Fraser of Allander Institute – Page 3 – The NEN

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 Band	Original multipliers	2017 reforms	New proposals
A	0.67	0.67	0.67
B	0.78	0.78	0.78
C	0.89	0.89	0.89
D	1.00	1.00	1.00
E	1.22	1.31 (+7.5%)	1.39 (+7.5%)
F	1.44	1.63 (+12.5%)	1.75 (+12.5%)
G	1.67	1.96 (+17.5%)	2.13 (+17.5%)
H	2.00	2.45 (+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 group	Average additional charge	Average income (latest data)	Average additional charge as a % of household income
6	£201	£27,820	0.72%
7	£201	£31,928	0.63%
8	£222	£37,544	0.59%
9	£258	£46,384	0.56%
10 (i.e. top 10%)	£317	£64,896	0.49%

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 9^th 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

Hospitality-in-scotland-report Download

Is the Scottish economy really growing at FOUR times the rate of the UK?

The big political news of the week in Scotland was undoubtedly the further disputes about the Scottish Government’s troubled Deposit Return Scheme (writes Fraser of Allander Institute’s MAIRI SPOWAGE).

This followed the decision by the UK Government to allow the scheme in Scotland to proceed, granting a “temporary and limited” exemption from the Internal Market Act, but only if the Scottish scheme excluded glass – and therefore include PET plastic, aluminium and steel cans only.

The justification from the UK government’s point of view is that the exemption is temporary only until UK-wide schemes are introduced (planned to be in 2025); and that the exemption does not include glass because the scheme that the UK Government are planning to introduce does not include glass.

The Scottish Government have made it clear, through a statement by the responsible Minister Lorna Slater on Tuesday, that this may mean that the scheme as designed in Scotland is not viable. The SG are now examining the implications of how and if the scheme can proceed on this basis.

If the decision by the SG was to scrap the scheme, or even to proceed without glass, there are likely to be calls for significant compensation for the businesses who have invested money to comply with the scheme, including the glass elements.

This is not just an issue about DRS, or actually about Scotland. Wales had also planned to introduce a similar scheme, also including glass, and Mark Drakeford intervened yesterday to say that he would “dispute the use of the internal market for these purposes”, flagging that the UK Government had also initially planned to include glass in their scheme.

This row is now firmly in the area of constitutional grievance, with both the Welsh and Scottish Governments accusing the UK Government of meddling in devolved areas. We await to see how the Scottish Government will respond, but it is likely to include significant condemnation of the UK government no matter which course of action is chosen.

More questions over the cost of the National Care Service

While the fate of the National Care Service overall is uncertain, despite the new First Minister reiterating his commitment to the idea in recent weeks, there have been further exchanges between the Finance and Public Administration Committee at Holyrood and the Minister responsible Maree Todd.

In a letter published on Tuesday, the acting convener Michael Marra MSP has outlined the displeasure of the committee at not being given any more details of the costs of the scheme, given the formal role that this Committee has in scrutinising Financial Memorandums which accompany legislation and the fact they had formally requested more information after what they saw as an inadequate first draft.

A deadline of 21^st June for the Minister to respond – watch this space for updates!

Scotland’s economy growing faster than the UK in recent months

This week the Scottish Government published monthly data for March, which also meant they published the first estimate of quarterly growth for Scotland. This showed that Scotland had grown 0.4% in the four months to March, compared to 0.1% for the UK as a whole.

This led to headlines saying “Scottish economy grows at four times rate of the UK” and the like.

As folks who comment a lot on this sort of data, our heart sinks a little when seeing the growth figures being described like this. Yes, 0.4 is 4 times the size of 0.1. (Although to be technical, the figures are actually 0.13 and 0.36 – so not quite). But headlines like this somewhat exaggerate the meaning of such a difference in a quarterly figure and what it tells us about economic performance in Scotland vs the UK.

Digging under the data, the differences mainly come from the figures from March itself, where we see a contraction in the UK figure – driven by a contraction in consumer-facing services. It is really interesting to see these services in Scotland holding up a bit better, at least according to this first estimate of monthly growth.

	Scotland	UK
Monthly growth to March	0.0%	-0.3%
Quarterly growth to March	0.4%	0.1%
Annual Growth to March	2.1%	1.9%
Growth since pre-pandemic level (Feb 2020)	1.2%	0.1%
Growth over the last 5 years	1.6%	2.6%
Growth over the last 10 years	9.8%	15.5%

If we look over the last year, Scotland still performs better – growing at 2.1% compared to 1.9% at the UK level. Although, we should all be aware that such differences could change as data get revised.

