Schools, and the wider community, to provide the right support for the diverse needs of children and young people across Scotland, therefore recognising that a wide range of people who contribute to a child’s education.

“Finally, Leaders agreed to seek a guarantee that the £45m Barnett consequentials resulting from the UK Government’s recent announcement will be passed in full to councils, also in accordance with the Verity House Agreement so it can be used to address local priorities.”

Future Asset’s impact: Inspiring girls to create a diverse financial industry future

Reception at Holyrood addresses gender disparity in Investment Management

 On Tuesday 5 December, Future Asset hosted a Reception at Holyrood sponsored by Michelle Thomson MSP.

The event provided an opportunity for key stakeholders, including students, teachers, industry representatives and volunteers, and elected members, to discuss the lack of gender diversity in the investment management industry.

Michelle Thomson, MSP said: “I’m delighted to be sponsoring this Future Asset event in the Scottish Parliament this evening. I’m very interested in using all the ways I can to promote girls and women into financial services.

“Perhaps I have more than a vested interest in this, as I spent around 23 years in financial services. I’m also the convener of the Cross-Party group for women’s enterprise and sit on the Finance Committee. In other words I’ve spent my career involved in the area so that is why I’m so delighted to sponsor it.”

The evening also highlighted the support needed for girls from all backgrounds to pursue careers within investment management, widening the talent pipeline and enabling long-term benefits for the Scottish Economy with a powerful video from the girls and teachers who are taking part in this year’s competition.

Helen Bradley, CEO of Future Asset said: “We have had so much positive feedback from our guests already. From firms, teachers and perhaps most significantly, from the girls.

“They had a fantastic evening, and it has really underlined to them that they have so much potential, and that their talents are very much needed in the investment management industry.”

At a time when the proportion of female fund managers lies stagnant at 12% in the UK and almost 60% of 16-24-year-olds in Scotland are unlikely to consider a career in financial services, this discussion comes at a crucial time for policymakers.

Future Asset informs girls in Scotland about careers in investment management, enthuses them about opportunities in the sector, and widens the talent pipeline whilst improving diversity in the industry. 

Attendees on Tuesday night heard from several schools across Scotland’s 32 local authorities on their experience with Future Asset. There are now cohorts participating in the competition from 30 of the local authorities.

The girls shared their recommendations on the additional support they require to expand access to this sector. Guests also heard from key industry representatives on why they are lending their full support to this initiative.

For more information visit https://www.futureasset.org.uk/

Scottish revenue increases by £15 billion

Strong growth in income tax and energy sector

Scotland’s notional deficit has continued to fall at a faster pace than the UK’s, driven by record energy sector revenues and strong growth in the tax take, figures for the 2022-23 financial year show.

Total revenue for Scotland increased by 20.7% (£15 billion) compared with 11.3% for the UK as a whole. This includes a £1.9 billion increase in revenue from Scottish income tax and £6.9 billion increase in North Sea revenue. These increases have partially been offset by a rise in spending on cost of living measures and interest payments on UK Government debt.

To mark publication of the 30th Government Expenditure and Revenue Scotland (GERS) statistics, the Cabinet Secretary for Wellbeing Economy, Fair Work and Energy, Neil Gray, visited the University of Glasgow’s Mazumdar-Shaw Advanced Research Centre to learn about the significant economic potential of quantum technology to Scotland’s economy. Recent research has suggested the sector could be worth £1 billion to Scotland by 2030.

Mr Gray said: “I am pleased that Scotland’s finances are improving at a faster rate than the UK as a whole, with revenue driven by Scotland’s progressive approach to income tax and our vibrant energy sector.

“While the record revenues from the North Sea show the extent that the UK continues to benefit from Scotland’s natural wealth, these statistics do not reflect the full benefits of the green economy, with hundreds of millions of pounds in revenue not yet captured.

“It is important to remember that GERS reflects the current constitutional position, with 41% of public expenditure and 64% of tax revenue the responsibility of the UK Government. Indeed, a full £1 billion of our deficit is the direct result of the UK Government’s mismanagement of the public finances.

