Tag: Fraser of Allander Institute

Disabled Employment in Scotland

FRASER OF ALLANDER INSTITUTE PUBLISHES INITIAL FINDINGS

Disabled adults are significantly less likely to be in work compared to adults without disabilities (write ALLISON CATALANO and CHIRSTY McFADYEN). 

In Scotland, 81% of working aged adults without disabilities had jobs in 2021, compared to just under 50% of adults with disabilities. This discrepancy of 31 percentage points – called the “disability employment gap” – is larger in Scotland compared to the rest of the UK (Chart 1).

Scotland has a goal of reducing the disability employment gap by half between 2016 and 2038. The 2021 numbers, encouragingly, show an improvement of 6 percentage points. A higher proportion of disabled people moved into work in Scotland between 2014 and 2021 compared to the UK as a whole, as well.

Chart 1: Gap in employment between people with and without disabilities in Scotland and in the UK, 2014-21

Source: Annual Population Survey, 2014-2021

In 2023, the DWP published a report on the employment of disabled people in the UK. This report looked at the reason why employment among people with disabilities has increased, while employment for the rest of the population has stayed roughly the same.

The DWP report highlighted four reasons behind the growth in the number of disabled people in employment:

  • Disability prevalence has increased in the UK, and the most common types of disabilities have changed.
  • The non-disabled employment rate has increased, implying that more jobs are available to both groups.
  • The disability employment gap has been narrowing overall.
  • There are more individuals in the working-age population.

The level of detail provided in the DWP report for the UK is difficult to replicate for Scotland with publicly available data: smaller sample sizes north of the border mean that more restrictions are placed on the data available to ensure that appropriate care has been taken with interpreting the robustness of results.

The Fraser of Allander Institute, in collaboration with the Scottish Parliament Information Centre (SPICe) are undertaking work to understand whether the same factors are driving changes in Scotland, and if not, what is different here and why.

This work is ongoing and future articles will get into more of the detail. This article sets the scene about the scale of the issue in Scotland vs the UK based on what know from data currently available.

What’s the state of disability employment in Scotland?

Scotland has a higher proportion of working-aged disabled people compared to the UK. It also has a lower rate of employment among disabled people, and a larger gap in employment between people with and without disabilities. Employment rates are noticeably different for different types of disabilities in Scotland compared to the rest of the UK, and disabled peoples are less likely to have educational qualifications in Scotland.

How is disability defined?

The current definition used in UK (and Scottish) surveys comes from the Government Statistical Service and the 2010 Equality Act. This change affected data collection from mid-2013 onwards, meaning that it’s not possible to compare current data to data before 2013. Our analysis specifically looks at the data since 2014 as a result.

This definition covers people who report “current physical or mental health conditions of illnesses lasting or expected to last 12 months or more; and that these conditions or illnesses reduce their ability to carry out day-to-day activities.” Previously, the definition was based on the Disability Discrimination Act (2005) (DDA), which applied to “all people with a long term health problem or disability that limits their day-to-day activities.” The slight difference in these terms means that some people may qualify as DDA disabled but not as Equality Act disabled.

Scotland has consistently had a higher proportion of working-aged disabled people.

In 2014, around 18% of the Scottish working-age population were classified as Equality Act disabled.

Since 2014, the number of disabled working-age adults has grown by around 222,000 people, making up over 24% of the working-age population as of 2021. By comparison, the total size of the working-age population only grew by around 31,000 people over the same time period. had a higher proportion of disabled adults in 2014 than the UK average, and this gap has widened over time. The 2021 data shows a further significant divergence, but this may be due to particular issues related to the pandemic and may not persist (Chart 2).

Chart 2: The size of the Scottish population with and without disabilities, and the proportion of the population with disabilities from 2014-21.

Source: Annual Population Survey, 2014-2021

Scotland has a higher disability gap and a lower rate of employment among disabled people.

Employment rates for working-aged people without disabilities in Scotland is roughly the same as in the rest of the UK. Employment rates for disabled people is much lower, however.

Since 2014, disabled people have moved into work faster in Scotland compared to the rest of the UK. The employment gap fell by around 6.5 percentage points between 2014 and 2021 in Scotland, compared to a fall of around 4.5 percentage points for the entire UK (Chart 3).

Chart 3: Proportion of adults between 16-64 that are in work by disability status, Scotland and the UK, 2014-21

Source: Annual Population Survey, 2014-2021

Scotland has different employment rates for people with different types of disabilities.

Unsurprisingly, Scotland has lower employment rates than the UK as a whole for the vast majority of types of disability.

The largest differences in employment rates are for people with diabetes, chest or breathing problems, and difficulty with seeing, hearing, or speech. Scotland fares better in the employment of people with stomach, liver, kidney and digestion problems, for instance, and slightly better for people with autism.[1]

Chart 4: Proportion of the working-age population with disabilities by working status and type of disability, 2022

Source: Annual Population Survey, 2014-2021. * Estimates are based on a small sample size and may not be precise.

Disabled people have lower qualification levels in Scotland.

Disabled people are more likely to have no qualifications than those without disabilities, both in Scotland and the UK. Scottish adults are also more likely to have no qualifications compared to the rest of the UK, although the gap in qualifications for disabled people is larger for Scotland than for the rest of the country (Chart 4).