Over the longer term, we can see that growth in Scotland has been more muted – driven partly by the oil price shock in 2015/16, and also over the medium term in the differences in population growth in Scotland compared to the UK average.

We’ll continue to dig under these data to understand more about differential economic performance in Scotland and the UK!

Summer has definitely arrived over the last week, and I’m sure we won’t be the only ones cracking out the barbeque this weekend. Enjoy the sunshine (with the factor 50 on, of course)!

What did we learn from the Scottish Government’s Medium Term Financial Strategy?

THIS week the Deputy First Minister and Cabinet Secretary for Finance Shona Robison presented her first major fiscal statement to parliament (writes Fraser of Allander Institute’s MAIRI SPOWAGE).

For the uninitiated, the Scottish Government’s Medium Term Financial Strategy (MTFS) is a document that outlines its financial plans and priorities over the next five years. The strategy aims to provide a framework for fiscal decisions, resource allocation, and economic management in Scotland. It takes into account various factors such as economic forecasts, revenue projections, spending priorities, and the government’s policy objectives.

The MTFS was introduced following the Budget Process Review Group’s final report, which recommended a number of changes to the budgetary process at Holyrood so the parliament could move to year-round budgeting. The idea is that this sets out the context at this time of year, to allow Committees to plan their pre-budget scrutiny in the Autumn, feeding into the Budget which comes towards the end of the year.

It’s fair to say that this hasn’t always looked like a particularly strategic document: perhaps in the past setting out possible challenges, without engaging with what might need to be in response. It is clear from what the DFM said yesterday that she is trying to highlight and engage with the challenges to outlook presents, which is to be welcomed.

A chunky document at 117 pages – we’ve read it so you don’t have to!

Funding Commitments are outstripping the funds available

The big headline from the MTFS is that public spending in Scotland is currently projected to outstrip the funds available by significant amounts of money from the next fiscal year (2024-25). The document says:

Our modelling indicates that our resource spending requirements could exceed our central funding projections by 2% (£1 billion) in 2024- 25 rising to 4% (£1.9 billion) in 2027-28.

The funding gap has been presented in the media this morning using that dreaded phrase “black hole”. Of course, this gap cannot be allowed to manifest itself in reality. For context, this £1 billion gap is bigger than the whole of the Rural Affairs and Islands budget; or about the same as we spend on prisons and courts combined.

Given the Scottish Government has to present a balanced budget, and if the funding coming from both Westminster and devolved taxes is as expected, what this means in practice is that difficult decisions are going to have to be made about spending. Of course, there are also options to raise taxes – but let’s come back to that.

Opposition politicians were quick to criticise the Government for saying that they were prepared to take tough decisions to deal with this challenge – but not setting out what these tough decisions were, i.e. where the axe might fall if it needs to.

To be fair, this is not the first one of these documents to highlight a potential funding gap if things continue as they have been. The difference was that DFM was very upfront about the fact that this was going to mean tough decisions were necessary. The financial statement yesterday was not a budget, and we should not have expected detailed allocation announcements.

So while we can see the uncertainty that this causes for service providers in terms of what is coming in December, to a certain extent the MTFS has done what it is supposed to do: to set the context for the start of the year-round budgeting process in Holyrood.

However, having said that, there are a number of commitments the Government has already made that are not included in this – such as the expansion of childcare provision, or further investment in the National Care Service. Therefore Ministers will have to be clear over the Summer and in the Programme for Government that they are acknowledging the tough decision environment when policy announcements are being made.

The DFM was fond of saying to opposition parties that they need to set out where cuts should happen if they are asking for more to be spent on particular areas – therefore the Government needs to hold themselves to the same standard.

A large income tax reconciliation still looks likely – but won’t be confirmed until the Summer

One of the issues that is contributing to the difficult outlook for the next financial year is a large income tax reconciliation.

To explain what this means, I’ll hand over to the Scottish Fiscal Commission (our boldening)…

When the Scottish Budget is set, funding from Scottish income tax for the financial year is based on forecasts and does not change during the year. Only when outturn information on income tax revenues becomes available is funding brought in line with outturn and a reconciliation applied to the following Scottish Budget. We can derive indicative estimates of future income tax reconciliations by comparing our latest forecasts and the latest forecast Block Grant Adjustments (BGAs) to those used in the Budget setting forecasts.