“An independent Scotland would have the powers to make different choices, with different budgetary results, to best serve Scotland’s interests.

“While we are bound to the UK’s economic model and do not hold all the financial levers needed, we will continue to use all the powers we do have to grow a green wellbeing economy, while making the case that we need independence to enable Scotland to match the economic success of our European neighbours.

“I’m grateful to the University of Glasgow for showing me their world-leading quantum technology research, which could be worth £1 billion to our economy within seven years, highlighting just how bright Scotland’s future could be outside of the UK.”

Government Expenditure and Revenue Scotland 2022-23

Government Expenditure & Revenue Scotland figures ‘show Scotland benefits from being part of a strong United Kingdom with a sharing and pooling of resources’

The Scottish Government has published their annual Government Expenditure & Revenue Scotland report, which shows the difference between total revenue and total public sector spending in Scotland.

The figures for 2022-2023 showed that people in Scotland are continuing to benefit from levels of public spending substantially above the United Kingdom average.

And even in a year of exceptional North Sea Revenues, Scotland’s deficit is still more than £19 billion, demonstrating how the country continues to benefit from being part of a strong United Kingdom, with the vital pooling and sharing of resources that the Union brings.

Commenting on the figures, Scottish Secretary Alister Jack said: “The Scottish Government’s own figures show yet again how people in Scotland benefit hugely from being part of a strong United Kingdom.

“Scotland’s deficit is more than £19billion – even in a year of exceptional North Sea Revenues. Without oil and gas, that figure soars to more than £28billion.

“People in Scotland benefit to the tune of £1,521 per person thanks to higher levels of public spending.

“As we face cost of living pressures and unprecedented global challenges it is clear Scotland is better off as part of a strong United Kingdom.”

GERS 2023 – Uptick in oil revenues narrows the gap between Scottish and UK Deficit

Fraser of Allander Institute’s MAIRI SPOWAGE, JOAO SOUSA and CIARA CRUMMEY unpick the latest statistics:

This morning sees the publication of Government Expenditure and Revenue Scotland 2022-23.

These statistics set out three main things:

  • The revenues raised from Scotland, from both devolved and reserved taxation;
  • Public expenditure for and on behalf of Scotland, again for both devolved and reserved expenditure;
  • The difference between these two figures, which is called in the publication the “net fiscal balance” – but as you may well hear colloquially referred to as the “deficit”.

These statistics form the backdrop to a key battleground in the constitutional debate, particularly when it is focussed on the fiscal sustainability of an independent Scotland and what different choices Scotland could make in terms of taxation and spending.

So what do the latest statistics show?

The latest figures show that the net fiscal balance for 2022-23 was -£19.1 bn, which represents -9.0% of GDP. This is a fall from the 2021-22 figure of -12.8% of GDP and is down significantly from 2020-21 which was inflated hugely by COVID-related spending.

The comparable UK figure for 2022-23 is -5.2% of GDP. The UK figure is unchanged from 2021-22. The reason for the differential trend for Scotland and the UK as a whole has been driven by North Sea revenue, which contributed £9.4 billion to Scottish revenue in 2022-23.

Chart 1: Scottish and UK net fiscal balance, 1998-99 to 2022-23

Source: Scottish Government

In this year of record North Sea revenue (at least in cash terms), the difference between the Scottish and UK deficit is driven by the expenditure side of the net fiscal balance equation.

Chart 2: Spending and revenue per head, Scotland-UK, 1998-99 to 2022-23

Source: Scottish Government

On revenues, including the North Sea, Scotland raised £696 more per head than the UK, whilst on expenditure, Scotland spent £2,217 more per head than the UK average.

So what do these statistics really tell us?

These statistics reflect the situation of Scotland as part of the current constitutional situation. That is, Scotland as a devolved government as part of the UK. The majority of spending that is carried out to deliver services for the people of Scotland are provided by devolved government (either Scottish Government or Local Government).