The proportion of people with no qualifications has been falling in recent years. This may be due to older people, on average,  being less likely to have formal qualifications, and as they move to retirement age, the number of working age people without qualifications goes down.

For disabled people, it may also be true that the increase in the number of disabled people have changed the make-up of the disabled population, especially for people who are becoming disabled later in life (for example, due to mental health issues that present post-education).

Chart 5: Proportion of working-age adults with no qualifications by disability status, Scotland & rUK, 2014-21

Source: Annual Population Survey, 2014-2021

Where are there gaps in our knowledge?

As discussed at the start, publicly available data on disability types is severely limited. For example, survey data in Scotland has detailed disaggregation on different types of disability, but only publicly provides information on whether or not someone qualifies as disabled under the 2010 Equality Act definition. The Scottish Government has been making strides to improve this data, however – a 2022 publication analyses disability employment by type of disability, but only examines one year.

One particular issue that we have found is for people who have a learning disability where the data is extremely poor.  We will be publishing a new article later this week that sets out some of the particular issues for people with a learning disability.

Our next phase of research will look into more of the detail around employment levels for people in Scotland living with different disabilities based on access to non-public secure data held by the ONS. There may still be limits on the data we are able to use (for example, where robustness thresholds set by the ONS are not met), but we hope we will be able to add to the evidence base here in Scotland and provide better insights for policy makers and stakeholders on where support needs to be focussed.

What’s in the Programme for Government?

It’s a new term at Holyrood, and a new Programme for Government – the first for the new First Minister Humza Yousaf (writes Fraser of Allander Institute’s EMMA CONGREVE).

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

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

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

A focus on rebuilding trust with business

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

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

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

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

Childcare

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

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

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

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

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

What wasn’t in there

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

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

Little detail on fiscal trade-offs

In May, the Deputy First Minister presented the Medium-Term Financial Strategy (MTFS), in which outlined three pillars to achieving fiscal sustainability – spending decisions focused on critical missions, supporting economic growth and a strategic approach to tax policy – set against the backdrop of spending commitments in excess of funding by £1bn in 2024-25, rising to £1.9 billion by 2027-28.

At the time, the SFC expected a larger income tax reconciliation than has transpired, and the increased borrowing powers in the latest Fiscal Framework Agreement also help ease some of this, but we think the funding gap remains at around £600m – still a large number.

The Programme for Government adds little detail on how the Scottish Government will deal with this shortfall. There is a vague mention of “more effective targeting of existing provision and services to support those who need it most” in line with the MTFS, but no specifics on whether there will be cuts to programmes and if so, to which.

The list of public service reform activities, while welcome (who could object to cataloguing assets or trying to save public funds on estates?), is hardly transformational, and unlikely to go a long way towards addressing the funding gap.

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

The First Minister did outline the intention to introduce a new Building Safety Levy akin to that legislated for by the UK Government for England and which will apply from next year, with the intention to make developers contribute to the cost of cladding remediation work.

But this is not part of current devolved powers, and so the Scottish Government would need to successfully negotiate that with the UK Government before even starting the lengthy process of introducing and designing a new levy. So it’s unclear when it could come into place, assuming the Scottish Government did get said powers.

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

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

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

We’ll have to wait for confirmation from the Scottish Government on the timing, which hopefully will come soon!

Short-term lets licensing scheme explained

This week the Scottish Government released the first statistics on applications and granting of licences for short-term lets by councils (write Fraser of Allander Institute’s JOAO SOUSA and MAIRI SPOWAGE).

The licensing scheme came into force in October 2022 for new operators, and existing operators must apply for a licence before 1 October 2023. We’ll explore a bit more about the expected outcomes from the scheme and what the data tell us so far:

What is the idea behind the licensing scheme?

The Scottish Government committed in the 2018-19 Programme for Government to create a system that would allow local authorities to have “appropriate regulatory powers to balance the needs and concerns of their communities with wider economic and tourism interests”. There have since been three consultations (2019, 2020 and 2021) on the desirability of a scheme and its aims, with a final statutory instrument being laid in late 2021 to implement the scheme now in place.

The licensing scheme is based on provisions from the Civic Government (Scotland) Act 1982, which allow the Scottish Government to make it a criminal offence for operators in specified markets to operate without a licence, making them subject to a fine of up to £2,500 (which the Government intends to legislate to increase to £10,000). There is also a provision for the designation of control areas by councils to manage high concentrations of secondary letting.

The Scottish Government’s stated aims in introducing the scheme are to:

  • Ensure short-term lets are safe and address issues faced by neighbours;
  • Allow local authorities to know and understand what activities are happening in their area, and to allow them to handle complaints effectively;
  • Manage high concentration areas of secondary letting where it affects the availability of residential housing or the character of a neighbourhood);
  • Restrict short-term lets in places where they deem it not appropriate; and
  • Help local authorities ensure the available housing stock is used to the best effect.

The Scottish Parliament Information Centre (SPICe) has a helpful blog covering the specifics of the scheme and the legislative process that has underpinned it.

Why does the Government feel the need to intervene?

As part of the business and regulatory impact assessment (BRIA) process, the Scottish Government is required to justify why it feels that government intervention is appropriate. The rationale for intervention is generally a market failure, that is, a situation where market outcomes end up not being socially optimal – either because too much or too little activity happens and/or because costs are imposed on third parties that have no say in the transaction.