As we have highlighted in recent publications, we continue to expect a large and negative income tax reconciliation for the Budget year 2021-22. Comparing our and the OBR’s latest forecasts indicates a large negative reconciliation for 2021-22 of -£712 million. Final outturn data should be available in July 2023, with the resulting reconciliation being applied to the Scottish Budget for 2024-25.

So, we will know in July to what extent this reconciliation emerges in practice. This feature of the operation of the fiscal framework highlights the complexity of the arrangements that now determine the Scottish Budget.

Some of the coverage of this reconciliation have been characterised (by the IFS on socials for example) as a result of “over-optimism on tax receipts”. Let’s break down what is causing the reconciliation.

The forecasts for which the 21-22 budgets were set were still in the middle of the pandemic (Jan 2021), and the reconciliations are a function of both the view of the OBR of the rest of UK tax receipts and the SFC’s view on Scottish Income tax. Both of these figures were quite far out (the OBR’s more than the SFC’s) but it is absolutely to be expected given the uncertainty.

So, the current view of Scottish Income Tax is that it will be 9% higher than was forecast at the time of the 21-22 budget; but the current view of the Block Grant Adjustment is that it will be 15% higher than was forecast at the time of the 21-22 budget, hence the negative reconciliation.

To characterise this situation as “over-optimism” doesn’t seem very fair.

The outlook for the public sector workforce is assumed to be quite different in the document compared to the Resource Spending Review last year

When the Resource Spending Review was presented in May 2022, one of the main things that stood out was the analysis of the public sector workforce. The suggestion was in aggregate that the public sector workforce had increased significantly over the period of the pandemic, and that one of the ways that the tight fiscal environment could be dealt with was to manage down the public sector to its pre-pandemic size.

What wasn’t set out last year, or indeed anytime since, was how this would be achieved and in which areas the workforce would be managed down.

The MTFS does present different scenarios for the evolution of public sector pay settlements and the size of workforce. However, none of these assume that the public sector is to reduce overall. The scenarios the government examines in the document are:

Low Scenario – 2% pay award in 2023-24, and 1% pay award from 2024-25 onwards, 0.3% workforce growth
Central scenario – 3.5% pay award in 2023-24, and 2% pay award from 2024-25 onwards, 1.1% workforce growth
High Scenario – 5% pay award in 2023-24, and 3% pay award from 2024-25 onwards, 2.2% workforce growth

The document still indicates that reductions may be required in some areas of the public service, but it seems clear that this will be driven by the budget allocations that will be dished out:

Where a reduction in workforce is required for a public body to remain sustainable, we would expect this to be through natural turnover wherever possible and we restated our commitment to no compulsory redundancies in this year’s Public Sector Pay Strategy.

Let’s talk about talking about tax

The Deputy First Minister has announced that an external tax stakeholder group will be established this Summer. The document says:

This group will build on the Government’s inclusive approach to tax policymaking and will consider how best to engage with the public and other stakeholders on the future direction of tax policy, including whether a “national conversation” on tax is required.

It is hard not to be cynical about this announcement: those of us in the tax policy field have been invited to many conversations and round tables about tax over the years, but engagement is only meaningful if feedback and suggestions are taken on board. This sounds a little like a group to talk about how to talk to the public about tax. Not bad in itself, but it’s not clear how this is going to feed not many of the announcements that have already been made about taxation by this refreshed administration.

The idea is that this engagement will shape a refreshed tax strategy from the Scottish Government. A couple of things that we would say (if we are asked of course!) –

Discussions about wealth taxes look very difficult in a devolved context. However, completely within the gift of the Scottish Government is the reform Council Tax, something the SNP have said they wanted to do since coming to power in 2007. Given the number of commissions and groups that have discussed this over the years, another one is not required to set out the issues with CT, or indeed to set out options for replacement. Meaningful discussions about replacements and the political bravery to recognise there will be losers, as well as winners, will be required.
Further additions to the higher and top rates of income tax are unlikely to be able to yield large amounts of revenue. For example, there is the suggestion from the new FM (which had been put forward by the STUC) to introduce a new band at 75,000 and up the rate by 2p. The new ready reckoners published by the Scottish Government yesterday show that even if the whole of the Higher Rate Tax band is upped by 2p, this will raise £176m – not an insignificant amount of money, but not enough to deal with the funding gap outlined in the MTFS.
Tax rises are not cost-free. If engagement is to be meaningful, it is important that the SG engage with those who can see some of the costs as well as the benefits to either (i) more complexity in the tax system (ii) more divergence from the rest of the UK and (iii) higher tax burden overall.