To a certain extent therefore, the higher per head spending levels are driven by the way that the funding for devolved services is calculated through the Barnett formula.  Add on top of that the higher than population share of reserved social security expenditure, and we have identified the two main reasons for higher public expenditure in Scotland.

Let’s go over some of the main points that may come up today when folks are analysing these statistics.

Scotland isn’t unusual in the UK in running a negative net fiscal balance

This is absolutely right. ONS produce figures for all regions and nations of the UK, and these have shown consistently (in normal years, so excluding COVID times) that outside of London and surrounding areas, most parts of the UK are estimated to raise less revenue than is spent on their behalf.

In 2021, we discussed the differences between parts of the UK in an episode of BBC Radio 4’s More or Less programme.

The Scottish Government doesn’t have a deficit as it has to run a balanced budget

This statement isn’t quite true (the SG now has limited capital borrowing powers and resource borrowing powers to cover forecast error). The Scottish Government’s Budget is funded through the Barnett determined Block Grant, with some adjustments to reflect the devolution of taxes and social security responsibilities (most significantly, income tax).

The SG do not have the flexibility to borrow for discretionary resource spending.

However, to focus on this around the publication of GERS somewhat misses the point of the publication. It looks at money spent on services for the benefit of Scotland, whoever spends it, and compares that to taxes raised, whoever collects them. As touched on above, the Barnett-determined block grant funds services at a higher level per head in Scotland than in England in aggregate.

What does this tell us about independence?

Setting aside the noise that will no doubt accompany GERS today, there are essentially two key issues, that need to be considered together.

GERS takes the current constitutional settlement as given. If the very purpose of independence is to take different choices about the type of economy and society that we live in, then it is possible that these a set of accounts based upon the world today could look different, over the long term, in an independent Scotland.

That said, GERS does provide an accurate picture of where Scotland is in 2023. In doing so it sets the starting point for a discussion about the immediate choices, opportunities and challenges that need to be addressed by those advocating new fiscal arrangements. And here the challenge is stark, with a likely deficit far in excess of the UK as a whole, other comparable countries or that which is deemed to be sustainable in the long-term. It is not enough to say ‘everything will be fine’ or ‘look at this country, they can run a sensible fiscal balance so why can’t Scotland?’. Concrete proposals and ideas are needed.

And please guys… dodge the myths!

We have produced a detailed guide to GERS which goes through the background of the publication and all of the main issues around its production, including some of the odd theories that emerge around it. A few years ago, we also produced a podcast which you can enjoy at your leisure.

In summary though, to go through the main claims usually made about GERS:

  1. GERS is an accredited National Statistics produced by statisticians in the Scottish Government (so is not produced by the UK Government) and is a serious attempt to understand the key fiscal facts under the current constitutional arrangement
  2. Some people look to discredit the veracity of GERS because it relies – in part – on estimation. Estimation is a part of all economic statistics and is not a reason to dismiss the figures as “made up”.
  3. Will the numbers change if you make different reasonable assumptions about the bits of GERS that are estimated? In short, not to any great extent.
  4. If you have any more questions about how revenues and spending are compiled in GERS, the SG publish a very helpful FAQs page, including dealing with issues around company headquarters and the whisky industry.

Look out for more analysis

It’ll be interesting to see the coverage of these statistics today and the talking points that are generated given where we are in the constitutional debate.

If you have any questions about GERS for us, then why not get in touch? Submit them to fraser@strath.ac.uk and we’ll try to cover them in our weekly update later this week!

Deal struck on a renewed Fiscal Framework for Scottish Government

  • UK Government will continue to top-up the Scottish Government’s tax revenues, worth £1.4 billion last year, as a benefit of strength and scale of the UK. 
  • Boost to borrowing powers and backing of Barnett formula will build a better future for Scotland and help to grow the economy. 
  • Chief Secretary to the Treasury John Glen hails a fair and responsible deal in line with the Prime Minister’s economic priorities. 