In the BRIA for this measure, the Scottish Government highlights two main market failures:

  • One is asymmetric information, as hosts are likely to know more about the safety and quality of a property than guests. The classic example of this in the market for used cars (George Akerlof’s Nobel Prize-winning contribution), where the asymmetry means that eventually only poor quality cars are sold. In the short-term licensing case, the Government argues that people may unwittingly stay in unsafe accommodation and that unsafe hosts will undercut safe hosts because they will not have to bear the costs of meeting safety standards. The Government then argues that the licensing scheme will provide better information, removing unsafe accommodation and providing a level playing field – and also states that increased consumer confidence might increase demand for short-term lets.
  • The other market failure described by the government is the existence of negative externalities, which mean that third parties (i.e. neither hosts nor guests) bear some of the costs of these transactions but such costs are not accounted for in the market price. The BRIA lists a number of those, including increased housing costs (to rent long term or buy) for local residents; the decrease in local amenities for long-term residents and reduced sense of community due to a high concentration of short-term lets; nuisance through noise, littering and anti-social behaviour; and potential use of accommodation for criminal purpose, with or without collusion from the host. Nuisance impacts (parking, littering, traffic and noise) were found in a 2019 survey by the Scottish Government to be a big concern, as were the impacts on the housing market through reduction in housing affordability through lower availability and higher prices for long-term residential use.

The effects on neighbourhood character, nuisance and the long-term residential housing market are especially prevalent in areas of very high concentration of short-term lets. Edinburgh City Centre and Skye are the most extreme cases, where the Scottish Government estimates that more than 10% of dwellings are used for secondary letting.

Who and what does licensing cover?

The licensing scheme casts a very wide net. It naturally applies to secondary letting – that is, the letting of a property that is not one’s main residence, so a second home or holiday let. But it also applies to those renting out a room in their property on a short-term basis while living in it, and those letting out a property while on holiday – including house swaps, even if no money is exchanged (as the legislation treats that as an in-kind payments and therefore still requiring licensing).

There are exemptions – for example, those providing a service (e.g. careworkers) while staying overnight, aparthotels and other types of accommodation (hotels, some B&Bs and guesthouses with licensed premises) which already have their own licensing scheme.

The scheme also imposes minimum safety standards, including meeting the repairing standard, providing an energy certificate, fire records and warning systems, gas supply certificates, electrical installation condition reports, portable appliance testing for all movable appliances, legionella risk assessment, and buildings and public liability insurance.

Councils are also allowed to set additional standards which go above those in the legislation. Operators will also have to pay a fee for obtaining the licence, which is to be set by local authorities on the basis of the cost they incur to administer the scheme. The SPICe blog mentions £300 to £500 as the expected level for these fees.

Is there evidence for these market failures and how well does the scheme address them?

There is some evidence in the BRIA that specific areas of Scotland have very high concentrations of short-term lets, and that such concentrations have reduce the supply of housing available for long-term residential use. This drives up prices and reduces affordability, and is especially true for second homes.

The scheme goes some way towards addressing this by imposing additional costs on secondary letting and allowing councils to set up control areas in which planning permission is required for letting out an entire second home. If the intended effect is to encourage some people at the margin who would otherwise keep letting out their second home to release it for long-term use, then it will have some effect.

It is, though, debatable how large that will be relative to the additional income earned through short-term letting. But the Government’s BRIA has made no attempt to quantify this – in fact, section E (which summaries costs and benefits) is notable for the absence of any quantification of impacts.

One clear effect of the scheme will be to increase the cost of supplying accommodation. Even if a host provides safe accommodation already, with all the formal requirements set out in the regulations, it will still have to bear the cost of the licence.

But it is unlikely that many will have no other additional costs. The question then becomes who bears these additional costs, and that depends mostly on the price elasticity of demand, that is, how price sensitive consumers are.

If guests are not very price sensitive, then we would expect them to bear most of the additional costs through higher prices, without much reduction in the quantity of accommodation purchased. But if they are very price sensitive, then more of the cost will be borne by suppliers – and if it tips some into not making a high enough return on supplying short-term accommodation, then they might exit the market altogether – leading to both higher prices and lower availability.

That may well be the Government’s intended outcome – but the BRIA does not make that clear. And by including those renting a room in their home while living there in the scheme, it’s not clear either that licensing will lead to the release of substantial amounts of property into residential use.

But rooms for short-term rental are substantially cheaper than whole dwelling accommodation, and hosts are likely to be earning considerably less – and given the fee and cost structure of complying, they are the most likely to decide not to supply short-term accommodation.

If that happens, we will be in a situation where supply is lower, prices are higher and little additional housing is available – because those most likely to exit the market were already using it for their main residence. The BRIA states that a visit to Scotland does not have a perfect substitute in visiting a different place, implying that the market would be able to bear higher prices – but that presumes that the prospective visitor has a very specific preference for visiting Scotland.

But no evidence is provided to back this up – and if consumers are instead indifferent about destinations and are instead shopping around given specific dates they have in place, their price sensitivity could be much greater.

The BRIA argues that the reduction in information asymmetry may in fact increase demand for accommodation in Scotland relative to competitor destinations. This is an unpersuasive argument.