Multi-year Funding envelopes will be set out with the 2024-25 budget (so probably in December)

The Government have committed to publish refreshed multi-year spending envelopes alongside the Budget for 2024-25. Given everything that has changed since the Resource Spending Review was published in May 2022, this is to be welcomed – although given the difficulties overall it is unlikely to be good news for many areas.

Hello? Is it MSPs you’re looking for?

Given the importance of the statement yesterday, we were quite surprised at both the time the was given in the chamber but mostly by the lack of MSPs who were in the chamber to hear the statement.

This is basically the equivalent of the Autumn Statement at Westminster – not the budget, no, but it gives clear signals of the context for the budget to come. This sets off the Budget process, and highlights that really difficult decisions are going to have to be made in the 2024-25 budget.

Engagement from across the chamber will no doubt increase as we get to the sharp end of the budget process – let’s hope it’s more meaningful than it was yesterday.

Another rate rise and what is going on with the fiscal framework review?

FRASER OF ALLANDER WEEKLY UPDATE

The big economic news this week was undoubtedly the 12^th consecutive rate rise from the Bank of England (writes Fraser of Allander Institute’s MAIRI SPOWAGE). The Bank have done this to continue to bear down on stubbornly high inflation, which is still in double figures at 10.1% (latest data for March).

The Bank’s outlook for the UK economy has improved considerably since their last set of forecasts were published in February. Broadly in line with the Office for Budget Responsibility, they now think that the UK economy will overall be flat in the first half of 2023 before returning to growth in the second half of the year.

The Bank are forecasting 0.7% growth in 2023, followed by 0.8% growth in 2024. It is worth highlighting though that this figure for 2024 is pretty anaemic, and below the current forecast from the OBR for the same period.

The Bank’s expectations are still for inflation to fall sharply from April, in part as the high price levels from a year ago come into the comparison. The next data are out on 24^th May: let’s see if the economists are correct this time, as to be fair we’ve all been expecting the rate to fall below 10% for some months now.UK

Economy grows in Q1

Today, we got data from the ONS that confirms that the UK economy grew during the first quarter of the year, albeit by only 0.1%. That is balanced out with the news from the monthly data that there was a contraction during March, with wholesale and retail contributing the most to this contraction. This could suggest that the wider economic conditions are starting to bite on consumers, so it will be interesting to see how this is reflected in next month’s data.

Reports about talks about talks

Officials from the Scottish Government and HMRC were at the Public Audit Committee this week to give evidence about the administration of Scottish Income Tax. This session, as one may expect from the Public Audit Committee, was on the technical details of the collection of the tax (which, while partially devolved, is collected by HMRC rather than Revenue Scotland) and also the audit arrangements for the tax collection.

There were some interesting nuggets in there from a tax policy perspective. There was the view of the Scottish Government on the reasons for Scottish Income tax lagging behind the rest of the UK: mainly laid at the feet of the decline in oil and gas jobs: but there didn’t seem to be much clarity on whether we would ever be able to analyse whether this was actually the case.

We also heard that the fiscal framework review has moved “back into an active space”. For those who are after a recap of what on earth this is all about, see our blog in late 2021.

Slightly depressingly, as the PAC Convener Richard Leonard characterised it, this review is currently in the status of “talks about talks”. It is still very unclear when this may be concluded (or even start). Hopefully, we’ll see some news about this from both Governments soon.

Robertson Trust awards £1.7 million to six projects under Financial Security Programme funding

THE ROBERTSON TRUST has announced that six organisations have been awarded over £1.7M under their Financial Security Programme Awards. All of the projects are working to deliver big change that lasts on tackling poverty and trauma in Scotland.

Through our Financial Security theme, we want to fund, support and influence to improve income adequacy, income security, reduce cost-related pressures on finances and improve financial safety nets for people in financial trouble.

We made an open call for long-term change project ideas through our Programme Awards in October 2022 for organisations focused on delivering big change that lasts on financial security in Scotland.

Our Programme Awards will allow us to work alongside some of the organisations best placed to achieve impact on poverty and trauma in Scotland, allowing us to learn from them and them from us as we go.

The successful organisations include proposals to develop strengthening social security in Scotland, reducing the costs of essential goods and services, and preventing and relieving financial crisis now and in the future in Scotland.

