Tag: Fraser of Allander Institute

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

Hospitality-in-scotland-reportDownload

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 21st 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.

 ScotlandUK
Monthly growth to March0.0%-0.3%
Quarterly growth to March0.4%0.1%
Annual Growth to March2.1%1.9%
Growth since pre-pandemic level (Feb 2020)1.2%0.1%
Growth over the last 5 years1.6%2.6%
Growth over the last 10 years9.8%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 12th 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 24th 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.