Unlike other markets where little recourse exists – e.g. cash sales or small value items – there is a lot of information already in the market, including peer reviews on platforms which already require those reviewing to have previously purchased the service.

The platforms themselves have an incentive to maintain high quality as otherwise their reputation will suffer. And in any case in none of the consultation documents provide much evidence that the sector is currently providing much unsafe accommodation – bringing into question whether the market failure the scheme is meant to address is a significant one to begin with.

What does today’s statistics release tell us about the scheme?

Today’s release covered the first two quarters (Q4 2022 and Q1 2023) during which applications could be made for a licence, though only new operators were required to have applied already.

It is also hard to know the total number of potentially affected operators. The BRIA used the non-domestic rates valuation roll for premises registered for self-catering or B&B/guest house use, which amounted to around 18,000 in April 2021. But many of the properties covered will not be subject to non-domestic rates but instead council tax, as their main purpose is residential use. Airbnb had 35,000 properties available to let in Scotland in January 2019.

In any case, the number of applications received by 31 March 2023 was just over 2,500, indicating that probably less than a tenth of all eligible properties were in the system by then. Of the applications received, just over a third had received a decision, and not a single one had been refused. This is perhaps unsurprising at this stage – people who have already applied when compliance is only mandatory for new operators will be disproportionally likely to comply with the rules.

Numbers were especially low in urban areas: both Edinburgh and Glasgow had less than 100 applications each, and Aberdeen and Dundee had less than 50 each. With urban areas being much more likely to have home sharing, we probably should read little into the fact that the majority of applications so far have been for secondary letting of whole dwellings.

The low numbers in the system though could be something of a concern going forward. The scheme’s binding deadline was extended by six months to 1 October 2023 in December of last year, and while the First Minister has ruled out subsequent delays, local authorities might find themselves flooded with applications right before the deadline.

It also raises the issue of compliance with the scheme and of the public’s awareness of it. The Scottish Government has set up a website with information on how to comply, but given how few people have already applied, it might be required to step up its information campaign – we are not sure people are fully aware they are in theory committing a criminal offence if they do not apply for licence and continue operating.

Overall, whilst the policy imperative on second homes in some areas of Scotland is well evidenced, the breadth of this legislation to target use of primary residences seems much less so. Many will be surprised to find that it includes house swaps! It is not clear to us what policy problem the inclusion of this activity is actually trying to address.

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.

Is Scotland heading into recession?

This week the Scottish Government published monthly GDP statistics for the month of May. These showed that the economy contracted in May by 0.2% (writes Fraser of Allander Institute’s MAIRI SPOWAGE).

This follows (larger than thought before) contractions in March and April, which means that in total the economy has contracted by 0.4% in the 3 months to May.

Now, these monthly figures can of course be volatile, and we shouldn’t read too much into the individual movements every month. The first estimates that are produced for each month and quarter are also more subject to revision than older estimates.

This has been underlined by the media line “Scotland is growing at 4 times of the UK” (which we discussed the issues with as part of a previous update) now no longer being true for the first quarter of the year. For the first quarter, the new estimate is that Scotland grew by 0.2% compared to 0.1% for the UK as a whole.

The recent monthly contractions have also meant that the size of the Scottish economy has dipped slightly below that all-important level of February 2020, the so-called “pre-pandemic levels of output”.

Bearing in mind the caveats above, we can see in the latest figures significant contractions in the wholesale and retail and accommodation and food services sectors, perhaps signalling the contraction in consumer-facing services we have been expecting given the pressure on household budgets.

In production, there was a very large contraction in the electricity and gas supply sector, which, given the dominance of wind generation in Scotland, is likely to reflect the weather in May (i.e. it wasn’t very windy). The construction sector has also shown contractions in each of the last 3 months, although in general, this sector’s output is well above pre-pandemic levels.

Towards the end of August, we’ll get the figures for June which will give us the first estimate of the figure for the full quarter. There will have to be a significant recovery in June for that not to be a contraction overall. Of course, there would also have to be a contraction in Q3 for us to be technically in recession.

We’ll also be looking with interest at the new forecasts produced by the Bank of England next week. The decision on rates will of course take the headlines. The Bank’s view may soften slightly, with market expectations coalescing around a 0.25 rise in the base rate. However, we’ll also be digging through their new forecasts to see what the Bank is expecting to happen for the rest of 2023 and beyond.

We’ll discuss all this in next week’s update! Enjoy the weekend, whether you’re seeing Barbie, Oppenheimer, or simply dodging the rain at a BBQ!

A mixture of sunshine and showers

The economy in recent weeks has resembled the Scottish weather: not quite the summer we hoped for but definitely could be worse, and we hope for better to come (writes Fraser of Allander’s Institute’s EMMA CONGREVE).

Inflation easing

This week’s announcement on inflation coming in at 7.9% in the year to June 2023 was lower than markets were expecting.

According to the ONS, the fall was driven by lower motor fuel prices and an easing in the rate of food price growth. We’re sure readers of the FAI weekly update don’t need to be reminded of this, but just in case, remember that a drop in the inflation rate does not mean that average prices are falling.

However, as the Resolution Foundation’s Torsten Bell pointed out in a useful thread on Twitter, in June 2023 it looks like we (finally) had a situation where average wage growth was higher than inflation, meaning that real wages rose.