We are pleased to share details of the organisations awarded funding:

One Parent Families Scotland awarded £384,678.00. This project will deliver evidence-based recommendations to achieve transformational change to the UK child maintenance system to contribute to reducing child poverty. A partnership with One Parent Families Scotland, IPPR (Scotland) & Fife Gingerbread, each organisation will lead on different strands of work, while working together across all activities. Ambitious policy proposals will be developed, at both Scottish and UK government levels, to radically reform the child maintenance system (CMS), informed by robust evidence and lived experience. The project aims to see action to tackle immediate shortcomings of the existing child maintenance system, and secure public and political support for long-term, systemic reform.

The Poverty Alliance – awarded £492,697.00 to fund new work to tackle rural poverty. Too often people living on low incomes in rural parts of pay a premium for essential goods and services – food, energy, transport, etc. ‘Taking Action on Rural Poverty’ (TARP) will develop new ways of addressing rural poverty in Scotland by reducing the rural poverty premium. The project will do this by bringing together people with direct experience of poverty, community and voluntary organisations, the private sector and public bodies to identify and test solutions to the poverty premium. It will also work to improve processes to involve people in local decision making and to make changes to national policy that will affect rural poverty.
Child Poverty Action Group (CPAG) – awarded £249,866.00 CPAG strengthening social security project aims to ensure the delivery of Scottish Child Payment and other national and local payments provide greater financial security and stability for those on the margins of entitlement or excluded altogether. The project will develop new ways of bringing together the voice of lived experience and CPAG’s social security expertise to develop and promote approaches that will ensure more families can access Scotland-based payments, and that these payments can be relied upon throughout changes in family’s circumstances. In so doing it will not only aim to prevent families being pulled into poverty but also look to secure greater financial stability for families in Scotland.
Save the Children – awarded £249,761.00. The aim of this ambitious project is to inspire and coalesce public support around sustainable policy solutions to meet Scotland 2030 child poverty targets and deliver financial security in Scotland. The project will provide evidence and deeper insight into public attitudes across Scotland on different interventions that could sustainably drive down child poverty. Importantly, it will build a narrative framework – informed by these insights and our lived experience panel – and work with partners across the sector to ensure policy makers and campaigners have evidence on where the public has an appetite for change. Through engagement and influencing the project will build a network of champions to help ensure that findings and insights are lived and breathed and can have real world impact far beyond the lifetime of this project.
The Trussell Trust – awarded £230,000.00. The Trussell Trust is launching a three-year project that will help gain an understanding of how to provide better access to and engagement with local advice and support services that reduce destitution and prevent food bank use. The project as a whole will run pilots in six areas – Glasgow, Perth & Kinross, North Lanarkshire, Dundee, Orkney, and Aberdeenshire. By testing different models in six localities that represent key geographies of Scotland, the aim is to learn which interventions work in different areas, support community-led priorities, evaluate and learn comparatively from their experiences, and make recommendations to local and national government. The Robertson Trust is providing funding to part-fund the whole project, alongside a number of other funders.
University of Strathclyde (Fraser of Allander Institute) – awarded £158,742.00. The Fraser of Allander Institute and the Scottish Commission for People with Learning Disabilities (SCLD) are collaborating to address the limited understanding of the additional costs of disability in Scotland. The social model of disability recognises that people are disabled by barriers in society not by their impairment or disability. The extent to which financial barriers constrain and impact the lives of people with a learning disability and their families is a key part of our research. This project, co-produced with a researcher with lived experience, will provide valuable evidence for the Scottish Government for future programmes of social security reform.

Commenting on the announcement of the new Programme Awards, Robertson Trust Head of Programmes and Practice, Russell Gunson, said: “I’m delighted to share the details of the Robertson Trust’s new programme awards today.

“Each of the awards we have made have demonstrated the potential to deliver big change that lasts on poverty and trauma in Scotland. We’re really excited to be working together to make the most of the potential for long-term change in Scotland.

“Our support comes at a time when people and places facing poverty are experiencing gale force winds against them and their living standards. We have been living through crisis after crisis, stretching back through this cost-of-living emergency, the Covid-19 pandemic and at least back to the financial crash 15 years ago.

“It is often hard to think long-term when the immediate challenges are so pressing but the Trust has protected significant funds for this long-term change work so that we can prevent poverty and trauma in the future, while also helping to make a difference here and now.

