finance – Page 3 – The NEN – North Edinburgh News

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.”

Income Tax rise for higher earners as new tax year begins

Additional half a billion pounds raised for public services

Changes to income tax in Scotland have come into force and are estimated to raise more than half a billion pounds of additional revenue this financial year to support vital public services.

The tax rates for earnings between £12,571 and £43,662 remain the same while earnings above £43,663 are now taxed at the Higher tax rate of 42%.

The threshold at which people pay the Top Rate of tax has reduced from £150,000 to £125,140 with earnings over that threshold now taxed at 47%.

According to the Scottish Fiscal Commission, these changes will raise £129 million in 2023-24.

The Higher Rate threshold will also remain at its 2022-23 level, applying to earnings over £43,662, which will increase revenue by a further £390 million when compared to uprating the threshold by inflation, according to Scottish Government estimates.

As the new financial year begins, Scottish taxpayers are also being encouraged to check if their tax code on their first payslip is correct – people paying Scottish Income Tax should have a tax code that starts with an S.

Deputy First Minister Shona Robison said: “The decisions we have made on income tax are fair and progressive by ensuring that those who can, contribute more. They strengthen our social contract with the people of Scotland who will continue to enjoy many benefits not available in the rest of the UK such as free prescriptions.

“The additional revenue will help us invest in our vital public services including the NHS, above and beyond the funding received from the UK Government. At the same time, the majority of taxpayers in Scotland will still be paying less income tax than if they lived in the rest of the UK.

“Now that the new financial year has started, I’d also encourage people to check that the tax code is correct on the first payslip they get. If you think your tax code is wrong, you can check your details with HMRC who will be able to help.”

The new Scottish Income Tax bands and rates for the financial year 2023-24 are:

Band	Band name	Rate
£12,571* – £14,732	Starter Rate	19%
£14,733 – £25,688	Basic Rate	20%
£25,689 – £43,662	Intermediate Rate	21%
£43,663 – £125,140**	Higher Rate	42%
Over £125,140	Top Rate	47%

* Assumes individuals are in receipt of the standard Personal Allowance.

** Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

The Personal Allowance threshold remains reserved and is set by the UK Government at the UK Budget.

Edinburgh approves Lib Dem budget

EDINBURGH councillors have passed a budget focused on ‘getting the basics right’ and making Edinburgh a ‘cleaner and greener city’. However that budget was not the one put forward by by the ruling Labour administration – council rejected that, and instead eventually backed a Liberal Democrat budget.

This means a Labour-led council will now be promoting and implementing a budget put forward by the Liberal Democrats, the council’s third biggest party.

Trade unions are concerned about elements within the budget passed by the council – particularly over compulsory redundancies and outsourcing- and some senior Labour figures believe Council Leader Cammy Day’s position is now untenable.

There are calls for him to resign: both from the SNP – the biggest group on the council – and, perhaps of more concern, from within the city’s own Labour group.

The humiliating budget defeat shows the fragility of Labour’s leadership position within the council.

With thirteen councillors Labour needs the support of other parties to run the city.

Labour chose to break their ‘Capital Coalition’ agreement with the SNP and instead joined forces with the Conservatives and Liberal Democrats following last May’s local government elections, despite assurances from Scottish Labour leader Anas Sarwar that there would be ‘no deals’.

With 18 councilllors the SNP is the biggest group on the city council by some way. Labour (13) is second followed by the Lib Dems (12), Greens (10) and Tories (9).

Lib Dems, doubtless boosted by their Budget coup, are bullish about their chances of increasing their representation in the City Chambers following a by-election in Corstorphine/Murrayfield on 9 March.

SNP Group leader (and leader of the former ruling ‘Capital Coalition’) said: “What Labour actually voted for: -£600k saving by ending no compulsory redundancy policy NOW. -£500k saving THIS YEAR by privatising waste & cleansing services.

“You can’t trust a word from Labour on this.”

He also tweeted: “Labour “administration” budget defeated – Labour instead backed the LibDem budget in full. If my budget had been voted down as Council Leader I’d have had the integrity to resign.”

Following a series of votes on Thursday (23 February), the Liberal Democrats’ spending proposals for 2023/24 were agreed, as was the Administration’s Housing Budget Strategy.

While rejecting a series of savings proposals in education and speech and language therapy, councillors agreed to allocate substantial additional money to improve roads, paths and pavements and carry out additional resurfacing works for the long term.