Of course, averages are just that, and will not apply to all, but it’s a chink of sunshine nonetheless. Many will hope that this easing of inflation will ease the pressure on the Bank of England’s Monetary Policy Committee.

The next rate decision is due on the 3rd of August.

Recent labour market news

On the 11th June, the latest labour market statistics were released covering the period March to May 2023.

The employment rate reduced slightly over this period, leading to an increase in both unemployment (people seeking work) and inactivity (people not working and not seeking work).

Inactivity statistics have been moving in opposite directions in Scotland compared to the rest of the UK over recent quarters, although as the chart shows, this follows a period of relative convergence of the UK and Scottish rates, and rates have tended to be higher in Scotland than the UK average over recent years.

Chart: Economic Inactivity Rates in Scotland and UK

“Risky” Finances

According to the OBR, in a report published on the 13th July, the pressure on UK public finances has risen considerably over the last year, due to a combination of inflation and interest rate rises, and accelerated changes in demographic change.

One key part of this is the fact that the UK has a relatively high proportion of inflation linked debt compared to other advanced economies. Their frankly terrifying forecasts see UK public debt rising to over 300% of GDP over the next 50 years, from around 100% now (indeed statistics out today show that the UK’s debt pile is now officially higher than GDP in June 2023).

Nothing is inevitable, and these forecasts are drawn up to provide context and evidence for government decision-making in the years ahead. Difficult decisions, as ever, loom.

That’s it for this week. If you haven’t seen it yet, I’d encourage you to watch our colleague Adam’s presentation as part of this year’s Pride in Economics Event. You can find it on our website.

Tweaking around the edges of Council Tax does not fix its fundamental flaws

On Wednesday, the Scottish Government and COSLA released their anticipated (and widely leaked) consultation on Council Tax changes (writes Fraser of Allander Institute’s EMMA CONGREVE).  

The proposals set out would see a repeat of the 2017 increases in band multipliers for properties in Band E – H with the consultation seeking views on whether the changes to the mulitpliers should be higher or lower, or not happen at all. .

Table 1 shows the proposed changes in the context of the original multipliers set out in 1993 and the reforms in 2017. The proposed changes would lead to an increase in the amounts paid of £139, £288, £485 and £781 per household (or dwelling in official council tax speak) for those in Band E, F, G & H respectively.

Table 1 – Council Tax Multipliers

 Council Tax BandOriginal multipliers2017 reformsNew proposals
A0.670.670.67
B0.780.780.78
C0.890.890.89
D1.001.001.00
E1.221.31 (+7.5%)1.39 (+7.5%)
F1.441.63 (+12.5%)1.75 (+12.5%)
G1.671.96 (+17.5%)2.13 (+17.5%)
H2.002.45 (+22.5%)2.68 (+22.5%)

The consultation documents note a number of valid points, but fails to mention others that are fairly fundamental to the operation of the Council Tax. Here we cover some of the main issues.

A fundamentally flawed tax

Council Tax is a regressive tax. By regressive, this means that the average tax rate (the % of the tax base paid in tax) falls as the value of the tax base rises. For Council Tax, the tax rate depends on the property you live in, meaning the relevant tax base is property value (as of 1991 – an issue we’ll return to later). The highest valued properties pay a lower % of that value in their Council Tax bill.

The consultation document restates research that was completed as part of the 2015 Commission on Local Tax Reform that found that, in order for Council Tax in its current banded form to be progressive, the Band H rate would need to be in the order of 15x the Band A rate. Given this was based on 2013-14 property values, this figure may have since increased even further.

It is a shame that the government has not revisited the 2015 analysis to provide up-to-date figures. This is not an easy task (this author was involved in it the first time round!) but the data exists to repeat much of the Commission’s analysis. Updated figures would provide a better evidence base for judging their proposals.

However, updated figures would not change the overall position: the proposed changes would place Band H at 4x the Band A rate, far below values that would be required to become anything approaching progressive. The consultation document does not shy away from admitting this, stating that the proposals will not address ‘the fundamental regressivity of Council Tax’.

How do the proposed reforms link to ability to pay?

Although Council Tax is tied to property, it is income or savings that are required to pay the bill each year. As well as being regressive with respect to property, council tax is also regressive with respect to income. That is, as your income rises, the % of your income that you pay in the tax reduces.

There are some protections in the system to ensue those on the very lowest incomes do not pay some or any of their bill. The 2017 reforms also came with a condition that anyone who had income below the national average (median) would not pay any additional amounts if they were in Bands E – H. However, the regressivity with respect to income remains an issue that these reforms will not be able to address.

If we look at the impact of the proposals on the upper half of the income distribution (where we expect most people to be outwith any form of CTR protection), the average impact on Council Tax bills range from around an additional £200 – £320 a year.

In the context of some of the recent figures on increases on increases in mortgage increases, these figures look relatively sedate (although it may feel far from that, especially for those affected by mortgage increases too).

In addition, these numbers do not include any other form of discounts or exemptions which may reduce the additional amounts, such as the single person discount. Table 2 shows that, as a proportion of household income (and with the same caveats re not accounting for other discounts) this is between 0.7% and 0.5% (i.e. a half of 1%).