The UK and Scottish Governments have today reached an agreement on an updated Fiscal Framework. 

Holyrood’s capital borrowing powers will rise in line with inflation, enabling the Scottish Government to invest further in schools, hospitals, roads and other key infrastructure that will help to create better paid jobs and opportunity in Scotland.  

The new deal maintains the Barnett formula, through which the Scottish Government receives over £8 billion more funding each year than if it received the levels of UK Government spending per person elsewhere in the UK. It also updates funding arrangements in relation to court revenues and the Crown Estate.  

Chief Secretary to the Treasury, John Glen, said: “This is a fair and responsible deal that has been arrived at following a serious and proactive offer from the UK Government.  

“We have kept what works and listened to the Scottish Government’s calls for greater certainty and flexibility to deliver for Scotland. 

“The Scottish Government can now use this for greater investment in public services to help the people of Scotland prosper. These are the clear benefits of a United Kingdom that is stronger as a union.” 

The funding arrangements for tax will be continued, with the Scottish Government continuing to keep every penny of devolved Scottish taxes while also receiving an additional contribution from the rest of the UK. 

Under the previous Fiscal Framework, the Scottish Government could borrow £450 million per year within a £3 billion cap, as well as receiving a Barnett-based share of UK Government borrowing. Going forward these amounts will instead rise in line with inflation, which supports additional investment across Scotland and lays the foundations for economic growth. 

The UK Government has listened to calls from the Scottish Government for greater certainty and flexibility to help them manage their Budget and agreed a permanent doubling of the resource borrowing annual limit from £300 million to £600 million.

Limits on how much can be withdrawn from the Scotland Reserve to spend in future years will also be removed. This will boost spending through borrowing by £90 million in 2024/25. All future limits will increase in line with inflation. 

Scottish Secretary Alister Jack said:  “The renewed Fiscal Framework shows what can be achieved when there is a collaborative focus on delivering economic opportunity and why we are stronger and more prosperous as one United Kingdom.  

“The deal – worth billions of pounds to Scotland over the coming years – builds upon work to support economic growth and provide more high skill jobs, investment and future opportunities for local people, such as the establishment of Investment Zones and Freeports in Scotland. 

“The UK Government knows that high prices are still a huge worry for families. That’s why we’re sticking to our plan to halve inflation, reduce debt and grow the economy.  As well as providing targeted cost of living support, we are directly investing more than £2.4 billion in hundreds of projects across Scotland as we help level up the country.”   

As both governments continue to work together to tackle challenges like the cost of living, an updated Fiscal Framework equips the Scottish Government with the instruments for growth while protecting the wider public finances. 

Scotland’s Deputy First Minister Shona Robison said: “This is a finely balanced agreement that gives us some extra flexibility to deal with unexpected shocks, against a background of continuing widespread concern about the sustainability of UK public finances and while it is a narrower review than we would have liked, I am grateful to the Chief Secretary to the Treasury for reaching this deal.  

“As I set out in the Medium-Term Financial Strategy, we are committed to tackling poverty, building a fair, green and growing economy, and improving our public services to make them fit for the needs of future generations.

“We still face a profoundly challenging situation and will need to make tough choices in the context of a poorly performing UK economy and the constraints of devolution, to ensure finances remain sustainable.”

This morning the UK and Scottish governments have published the long-awaited update to the Fiscal Framework, following the review that has been going on for the last couple of years (writes MAIRI SPOWAGE of the Fraser of Allander Institute).

Since this was due to happen in 2021, we have been waiting for the outcome of this review. For more background, see our blog from late 2021.

For those new to it, the Fiscal Framework sets out the rules for how devolution of tax and social security powers following the Scotland Act 2016 is supposed to work in terms of finances. It sets out the mechanisms by which the Scottish block grant is adjusted to reflect the fact that large amounts of tax and social security powers are now the responsibility of the Scottish Parliament.