Additional funding will also be made available for the city’s parks and greenspaces, tackling fly tipping, graffiti removal and street sweeping, and additional resource for flood defences and gully cleaning in light of the increasing impacts of climate change.

The Climate and Sustainability Team will also be bolstered, enabling a greater focus on the city’s ambition of becoming net zero by 2030 and the King’s Theatre will also benefit from funding to secure its future, with £3m set aside – a move supported across the council.

Liberal Democrat Group Leader Cllr Kevin Lang said: “I’m delighted that our budget got support from councillors – and that, in the midst of the cost of living crisis, we’ve been able to limit the rise in council tax to 5% for Edinburgh’s residents.

“This is a Council budget that delivers. A budget that stops £5 million of education cuts, injects £11 million extra to tackle our broken roads and pavements, more investment for parks and new money for climate change action.

“Despite continued funding cuts from the Scottish Government, residents still rightly expect high quality local services in return for the increasing amounts of council tax they pay each year, which requires a budget which focuses on essential core services, delivered well.”

Council Leader Cammy Day said: “Despite the unique demands of a Capital city, Edinburgh continues to receive the worst grant funding of any local authority in Scotland. Years of local government cuts have now come to a head, forcing us to find close to £80m of savings this year – on top of the hundreds of millions we’ve made already.

“It’s a position none of us wanted to be in and our residents deserve better. Despite this, we presented a positive, fair and responsible set of proposals, aimed at protecting vital frontline services on which our communities and residents rightly depend.

“So, I was deeply disappointed we didn’t secure the backing from other groups, particularly in the manner in which it came about. But, for all that, I remain absolutely committed to leading this council and to working with all other groups to deliver the best for the people of Edinburgh.”

Council Tax Bands

A £965.13

B £1,125.98

C £1,286.84

D £1,447.69

E £1,902.10

F £2,352.50

G £2,835.06

H £3,546.84

Education: COSLA seeks urgent talks with Scottish Government following emergency meeting

A COSLA Spokesperson said: “Following an emergency meeting of Leaders today (Friday) Council Leaders have agreed that COSLA approach the Scottish Government seeking urgent further discussions around their expectations for education. There was agreement that Scottish Government expectations cannot be met unless additional necessary resources are provided.

“Council Leaders re-emphasised their great disappointment with the approach taken by Scottish Government on this matter which is neither in the spirit of partnership working nor recognises councils’ legitimate authority to make decisions on the services they deliver on behalf of their local communities.”

“A mandate has been provided to open discussions to consider how the government’s priorities might be delivered, including considerations on the flexibilities and the overall quantum of funding in the Local Government settlement and establish a shared understanding of the best path forward, to achieve our shared objective of closing the attainment gap and maintaining other vital local services.”

“Leaders remain committed to improving attainment and closing the poverty related attainment gap and achieving the best outcomes possible for all young people. Local Government has made good progress in the last few years and have seen the biggest ever decrease in the gap.

Leaders acknowledge this is down to the partnership working between local and central government pulling together for a shared outcome, which always provides the best opportunity to achieve our ambitions in difficult circumstances.”

The Salaries Committee of the EIS has highlighted that the First Minister has it within her power to bring an end to the current dispute over teacher pay.

This follows a question at First Minister’s Questions in Parliament, where the First Minister said that she “very much hoped” that a resolution to the pay dispute could be reached “soon”.

Commenting following a meeting of the EIS Salaries Committee on Thursday afternoon, where the ongoing dispute over pay dominated the agenda, EIS Salaries Convener Des Morris said, “While the EIS Salaries Committee very much shares the First Minister’s ‘hope’ that a resolution to the pay dispute can be reached ‘soon’, we would also point out that the ability to settle the dispute is very much within the First Minister’s power.

“The only thing that will settle this dispute is an improved offer to Scotland’s teachers, one that is both fair and affordable to them, which will involve additional new money from the Scottish Government.

“This is what was done to settle disputes with other local government workers. It is the First Minister who has ultimate control over the purse strings so, if she wishes this dispute to be settled soon, the First Minister should authorise the Cabinet Secretary and her officials to release the comparatively modest additional funding needed to end this dispute.”

Mr Morris continued, “The truth is, that little or no progress has been made towards an agreement for several months. There are currently no further pay negotiations scheduled within the Scottish Negotiating Committee for Teachers (SNCT).

“Negotiating meetings through the SNCT have become profoundly frustrating affairs, as Scottish Government negotiators are coming into talks with their hands effectively tied and with no additional money to offer. We have been extremely clear that the current 5% offer on the table – which was itself simply a repackaging of a previously rejected 5% offer – will not be accepted by Scotland’s teachers.