Table 2 also shows that although those higher up the income distribution will pay more, the proportion of income paid decreases as income rises: that is the proposed reforms will be regressive with respect to income. Those in the top 10% of income are likely to pay a lower proportion of their income in additional tax than those in the next income decile down.

Table 2 – Additional charges faced by the top half of the income distribution

Income decile groupAverage additional chargeAverage income (latest data)Average additional charge as a % of household income
6£201£27,8200.72%
7£201£31,9280.63%
8£222£37,5440.59%
9£258£46,3840.56%
10 (i.e. top 10%)£317£64,8960.49%

i Average income data is taken from the DWP Households Below Average Income dataset for 2021-2022. Average income in this table refers to a reference household with two adults and no children. Income is net of tax and transfers.

This is partly a result of incomes not being directly tied to value of the property you live in. Many critics of using property values as a basis for a recurring tax cite this issue, particularly for pensioners who may have lived in a home that has accrued in value over many years, but have a relatively low disposable income (although not low enough to qualify for Council Tax Reduction).

An additional factor relates to the fact that there are relatively few Band H properties where the highest charge applies: even in the top 10% of households less than 1% of households are in a Band H property, a similar proportion to households in the 9th income decile.

The elephant in the room: revaluation

An additional fundamental issue, absent from the consultation document, is the fact that the property values used to put properties into bands are based on 1991 values. Some properties have grown much faster in value than others since then.

That means that two properties that were in the same band in 1991 may now be worth vastly different sums of money, and if there was a revaluation today they would no longer be placed together in the same band.

The issue is further complicated by new builds where finding a comparable hypothetical 1991 value is difficult.

A quick look at any property website will provide you with all the evidence you need to illustrate the issue where property value and Council Tax Band are often quoted side by side.

For example, the market at the moment in Edinburgh:

  • A 2 bed ground floor flat for sale in the New Town for offers over £415,000 which is in Council Tax Band D (and therefore will not face the proposed additional charge)
  • A similarly sized 2 bed ground floor flat in Craigleith for offers over £210,000, which is in Council Tax Band E (which will face the proposed additional charge)

For those not familiar with Edinburgh geography, the locations are shown on the below map*.

This is not a one off. The Commission’s analysis in 2015 estimated that over half of all properties in Scotland would have changed band if revaluation had taken place in 2014.

We could speculate, at length, why revaluation has not happened. Scotland is not the only country that has struggled to find the political appetite to make it happen (the UK Government has done no better in England), but other parts of the UK have managed it in the last two decades.

What should be happening

Most people would agree that reforms to Council Tax need to go beyond tweaking multipliers. There are a number of options available, with a proportional tax on the value of a property being the majority view of the 2015 Commission, and indeed the previous Burt Commission that came up with similar proposals back in 2006.

However, any reform is contingent on the tax being levied on correct values. That means a revaluation is necessary. Indeed, it should be a prerequisite even for the type of tweaking that the Scottish Government did in 2017 and is proposing now given the majority of properties are likely to be in the wrong band.

To continue without revaluation is deeply unfair and to take forward reforms without a revaluation just rubs salt into the wounds.

*This map contains information from OpenStreetMap, which is made available here under the Open Database License (ODbL)

Meeting Scottish child poverty targets – is it a case of too little, too late ?

Tackling child poverty is a stated priority of the Scottish Government (writes Fraser of Allander Institute’s EMMA CONGREVE). Yet recent data has displayed little progress towards eradicating poverty and Scottish Government modelling now shows, with its current set of policies, the interim 2023/24 statutory targets are likely to be missed following a ‘deterioration in the macroeconomic situation’. [i]

The Child Poverty (Scotland) Act 2017 set out Scotland’s ambition through a set of child poverty targets,. This article looks at the data to understand why the progress hoped for has not been realised.

Why has there been little progress to date in tackling child poverty?

The most recent data shows that child poverty trend looks fairly flat (chart 1). The most recent period covers 2019-20 to 2021-22, and showed the number of children in poverty actually rising slightly compared to the previous period, matched by an increase in the total number of children in Scotland. This left the headline 2019-22[1] rate at 24%, the same as 2018-19 to 2020-21.

Chart 1: Relative child poverty in Scotland 

Despite the fact that Scotland is the only part of the UK to have child poverty targets, Scotland does not particularly appear to be outperforming rUK when it comes to reducing child poverty.

As chart 2 shows, whilst Scotland is towards the bottom of the pack when it comes to child poverty rates, other parts of the UK (the South East of England, Northern Ireland and the East of England) have had similar rates of progress over recent years. The data is quite volatile, but at the moment there does not appear to be evidence of Scotland forging a unique path.

Chart 2 – Child poverty rates across UK countries and regions

But what about the counter argument: in the absence of government policy, child poverty could have risen. Scottish Government analysis shows that they believe this would have indeed been the case?

However, the point still stands that there is nothing in the data so far that shows Scotland setting itself apart from elsewhere in the UK, perhaps reflecting the point that many of the policies that Scotland have in place exist in a not too dissimilar form in rUK – for example Free School Meals and an equivalent to Scotland’s Best Start Grant.  And whilst these may be less generous, it is seems that they are not different enough to show up in the aggregate poverty data.

However, this should be about to change. The Scottish Child Payment started to be rolled out in 2021. The 2021-22 data collection was the first year that Scottish Child Payment claimants were picked up in the data but over the next few years we would expect it to make more of an impact as the number of claimants and the generosity of the benefit has ramped up.