“We will only be successful if we commit to the belief that things can change – we’ve made progress before and we know we can again – if we build the participation, partnerships and coalitions necessary to make change irresistible, and if we build social change over the long-term to reshape the systems and structures that sit underneath why we have the levels of poverty, trauma and inequality that we do.

“We look forward to working with each of the projects and are keen to learn alongside them, to understand what helps and hinders in achieving our mutual ambition of ending poverty and trauma, and its negative impacts, in our society.”

Commenting on the announcement of the Programme Awards, David Reilly, Communities and Networks Manager at the Poverty Alliance said: “Rural poverty is an issue of growing concern for the Poverty Alliance.

“This important grant from Robertson Trust will not only allow us to test ideas to practically take action on rural poverty, but will also help us to strengthen the networks and relationships that we need to make long term progress on rural poverty.”

John Dickie, Director of Child Poverty Action Group (CPAG) in Scotland said: “Child Poverty Action Group in Scotland is delighted to be awarded funding by The Robertson Trust. This grant provides us with a unique opportunity to help shape the way Scottish Child Payment and other local and national payments support those currently on the margins.

“It will enable us to bring our expertise together with the voice of lived experience to prevent poverty and increase families financial stability by helping create more inclusive, consistent and secure financial support through the social security system”.

Satwat Rehman, CEO of One Parent Families Scotland, said: “One Parent Families Scotland is delighted to receive this funding from The Robertson Trust. Child maintenance is an issue which single parents have raised with us time and again, calling for there to be a fairer and more equitable system.

“Four in ten children in poverty in Scotland live in a single parent family but maintenance payments can contribute to the costs of raising a child and in giving them a decent quality of life.

“However, over £474 million in child maintenance in the UK has gone unpaid – money owed to children. This is an issue of children’s rights and the rights of the child to financial support.

” Working alongside our amazing partners IPPR Scotland and Fife Gingerbread we will develop ways of supporting families through the maze that is the current child maintenance system and work with families to design a model that works for them and contributes to lifting children out of poverty. “

Claire Telfer, Head of Scotland, Save the Children said: “We are thrilled to have received The Robertson Trust grant for this exciting work.

“We believe this will be a game-changing project in the development of policy and actions to drive down child poverty and we can’t wait to get started”.

David Brownlee, the Trussell Trust’s Financial Inclusion Lead, Scotland, said: “We are delighted to be partnering with The Robertson Trust for this ambitious project. The Trussell Trust has just released its end of year stats, showing the highest levels of need ever in Scotland.

“The record levels of need seen this year, represents a 50% increase in the number of parcels distributed by food banks in the Trussell Trust network in Scotland compared to five years ago in 2017/18.

“The chronic cost of living crisis has only deepened our commitment to end the need for food banks in Scotland and the whole of the Trussell Trust network – this project will play a key part in enabling us to see how to achieve that aim.”

Emma Congreve, Deputy Director of Fraser of Allander Institute, said: “The Fraser of Allander are delighted to be collaborating with SCLD and embarking on this project to produce better evidence to underpin more effective policy for people with learning disabilities in Scotland, especially as this will enable us to recruit and support a researcher with lived experience which we would not have been able to do without this investment.”

Fraser of Allander Weekly Update – Bitter pill to swallow?

This week, the Chief Economist of the Bank of England, Huw Pill, generated many headlines when he said that “we’re all worse off” due to the stubbornly high inflation the economy is experiencing – and bluntly, that we all just need to accept that (write MARI SPOWAGE and EMMA CONGREVE) .

Given this follows on from Governor Andrew Bailey’s comments that people shouldn’t ask for pay rises, it adds a bit to the narrative that the Bank of England is a bit tin-eared to the way workers and households feel right now.

However, Pill’s comments are a reflection of the current outlook. Even with the more optimistic forecasts that we had from the OBR recently, meaning that a recession may be avoided, living standards are still projected to fall significantly over the course of 2023.

It is important though that we have a debate about who in society should bear the brunt of the costs we are experiencing, and whether indeed it is ever going to be possible to protect much of our society from these external shocks.

No sign of a recession… yet

On a more optimistic note, data published this week showed that the Scottish economy grew by 0.2% in February 2023, which follows on from growth of 0.5% in January. Services grew by 0.4%, and particularly encouraging was that consumer-facing services grew by 1.3%.

This means it looks like Q1 2023 is going to show some growth, rather than a contraction as many (including us) had feared.

It will be interesting to see how the economy evolves as we move past the end of March, when we know government support for energy bills started to wind down, particularly for businesses.