“We have now rejected sub-inflationary 5% offers twice, and underlined this rejection through three days of strike action by most EIS members, so only a fresh offer which is good enough to put to our members for consideration can hope to halt strike action in our schools.”

Mr Morris added, “As ever, the EIS remains ready and willing to re-enter discussions with the Scottish Government and Scottish local authorities to discuss a new pay offer for teachers.

“We are not, however, willing to continue discussing the same offer that has now been rejected by teachers twice. The Scottish Government and COSLA must come up with an improved offer to allow pay discussions to progress towards an agreement that genuinely reflects both the soaring cost of living and the value of Scotland’s teachers.”

Institute for Fiscal Studies: Scottish Government faces major medium- and long-term budget challenges

New analysis by IFS researchers shows the stark funding challenges facing the Scottish Government, and the public services it is responsible for, over the next five years and beyond.

In the next two financial years, the budget for day-to-day non-benefit spending looks very tight:

After taking account of in-year funding top-ups this financial year, which under current plans will not be available in 2023–24, funding will fall by 1.6% in real terms in 2023–24 compared with this year. Even after adjusting for major one-off costs this year, such as council tax rebates, the reduction will still be 0.8%.
Official projections imply that funding will fall by a further 1.6% in real terms in 2024–25, and then grow only modestly over the next three years. This means that funding is set to be almost 2% lower in 2027–28 than in 2022–23.

Such cuts would imply difficult trade-offs for the Scottish Government. Increasing spending on health to meet rising costs and demand, and boosting spending on net zero policies could require cuts of around 13% to other public service spending between 2023 and 2027.

These are among the key findings of two pre-released chapters from the inaugural IFS Scottish Budget Report, focusing on the Scottish Government’s funding outlook and devolved income tax revenue performance. Other key findings include:

Medium-term outlook

The baseline projections above rely on Scottish Fiscal Commission (SFC) forecasts of a significant improvement in income tax revenues. This largely reflects faster expected growth in Scotland’s underlying income tax base relative to the rest of the UK, rather than the effects of tax rises announced in the Scottish Budget last month. If this faster growth doesn’t materialise, then the Scottish Government’s choices would be harder still, with funding for non-benefits spending in 2027–28 still 5% below 2022–23 levels.
The faster growth in Scotland’s tax base forecast for the next few years follows a period during which the tax base has grown more slowly than in the rest of the UK. Because of this, SFC forecasts imply that even by 2026–27, almost one-third of the yield from Scotland’s higher income tax rates will be offset by slower tax base growth since the devolution of income tax in 2016–17. This would still be a substantial improvement from this financial year though, for which the SFC estimates that revenues from Scotland’s income tax policy changes since devolution will be more than fully offset by slower underlying growth in the tax base.

Long-term outlook

While the Barnett formula used by the UK government to allocate funding is often thought to benefit Scotland, in the long term it is likely to lead to relatively smaller increases in funding for Scotland than for England. The speed of this ‘Barnett squeeze’ depends on the rate of growth in spending in England (both real-terms growth and that which merely offsets inflation), and the rate of population growth in Scotland relative to England.
Using long-term projections for inflation and GDP growth from the Office for Budget Responsibility, assuming public spending is held constant as a share of GDP, and taking into account population projections from the Office for National Statistics, we project Scottish Government funding per person would increase by an average of 1.2% per year in real terms over the 30 years between 2027–28 and 2057–58. This compares to an average of 1.4% in England over the same period. Under this scenario, spending per person in Scotland would fall from 124% of English levels in 2027–28, to 121% in 2032–33, and to 115% in 2057–58.
Faster real-terms spending growth in England to meet the rising costs of health and social care (which are expected to grow faster than GDP) would result in bigger absolute increases in funding for the Scottish Government, making it easier for it to meet these costs in Scotland. However, it would increase the Barnett squeeze on funding levels relative to England – making it harder for the Scottish Government to maintain enhanced levels of service provision over and above those in England.

Bee Boileau, a research economist at the IFS and an author of the report said: “Additional funding from the UK government and a forecast boost to devolved tax revenues mean the outlook for funding has improved a little since last May’s Resource Spending Review.

“But the picture is far from rosy. Official projections imply that funding for non-benefit spending is set to fall over the next two years and then grow only slowly over the following three years. Indeed, it would still be close to 2% below 2022–23 levels in 2027–28. And that assumes a significant improvement in the performance of Scotland’s devolved income tax revenues – without that, this funding would be close to 5% lower than this year in 2027–28.