Looking at our own modelled estimate, we can see this emerging trend if we look out to 2023-24 with Scotland starting to diverge from those countries/regions of the UK that it was has recently been tracking alongside (Chart 3).

Chart 3 – Modelled estimate of the effect of the Scottish Child Payment on relative poverty rates in Scotland vs the rest of the UK

One potential issue is that the levels of Scottish Child Payment picked up in the most recent data look like an underestimate compared to the figures on admin data.

There is always some disparity; it is widely known that the official surveys of income understate benefit receipt. However, the Scottish Child Payment figures look low, even once that known discrepancy has been taken into account.

This may improve as years progress, and people become more familiar with the Scottish Child Payment. However, it is a concern and will need to be monitored closely.

Beyond the Scottish Child Payment

Since its initial introduction, the Scottish Child Payment has increased in value to £25 per week, and it is now available for every child who meets the eligibility criteria. Many charities and stakeholder groups have recommended that the Scottish Government increases the Scottish Child Payment to £40, but this has so far been rejected.

The Scottish Child Payment is forecast by the Scottish Fiscal Commission to cost £405m in 2023/24. An increase to £40 would cost in the region of £250m more for an additional 2.5 percentage point reduction in poverty. The modelling suggests this would have been enough to meet the 2023/24 interim target, but still leave poverty levels some way distant from the 2030/31 target.

Clearly, some new ‘game-changing’ policies are required. Along with social security, the most obvious place to focus attention is on earnings from paid employment. Both the 2018 and the 2022 tackling child poverty delivery plans had actions relating to employability, but the Scottish Governments most optimistic assumptions were only able to predict a 2 percentage point reduction in poverty[iii].

The decisions people make around work depend on many factors, and the jobs available to them can limit options. Childcare, transport, and skills are just some of the potential intervention areas, and for them to start adding up to significant impact, investment at scale will be required. It is likely that some additional social security interventions will need to be on the cards as well if there is any chance the 2030-31 targets will be met.

The unfortunate fiscal reality and the need to prioritise better

The recent Medium Term Financial Statement reminded us that, even with the current set of policies, Scottish Government is facing a budget shortfall in the coming years. Yet, child tackling child poverty remains a clear stated objective and it is difficult to see how the targets can be met without more money being invested.

The statement  set out the Scottish Government’s intention to “prioritise the programmes which have the greatest impact on delivery”. Our experience from years of scrutinising government policy development is that cost-effectiveness analysis is often absent, often due to lack of internal capacity, skills and oversight of appraisal processes[iv].

In the 2022-23 progress report[v] , the Scottish Government estimated that they had invested £3 billion on programmes targeting low income households, with £1.25 billion estimated to benefit children over the year. Prioritising this list in terms of its cost effectiveness would be a first step in working out what needs to stay, and what could justify being dropped and reinvested elsewhere.

Remember that a cost-effectiveness analysis is not just about the number of children directly lifted out of poverty as a result (although that is a good place to start). It is also about other objectives, such as reaching those in the deepest poverty and moving them close to the poverty line, or investing in policies that help contribute to other government priorities, such as tackling climate change.

Evaluation evidence is also lacking. Six years on from the first tackling child poverty delivery plan, we should be seeing the results of which policies have been in place over that time.

Robust evaluation which is able to isolate the impact of particular policies on child poverty is difficult to do, but without some evidence in this direction, objective prioritisation is a lot harder to do, if not impossible.

A child poverty policy evaluation framework[i] was launched in 2023 and the 2022-23 annual report stated that there will be a review of progress after 18 months. Whether or not this  framework will deliver enough, and come soon enough to make a difference in time to meet the targets, remains in doubt in our minds.

[1] Analysis of Scottish poverty in Scotland is based on multiple years of aggregated data, with three years of data the norm. Due to issues with collecting data during the height of the pandemic, data for 2020-21 is not usable and for the three year periods that contain the 2020-21 year, only two years worth of data is included. This is not ideal, but is a sensible approach to deal with this exceptional circumstance.

[i] Scottish Government (2023) Child Poverty – monitoring and evaluation: policy evaluation framework available here

[ii] Scottish Government (2023) Tackling Child Poverty Progress Report 2022-23, available here

[iii] See p18 of JRF & Save the Children’s response to the 2022 to the Scottish Government’s second Tackling Child Poverty Delivery plan for further explanation, available here

[iv] Fraser of Allander Institute (2022) Improving Emissions Assessment of Scottish Government Spending Decisions and the Scottish Budget, available here. Although the report was ultimately about emissions appraisal, many of the findings relate to appraisal across all policy areas.

[v] Scottish Government (2023) Tackling Child Poverty Progress Report 2022-23, Annex B accessed here

Fraser of Allander: New report on the future of hospitality in Scotland

In 2021, one in 14 jobs in Scotland was in the food and accommodation service sector, adding around £1.3 billion to the Scottish economy quarterly. Yet, average pay in the hospitality sector is significantly lower than the Scottish average – in fact, accommodation and food services has the lowest median hourly pay of any industry, at £10 in 2022. Across all sectors, the Scottish median hourly wage was £15 for the same time period.