How does Scotland compare to other regions of the UK?

ONS have published their latest data on regional economic activity – which you can get split up by all sorts of levels of geography, including local authority and city region, and by industry.

This data allows us to compare the level and type of economic activity across the UK, for the year 1997-2021. Looking across the 12 regions of the UK, known as International Territorial Level (ITL) 1 Regions, we can see that economic activity in London far outstrips that of the other region of the UK. Scotland usually performs pretty well on these metrics, generally 3^rd or 4^th in the UK depending on the year.

Chart: GVA per head, ITL 1 Regions

Source: ONS

[As statto aside, this is “onshore” Scotland only. Aficionados of economic statistics in the UK will be aware that activity associated with the whole UK Continental Shelf is put into a 13^th region called “extra-regio”, which also includes activities in embassies abroad.]

There are also significant differences between different local authorities within Scotland, with the main cities outperforming many other areas of the country. We have to remember of course that the economic activity data reflects where activity takes place – i.e. the location of the place of employment – rather than where people live, so there is a significant commuting effect associated with this data.

Chart: GVA per head, local authority

Source: ONS

Despite another instalment in the long running NCS saga, we still have no certainty over what, when or how much

Last week, it became clear that the National Care Service legislation (and by extension its delivery) will be pushed back (again). In a letter to the Health, Social Care and Sport Committee on the 17^th April, the Minister stated that the Scottish Government would be seeking parliamentary approval to extend Stage 1 of the Bill till after the summer recess.

We have written before on some of the questions that remained following the introduction of the Bill and the accompanying Financial Memorandum. The Finance and Public Administration Committee shared many of our concerns (and had others) about the lack of detail in the Financial Memorandum and asked the Scottish Government for an updated version. The Convenor of that Committee, Kenny Gibson, wrote to the Minister this week noting that the Committee are becoming:

“increasingly concerned at the lack of information available on the financial implications of the Bill and frustrated that we have still not received the updated FM we requested back in December last year”

They have asked for a new Financial Memorandum no later than Friday 12 May along with a breakdown of spend to date on the NCS.

The importance of the NCS to those who work and draw on social care, and to wider society, is huge. Although there remains a difference of opinion on how reform should happen, all agree that reform is needed. The delays that we have seen with the programme to date have been concerning. Understanding the financial implications of what this all means has been nigh on impossible. This call for clarity is welcome.

Fraser of Allander Institute: A new financial year beckons

Thursday 6^th April is the first day of the new tax year (hands-up who missed the ISA deadline, again) and a number of changes in both UK and Scottish policy come into effect (writes FRASER of ALLANDER Institute).

Here is a brief rundown of some of the changes that have come into play at the start of this new financial year:;

Firstly, taxes.

For higher rate tax payers the new 1p comes into effect in Scotland as well as the reduction in the threshold for those paying the additional rate, mirroring what has happened in the rest of the UK. Other band thresholds, including the personal allowance (the rate at which people start to pay tax) have remain frozen.

The UK Spring Budget announced changes to the pension annual allowance and lifetime allowance also come into effect.

Council Tax bills have gone up across the country. Local authorities have the ability to vary the Band D rate charged, which then translates into rises in bills across all bands via a set of multipliers. On average, Band D rates have risen by 5%, but there are clear exceptions (Chart 1).

Failure to reform Council Tax makes any additional revenue raised through Council Tax regressive in nature. Failure to revalue the tax base means that increasingly the bills paid by households bear little resemblance to the relative value of their home. This isn’t the fault of Councils – the ball firmly remains in the Scottish Government’s court on this one.

Unlike Council Tax, there has been a revaluation for Non-Domestic Rates. Even though the poundage rate charged to non-domestic properties has remained frozen (as also the case in rUK) businesses will see a change in their bills reflecting their updated ‘rateable values’.

Secondly, benefits

The UK Government announced in its Autumn Statement that reserved benefits would be uprated by 10.1%. This practice of uprating, using the previous September CPI, is standard procedure.

Devolved benefits have received the same uplift from the Scottish Government, with the exception of the Scottish Child Payment. This increased in value in November 2022 and it was decided it was not in scope for further uplift for 2023/24.

Although not strictly a benefit, the continuation of the energy price guarantee on energy means that we are not facing a rise in our energy bills this month. The guarantee has been extended at its current level for a further 3 months, by which time it is hoped that energy prices will have come down to more reasonable levels. It will hopefully be warmer by then too!