It also sets out fiscal flexibilities that the Scottish Government can choose to use in managing these new powers, as new tax and social security powers also come with risks that require to be managed.

In this blog, we set out the main headlines and our initial reaction to the updates.

The mechanism for adjusting the Block Grant will remain permanently as the Index Per Capita (IPC) method.

This is one of the most complex areas of the fiscal framework but definitely one of the most significant.

For tax, it sets out the mechanism for working out how much the UK Government has “given up” by devolving a tax to Scotland, given that it is a significant loss in revenue. As, following devolution, there are different policies pursued in rest of UK and Scotland, this is not straightforward. Essentially though, the mechanism agreed in 2016 was to grow the tax at the point of devolution at the rate, per person, that it grows in the rest of the UK. This is known as the Index Per Capita (IPC) method.

So, the idea is that if taxes per head grow quicker in Scotland, the Scottish Budget will be better off – conversely, if taxes per head grow more slowly, the Scottish Budget will be worse off.

In 2016, when the fiscal framework was first agreed, the IPC method was the SG’s preference, whereas the UKG preferred the “Comparable Method” (which would generally be worse than the IPC method for the Scottish Budget). SO they agreed to use IPC for the first 5 years and review it in this review published today.

They have now agreed that the IPC method will remain on a permanent basis.

Interestingly, this means that on a permanent basis, the mechanisms for adjusting the block grants for Wales and Scotland will be different, given Wales’s Fiscal Framework uses the Comparable Method, albeit with additional provisions to keep a funding floor in place.

Borrowing Powers for managing forecast error have been increased significantly

Resource borrowing powers to manage forecast error associated with tax and social security powers have been increased from £300m to £600m. This is required because when budgets are set, the tax, social security and block grant adjustment estimates are set on the basis of forecasts from both the Scottish Fiscal Commission and the Office for Budget Responsibility. When the outturn data is available, if there is a discrepancy (which is very likely) then the Scottish Budget has to reconcile these differences.

This will be good news for the Deputy First Minister looking ahead to delivering her first budget in December, given that it was confirmed recently that there will be a large negative reconciliation to reflect income tax receipts in 2021-22 of £390m. As these changes are coming into effect for the 2024-25 budget year, this means she will have more flexibility to borrow to cover this.

All limits, such as resource and capital borrowing powers, will be uprated in line with inflation

When the Fiscal Framework was first agreed, the limits on borrowing for both resource and capital, and the limits for what could be put into the Scotland reserve, were set in cash terms and have been fixed ever since.

This agreement today sets out that the ones that remain will be uprated by inflation (although the exact inflation measure and timing is still to be confirmed), and that the limits on the additions and drawdowns on the Scotland Reserve will also be abolished.

The VAT Assignment can gets kicked down the road again

One thing that is a little disappointing is that there was no final decision on VAT Assignment. See our blog from 2019 to get the background in this.

VAT Assignment was included as part of the Smith Commission powers. The idea was that half of VAT raised in Scotland would be assigned to the Scottish Budget, which would mean, if the Scottish Economy was performing better than the UK as a whole, the budget would be better off, and conversely, if VAT was growing less quickly in Scotland, the budget would be worse off.

However, after almost 10 years, it has become clear that there is no way to estimate VAT in Scotland that is precise enough for this to have budgetary implications. It is a large amount of money (more than £5 billion) so even small fluctuations in how it is estimated can mean changes of hundreds of millions of pounds.

Today, the Governments have agreed to just keep discussing it. We think it is time that everyone admitted it is just not a sensible idea.

We’ll keep digging through the detail of everything published today and will provide more commentary through our weekly update on Friday.

Chancellor agrees new support measures for mortgage holders

Chancellor Jeremy Hunt met the UK’s principal mortgage lenders and the Financial Conduct Authority (FCA) yesterday to agree support for people struggling with mortgage repayments.

The latest market indicators (FCA; UK Finance) show that mortgage arrears and defaults remain below pre-pandemic levels, which were themselves extremely low. The FCA reported 0.86% of total residential mortgage balances in arrears in the first quarter of 2023 which is significantly lower than the 3.32% rate in 2009.