Pre-pandemic, we published a report showing that hospitality workers were more likely to be in working poverty than workers in other industries. Children living in a household with at least one adult in hospitality were also significantly more likely to be in poverty than other households in Scotland.

Hospitality is also an extraordinarily difficult industry for business owners and operators. We found that food and accommodation services lost the highest proportion of revenue compared to other industries during the pandemic, on top of already having relatively low profit margins.

Hotels and restaurants also struggle to fill job vacancies, with data showing that around 30-35% of hospitality workers change employers annually – around twice the rate of other industries. This can add thousands of pounds to a company’s bottom line annually.

Holding on to these workers is vital for the long-term sustainability of these businesses, just like addressing low pay in hospitality is vital for the long-term wellbeing of these workers, their families, and the entire landscape of inequality and child poverty in Scotland.

To understand these issues, the FAI began a three-year project engaging with hospitality employers and workers in 2022. This project, called “Serving the Future,” is a partnership between the Robertson Trust, the Institute for Inspiring Children’s Futures, the Hunter Centre for Entrepreneurship, and the Poverty Alliance.

The goal of this project is to identify how hospitality industry employers can reduce in-work poverty, and what organisational, systemic, and policy-based changes can address child and working poverty in Scotland.

Today, we published our report summarising the first stream of work in this project. This workstream used scenario planning workshops to figure out what can be done to both support the sector financially and reduce in-work poverty.

Scenario planning involves discussing possible future situations based on various political, environmental, economic, or cultural factors. We established two groups for this: a group of hospitality workers and a group of business operators.

We asked these two groups to come up with ten major drivers of change each, isolating the two that were deemed the most important and most uncertain. The groups then created four scenarios based on the impact of the two drivers: what if one driver had high impact and one had low impact? What if both had high impact? What if neither did?

Participants then discussed the possible implications of these four scenarios, and what actions could be taken to mitigate potential negative outcomes. This allowed us to understand some major concerns for the future of this culturally and economically important industry.

What were hospitality workers concerned about?

Unsurprisingly, hospitality workers voiced concerns about poverty levels. They also expressed concern about business uncertainty: what if demand for hotels and restaurants skyrockets? What if demand drops? How will business levels affect mental health and job security for workers? What about pay?

The four situations addressed high consumer demand compared to low consumer demand, combined with either high or low levels of poverty.

The consumer demand scenarios showed the trade off workers make with hours and mental health. Especially in high-poverty scenarios, workers either suffer with burnout because of high business levels, or they suffer with unstable paycheques and poor job security because of low levels of consumer demand. Workers also noted that burnout and poor wages would naturally lead to bad service and bad practices.

The concern about poor service and bad practice was echoed in situations with lower levels of poverty, as well. In those scenarios, workers discussed ways to improve working conditions and reduce the stigma of hospitality jobs. This demonstrates a theme between both workers and employers – everyone takes pride in their work. Both groups want these positions to be viewed as a culturally significant and sustainable career path, rather than a low-status and temporary job.

What were the business operators concerned about?

Employers identified government policy and high energy costs as key issues facing the hospitality industry today. The four scenarios covered more and less effective policy backgrounds, combined with higher or lower energy costs.

The two situations with strong and effective government policy were generally considered more positively by employers, regardless of energy costs. Energy costs were still a major concern, especially among the rural business leaders in this group, but with better policy, employers felt that they could increase pay and invest more in staff training and development. They pointed out current childcare policy as an area with room for improvement – it’s a huge struggle for parents to access childcare when they need it, since typical work hours in hospitality fall outside of traditional school hours.

In situations with less effective policy, worker exploitation was seen as a natural outcome. This led employers to talk about the stigma around hospitality work. Like the worker group, employers want to see the work as a viable and sustainable career option. In situations without effective policy, employers thought that this worker exploitation would lead to high vacancy rates, burnout, low pay, and the continued view that hospitality is a temporary, low-status job.

Actions

Both groups felt that the government needs to provide policy which ensures adequate incomes for staff. They suggested increasing minimum wage or increased social security payments. Employers also want to see policy action on non-traditional childcare options.

Businesses also expressed how crucial government support was during periods of crisis for businesses – ongoing support for high energy costs were of particular concern when we held these meetings back in September.

Finally, businesses noted how challenging it is to navigate formal education and training. In particular, they talked about how education rarely prepares people to work in high-pressure, late-night environments. The modern apprenticeship programme, which is only available to under-25s, also misses out on recruiting older people that would benefit from such a programme.

This observation is timely, in that a recent report to Scottish ministers expressed a similar viewpoint. In particular, the system lacks cohesion, is overly complicated to navigate, and often results in tension between sectors and educational institutions, in spite of both having shared goals.

Within the sector itself, employers discussed training improvements and how these could be attained by working with other businesses.

Improving worker conditions within the sector was mentioned by both workers and employers. With better government support, both groups felt that there would be more of an opportunity to improve pay. Employers talked about transport and childcare, while workers focused on general working conditions.

This work was our first step in identifying ways to reduce the risk of in-work poverty for individuals in the hospitality sector. It also left us with several unanswered questions: how will technology impact the future of hospitality? How can employers help improve the educational system for hospitality workers? How can the sector and government make hospitality a viable, long-term career option?

Keep an eye on both our site and the project page at ServingTheFuture.scot for future developments in this space.

Download the full report here

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