If either of these scenarios were borne out, the Scottish Government would likely need to make significant cuts to a range of public services. Further big increases in devolved tax rates would be one way to avoid such cuts.

“The Scottish Government will instead be hoping for additional funding from the UK government – which may not be in vain as the UK government would also need to make cuts to many services if it sticks to the plans for spending it has pencilled in.’

David Phillips, an associate director at the IFS, and another author of the report said: ‘The Scottish Government’s long-term funding outlook beyond 2027–28 will also be determined, to a large extent, by UK government spending decisions via the Barnett formula.

“This formula is often seen to benefit the Scottish Government, by providing it with a much higher level of funding per person than is available for comparable services in England.

But this is a misunderstanding of the nature of the formula and its purpose. Because it provides the Scottish Government with a population-based share of funding changes planned for England, and Scotland starts with a higher-than-population share of funding, it delivers a smaller percentage increase in funding for Scotland than England.

This so-called Barnett squeeze will make it more difficult for the Scottish Government to meet rising costs and the demands on public services associated with an ageing population, and to maintain enhanced service provision relative to England, such as free personal care and free university education, in the longer term.”

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BDA: Scotland can’t have NHS dentistry without NHS dentists

The British Dental Association has warned the Scottish Government must step up to prevent a wholesale exodus from the service in April, following new figures from the Scottish Liberal Democrats suggesting an 8% fall in the number of NHS dentists since lockdown.

The professional body warns that dentists have little sense of what payment system they will be working to come 1 April. On 1 October the Scottish Government cut the ‘multiplier’ designed to support the pandemic recovery, that increased NHS fees by 1.3. A lower bridging payment’ took effect uplifting NHS fees at a rate of 1.2 for the next three months, falling to 1.1 for the period up to April 2023.

While COVID emergency measures have been withdrawn, practices continue to face an historic backlog, with many patients requiring more extensive treatment having bottled up problems during the pandemic.

The BDA say that in the weeks ahead progress must be made to deliver needed change to the broken high volume/low margin model NHS dentistry is based on. Without reform it stresses we will see a further flight of dentists from the NHS that is already evident in other UK nations.

Facing surging practice running costs, the BDA says that without an adequate interim funding package several key treatments, and anything – like dentures – that requires laboratory work, risk being delivered at a financial loss.

Robert Donald, Chair of the British Dental Association’s Scottish Council said: “Ministers need to understand that Scotland can’t have NHS dentistry without NHS dentists.

“Today colleagues have little sense of what the future will bring when the last pandemic support is pulled away.

“What they do know is this service hasn’t bounced back, and that some NHS treatments are now being delivered at a loss. “The Scottish Government needs to make a serious long-term commitment to prevent a wholesale exodus from the NHS.”

R&D Tax Relief Reform consultation

R&D tax relief reform set to simplify the system and help grow the economy
Clearer information about how much relief business will receive to be offered up front, helping them budget for R&D
Follows £20 billion investment in R&D from government at Autumn Statement and the Chancellor’s pledge to understand how to provide further support for R&D intensive SMEs

The Government has launched a consultation to simplify the UK’s R&D tax relief system, drive innovation and grow the economy.

The 8-week consultation, which runs from 13 January to 13 March 2023, sets out proposals on how a single scheme could be designed and implemented. This would replace the two R&D tax relief schemes currently in place – the Research and Development Expenditure Credit (RDEC) and the small and medium enterprises (SME) R&D relief.

A scheme modelled on the current RDEC for SMEs would also give decision makers in smaller companies clearer information, which will help them set budgets for R&D. In contrast, for those claiming SME tax relief in the current setup, the exact amount of money their firm will receive can only be known with certainty at the end of accounting period.

This is part of the government’s ongoing R&D tax reliefs review, and follows changes announced at Autumn Statement 2022 where the generosities of the two R&D tax schemes were broadly aligned, with the Chancellor pledging to work with industry to understand how to provide further support for R&D intensive SMEs.

The UK’s R&D tax reliefs have an important role to play in encouraging more businesses to invest in R&D, helping them to grow and create the technologies, products and services which reshape lives and livelihoods.

Government spending on R&D plays a crucial role in stimulating private sector investment which is why it is increasing investment to £20 billion a year by 2024-25 – the largest ever increase in a Spending Review period.

Victoria Atkins MP, Financial Secretary to the Treasury, said: “We are focussed on growing the economy – with thriving businesses bringing more jobs, higher pay and more tax revenue to fund our precious public services.