The proportion of disposable income spent on mortgage payments is currently at 5.4%, compared to around 10% in the 1990s and prior to the financial crisis.

The average homeowner re-mortgaging over the last twelve months had around a 50% loan-to-value ratio. This indicates homeowners have considerable equity in their homes, which makes it easier to manage repayments.

Lenders have less than 10% ‘owner-occupier mortgages’ on their books with loan-to-value rates greater than 75%, compared to around 25% before the 2008 financial crisis. Taken together, this puts the market in a significantly stronger position than before.

The lenders – which cover over 75% of the market – agreed to a new mortgage charter providing support residential mortgage customers. These are:

  • Anyone worried about their mortgage repayments can call their lender for information and support, without any impact on their credit score and we would encourage you to contact your bank who are there to help.
  • Customers won’t be forced to have their homes repossessed within 12 months from their first missed payment.
  • Customers approaching the end of a fixed rate deal will be offered the chance to lock in a deal up to six months ahead. They will also be able to apply for a better deal right up until their new term starts, if one is available.
  • A new agreement between lenders, the FCA and the Government permitting customers to switch to an interest-only mortgage for six months, or extend their mortgage term to reduce their monthly payments and switch back to their original term within the first six months, if they choose to.
  • Both options can be taken without a new affordability check or affecting their credit score.
  • Support for customers who are up-to-date with payments to switch to a new mortgage deal at the end of their existing fixed rate deal without another affordability check.
  • Providing well-timed information to help customers plan ahead should their current rate be due to end.
  • Offer tailored support for anyone struggling and deploy highly trained staff to help customers. This could mean extending their term to reduce their payments, offering a switch to interest only payments, but also a range of other options like a temporary payment deferral or part interest-part repayment. The right option will depend on the customer’s circumstances.

The Chancellor of the Exchequer, Jeremy Hunt, said: ““There are two groups of people that we are particularly worried about. The first are people who are at real risk of losing their homes because they fall behind in their mortgage payments. And the second are people who are having to change their mortgage because their fixed rate comes to an end, and they’re worried about the impact on their family finances of higher mortgage rates.

“So today I agreed with the banks and the principal mortgage lenders and the Financial Conduct Authority three very important things.

“The first is that absolutely anyone can talk to their bank or their mortgage lender and it will have no impact whatsoever on their credit score.

“The second is that if you are anxious about the impact on your family finances and you change your mortgage to interest only or you extend the term of your mortgage and you want to go back to your original mortgage deal, within six months, you can do so, no questions asked and no impact on your credit score. That gives people a powerful new tool for managing their monthly budgets – and it will begin taking effect within the next two weeks.

“And finally for people who are at risk of losing their home in that extreme situation, the banks and mortgage lenders have a number of things in place. The last thing that they want to do to repossess a home, but in that extreme situation they have agreed there will be a minimum 12 month period before there’s a repossession without consent.

“These measures should offer comfort to those who are anxious about high interest rates and support for those who do get into difficulty.

“Tackling high inflation is the Prime Minister and my number one priority. We are absolutely committed to supporting the Bank of England to do what it takes. We know the pressure that families are feeling. That’s why we’ve introduced big support packages around £3,000 for the average household this year and last.

“But we will do what it takes, and we won’t flinch in our resolve because we know that getting rid of high inflation from our economy is the only way that we can ultimately relieve pressure on family finances and on businesses.”

Martin Lewis, founder of MoneySavingExpert.com said: “The unprecedented steep rise in mortgage rates is causing a nightmare for many with variable mortgages and those coming off fixes.

“Therefore, the most important thing we can focus on right now is appropriate, flexible forbearance measures. While the Bank of England’s aim is intended to squeeze people’s disposable incomes, no one wants people’s lives to be ruined by arrears and repossessions – and that is the urgent protection we need to focus on.