On that note, we wish you a pleasant Easter weekend, and fingers crossed that the sun will shine.

Inflation continues to loom large as 2023 gets properly underway

This week always feels like a bit of a transition every year – it starts to feel a bit late to say “Happy New Year”, and the start of the week is dubbed “Blue Monday” as people realise that those well-meaning new year resolutions have already been broken (writes Fraser of Allander Director MAIRI SPOWAGE).

One of mine was to think hard to find the optimistic news in what can sometimes feel like the unrelentingly negative economic situation we are in, which is likely to remain tricky throughout the year. I was tested hard this week as new inflation data was released on Wednesday.

Inflation falls to 10.5% – but let’s not get too excited

The ONS released the official inflation data for December, which showed CPI inflation had fallen from 10.7% in November to 10.5% in December.

The main items driving the fall in inflation are petrol and diesel prices, and prices for clothing in footwear. Prices at the pump have been falling since their peak in July, and in December they were back to roughly the levels they were at before the Russian invasion of Ukraine. Clothing and footwear has fallen really due to a lack of discounting in December 2021, so when compared to December 2022 it appears that prices have fallen.

Obviously, energy prices are still contributing hugely to this very high inflation rate (which, let’s not forget represents a 40 year high of inflation apart from the preceding three months in 2022). That increase is currently stable in the figures due to the UK Government’s Energy Price Guarantee – but this cap on unit prices is only in place until end March, when it increases to £3,000 for a household with typical use. The ONS estimate that this will add 1 percentage point to inflation when it comes into effect.

Worryingly for those on the lowest incomes, food prices continue to increase faster than the headline rate. The inflation rate for food and non-alcoholic beverages increased to 16.9% in December from 16.5% in November.

We were asked two main questions when the data came out on Wednesday.

The first was, of course – what is the outlook for inflation for the rest of 2023? The expectation by the OBR is that inflation is likely to fall to under 4% by the end of the year. But remember, this does not mean that prices will start to fall at this point – just that they will grow less quickly.

This is somewhat simply due to the definition of inflation – it compares prices now to prices a year earlier, so as we move into October, we will be comparing to the much higher energy costs from October 2022. It was therefore inevitable that growth was likely to slow down – a point to bear in mind when some try to take credit for the fall in inflation.

The second is whether we are likely to see further increases in the Bank of England’s base rate at their next meeting on 2^nd February – especially given that inflation has come down a bit. Unfortunately for mortgage payers, it is still very likely that we will see further increases in the base rate.

Why? Because inflation is not just been driven by food and energy costs. CPI excluding energy, food, alcohol and tobacco (often referred to as core CPI) is at 6.3%, and has been around this level since July 2022. This is being generated by domestic factors, including the tight labour market, which means the Bank is likely to take the view that they need to continue to cool demand in the economy.

Scottish unemployment remains at 3.3%

We also got updated figures on the labour market on Tuesday, covering the three months to November. Scottish unemployment remained at 3.3%, slightly below the UK rate of 3.7%. Employment remains high, at 76.1%, with inactivity at 21.3%.

Changes in inactivity over the period of the pandemic have been a focus of much analysis – because although the level is now similar to before the pandemic, the underlying reasons why people are inactive seem to have changed – with an increasing number saying that they are not in work or seeking work because of ill health or disability.

See a great Twitter thread on this by our colleague Professor Stuart Mcintyre – as part of his monthly analysis of the labour market.

Alongside the headline labour market numbers, there is also information ONS publishes monthly on earnings and vacancies.

The vacancy level alongside the labour market data helps us understand how tight the labour market continues to be. The total number of vacancies has been falling in recent months, since the record highs in Q2 2022. However, the number of vacancies remains historically very high, with 1.0 unemployed people for each vacancy – a rate which remains indicative of a tight labour market.

Earnings (ex bonuses) grew by 6.4% in the year to the three-month period Sept-Nov. Given the inflation rate over this period, this means that earnings are continuing to fall in real terms. In the face of continuing public sector pay disputes across the UK, the split between the public and private sectors is particularly interesting. Private sector pay grew by 7.2% compared to 3.3% for the public sector.

Health Foundation publishes important research into health and health inequalities in Scotland

This week the Health Foundation published a report to provide a picture of health and health inequalities in Scotland, in order to inform future efforts to improve both.

An independent review underpins their report, and we were delighted to work with the Health Foundation on this programme of work, as one of four independent organisations to carry out supporting research. See our research here.

Tag: Fraser of Allander Institute