“Getting R&D tax relief right and fit for the future sits at the heart of making sure the UK remains a competitive location for cutting edge research – helping new firms grow.

“I welcome views on the option to simplify the scheme, especially from those who have experience of the existing tax reliefs.”

The UK is unusual in having two schemes and moving to a single measure would simplify the R&D tax system in line with the government’s overall plans for tax simplification.

The government would like to hear from a wide range of sources including individuals, companies, representative and professional bodies, and especially invites comments from research and development intensive businesses and those representing them.

The government recognises the reform to the rates creates challenges for some R&D intensive SMEs and those in the life sciences sector in particular and believes there is merit to the case for further support. Any further changes will be announced in the usual way, at a future fiscal event.

If implemented, the new scheme is expected to be in place from 1 April 2024.

COSLA: Scottish Government budget settlement simply not good enough

‘FUNDING REALITY IS A REAL-TERMS CUT’

Local Government spending decisions are being increasingly directed by Scottish Government, and the way Local Government finances are presented by Scottish Government is potentially confusing for the general public.

This can lead to raised expectations and lack of clarity in our communities about the reality of what is now possible to deliver on the ground, COSLA said today (Monday 16th January).

COSLA was clear that this year we needed and asked for a £1bn extra in real terms however we have ended up with £38million and that this was simply not good enough.

COSLA added that to avoid socially harmful cuts, the finances of Local Government need early and proactive discussions to avoid an annual public argument about the reality of what can and cannot be afforded by Councils.

Councils also need more freedom to address local priorities and the ability to focus on improving outcomes.

Commenting today, COSLA’s Resources Spokesperson Councillor Katie Hagmann said: “Given the significance of our council services to the lives and livelihoods of everyone across Scotland, communities deserve clear and consistent facts in relation to Local Government finance rather than a yearly debate on how much money is or is not available.

“All our communities are concerned about is the level of service they can expect that there is support for the most vulnerable and want to ensure their local environment looks and feels as good as it can – all of these things are under threat because of successive years of underfunding.

“Last week saw the publication of the Accounts Commission’s report on the health of council finances. The report makes it clear that councils are going to have to take very tough decisions over the next few years to balance the books, given the financial pressures they face.

“Responding to the Accounts Commission report, Scottish Government has quoted both real and cash terms increases of £2.2 bn between 2013-14 and 2022-23, but this is contradictory.

“We owe it to our communities to be clear, consistent and transparent about the starting point and how much less, in reality, councils have to spend year on year on the services that our communities rely on.

“In 2013-14, the Local Government funding settlement was worth £10.3 bn. Looking to 22-23 the Scottish Government provided £12.5 bn. This does equate to a £2.2 bn cash increase. However, that increase is heavily ring fenced and directed funding for core services and local priorities has stayed the same.

“The reality of having the same amount of money this year as 10 years ago for core services is a real terms cut. As well as increasing costs, this money is also now required to deliver more services than it was 10 years ago – Scotland’s population has increased, the number of households has gone up, COVID has left a legacy of support needs for the most vulnerable and as people live longer, their care needs have become more complex. This is just a snapshot of the demands being faced by councils, not to mention inflation and energy costs.

“For 2023-24, Scottish Government has stated that councils have seen a “£570m increase in their budgets” but the reality is, that only £38m of this can go towards pressures such as inflation, pay and service demand with the rest is for policy commitments that are already in the system, for example £100m to meet Real Living Wage commitments in social care.

“To put this into perspective, a 1% increase in pay across the Local Government workforces equates to around £100m. £38m will not go very far, especially when combined with energy price hikes, supporting the most vulnerable and our commitments to tackle the climate emergency.

“This year, demand for services like social care is at an all-time high but given the range of pressure facing councils, they simply don’t have the resources they need to work towards keep people out of hospital.

“Each day during winter, there is quite rightly a focus on getting people out of hospital to free up beds– currently councils support just over 97% of patients to be discharged without delay.

“The problem is not just getting people out of hospital but stopping them going in – councils simply don’t have the resources they need to provide the care packages or the interventions that prevent ill-health.

“COSLA’s key concerns are not only the socially harmful impact of cuts on our communities, but the way in which Local Government finance has been presented to them. The messaging is that there is more money for essential services each year despite this not being the case with councils asking communities about where they want to see cuts and reductions if essential services, like schools, roads, waste collection, child and adult protection, environmental health and social care are to continue to be delivered, every day of every year.”