“I met the Chancellor on Wednesday and reiterated that the minimum we needed was to ensure that when people asked for help from lenders, they knew that if things changed, it wouldn’t be detrimental to their financial situation and their credit scores would be protected as much as possible.

“I’m pleased to see it looks like the Chancellor has listened and those measures are going to be put in practice by the banks. We need to make sure everybody knows their rights if they are in trouble with their mortgage, so they can feel comfortable speaking with their lender and understand the measures that they can request for help.”

Nikhil Rathi, chief executive of the Financial Conduct Authority, said: “Today’s productive meeting builds on the work we’ve done over the last year to ensure those who get into difficulty receive the tailored support they need.

“We’ll move quickly to make any changes needed to support today’s commitments.”

Ian Stuart. Chief Executive Officer, said HSBC UK said: “We’re firmly focused on supporting our customers in this challenging economic environment, so we welcome the meeting with the Chancellor today, and with the support of the regulators, the concerted efforts across our industry to help customers through these measures.

“It’s important that customers feel comfortable contacting us if they feel they are getting into financial difficulty because whilst every customer’s situation is different we have a range of options that we can use to help them find their way through. We stand ready and remain committed to our customers.”

David Duffy, Chief Executive Officer, Virgin Money said: “Today’s commitments are an important next step in ensuring that customers feel supported as they navigate rising rates and high inflation.

“At Virgin Money, we are committed to supporting customers in the current economic environment and will continue to work with Government, regulators and industry to help those facing financial difficulty.”

Dame Alison Rose, Group Chief Executive, NatWest said: “Our priority is to help the people, families and businesses we serve to navigate this ongoing economic uncertainty.

“Today’s announcements, following very productive discussions between mortgage lenders, government and regulators, will provide further flexibility and reassurance to customers who may be anxious about their household finances.

“We stand ready to support those worried about the future, and encourage anyone experiencing financial difficulty to get in touch.”

City council’s commercial property strategy generates £15m for local services

Council sets sights on new business park

Commercial property investment by the City of Edinburgh Council has provided space for local businesses to thrive while raising over £15 million a year for vital public services, reveals a new report.

A revised version of the Council’s Commercial Property Strategy – which supports existing, new, and expanding enterprises across the Capital – has been approved by the Finance and Resources Committee.

It reveals that the Council is the biggest landlord of commercial property in all of Edinburgh, with a portfolio of 949 assets worth in the region of £245m. This has helped the Council generate income to reinvest towards frontline services and make profits from sales, which have helped with budget savings.

The strategy also supports a number of grassroots and community-based clubs and organisations with low-cost lease arrangements.

Under the refreshed plan, the Council will continue to maximise income growth from buildings in the year ahead while also prioritising support for start-ups and the Capital’s ambitious net zero by 2030 climate commitment.

A change to the strategy will also allow the opportunity for funds from property sales to be reinvested back into the portfolio, helping to streamline and make the most of the council’s assets.

This involves a vision for designing inhouse and building a new, sustainable, business park on Council-owned land at Peffermill – mirroring the successful business park launched in East Hermiston in early 2018. Five years on, the East Hermiston Park is providing 16 fully let units in a 1,600sqm modern industrial space yielding an annual income of £185k.

Councillor Mandy Watt, Finance and Resources Convener, said: “I’m pleased that the refreshed strategy has received Committee’s approval and that we’ll be able to improve on the £15m of income already raised from the council’s property portfolio.

“The opportunities available to support even more jobs at the new low carbon business park in Peffermill are exciting, and I’m looking forward to plans being brought forward later in the year.

“Over the last year, the council has used its properties to support the economic success of the city post-Covid and helped budding businesses to thrive, in ways that maximise income for delivering Council services. The results speak for themselves and we’ve seen first-hand the benefits business parks like the existing one at East Hermiston can bring.

“Against a backdrop of reduced government funding, we’ve had to think creatively to make the most of any income that we can raise for council services. This property strategy is a good example of that.”