The outlook for the Scottish and UK economies has weakened, with growth now expected to remain sluggish through the rest of 2025.
In its latest quarterly Economic Commentary, the Institute has downgraded its forecasts for Scottish economic growth to 0.8% in 2025 and 1% in 2026.
This comes despite more upbeat projections from both the Scottish Fiscal Commission (SFC) and the Office for Budget Responsibility (OBR), which have recently upgraded their expectations for 2026 whilst similarly revising down their GDP forecasts for 2025.
Economic growth is now slowing compared to the start of the year and inflation has also edged up to 3.4%, after staying below 3% throughout 2024.
The business environment is also showing signs of strain, with companies reporting cutting back on activities in the first quarter compared to last year, plagued by rises in National Insurance Contributions, which took effect in April, alongside uncertainty surrounding President Trump’s trade tariffs. Indeed, pay growth and employee numbers are down, signalling potential weaknesses in the labour market.
The current state of the economy was not unexpected: Institute Director Professor Mairi Spowage warned of turbulent and uncertain conditions which could last throughout the year in the previous commentary.
Professor Spowage said: “After a strong start to the year, the Scottish economy has faltered in March and April and is essentially the same size in real terms as it was six months ago.
“Unfortunately, the wider business environment and global events are still taking a toll on businesses and consumers, which is having a dampening effect on spending and business investment.”
In addition to the latest economic analysis, the commentary provides an overview of Universal Credit and Legacy Benefits in Scotland, a key element of the nation’s social security system, and summarises key takeaways from June’s spending review and medium-term financial strategy.
Dr Joao Sousa, Deputy Director of the Institute, said: “The fiscal announcements by both governments suggest that there are significant economic challenges in the years and months to come for the UK and Scottish Governments.
“Particularly from 2027-28 onwards, the choices of Government look to become more difficult. Of course, this is the role of the Government in power: but the difficulties of the UK Government this week show that events can quickly derail its plans.”
It’s less than a week until the Spending Review announcement, and rumours abound about what departments will get in funding and how it ties in with the Government’s priorities (write Fraser of Allander Institue’s João Sousa) .
But how did we get to this system in which departments depend on settlements with the Treasury as part of a broad review of what the government spends its money on? Does it work? How has history influenced it? And what can we expect from next week?
We have today published a paper looking at all this in detail – but here’s a shorter version of the history and a preview for Chancellor Rachel Reeves’ statement.
The Treasury has long been at the centre, and that has not always been great
The system that preceded post-Second World War changes to spending planning and control was set up by William Ewart Gladstone’s Treasury, and had a strong focus on ensuring that expenditure was kept on a tight leash. Parsimony with public funds, annual control of cash and using taxation to balance the needs on public spending were the driving forces of the Treasury, and remained so until the 1950s.
By then, however, Parliament had come to largely ignore its previously central role in setting public spending envelopes. Successive governments had made control of public spending a matter of confidence, and even large changes largely went through on the nod. The Plowden Committee in 1961 proposed a more collective way of deciding on public spending, and its recommendations were largely accepted.
This became the Public Expenditure Survey (PES), which intended to devolve responsibility for planning to departments and to think about what was needed rather than what the envelope as a whole would be. The intention was to limit the Treasury’s influence, which in large part it did.
The 1970s crises bring the Treasury back into the driving seat
But although the PES was well intentioned, it had implementation and incentive problems.
On the implementation side, it was extremely complicated. It required controlling the volume of public services provision, which is as difficult as it sounds. But the lack of constraint on overall spending was its biggest downfall. Although it was meant to reflect economic conditions in the medium-term, there was no mechanism for doing so.
The system was stressed to breaking point during the mid-1970s inflation crisis. The focus on volumes meant that the Government was expected to find additional funds to inflation-proof programmes, but that became impossible with inflation running well above 20% and market participants jittery about sterling and the Government’s finances. From 1976-77 onwards, hard cash limits were introduced, much to the chagrin of many in Harold Wilson’s Cabinet. 1 Horse Guards Road was back in charge of spending.
Cash limits were extremely successful in combating unabated growth in public spending, although of course that came at the expense of being able to deliver all that the Government might have liked to do. The PES formally stayed in place until Gordon Brown’s time in Number 11, but it was for all intents and purposes no longer the tool it had been.
We’re still living with the 1970s spending control architecture
Cash limits are essentially the basis on which Gordon Brown’s Spending Review framework for departmental expenditure limits (DEL) would stand. Since their introduction and success, they have been the way Chancellor after Chancellor has found to push back against demands from departments, and they work in a remarkably simple way. The risk of future demands on spending, particularly for ongoing programmes and costs, is transferred to departments, which then have to trade them off against other pressures that might arise.
Of course, in many cases spending ministers end up in a stalemate with the Chancellor, and end up appealing to the Cabinet or Number 10. But the system is designed for stooshies of this kind – imposing a high bar on ministers to get additional spending, and therefore maintain Treasury control over most areas of spending.
Spending Reviews are big Whitehall events, but they decide less than might appear at first
Since the first spending review in 1998, these have been all-consuming affairs for departments of the UK Government. But they are only a way of divvying up an envelope that’s already been decided: the Chancellor sets it out at the previous fiscal event, and then it’s very much a zero-sum game.
On the other hand, one might ask to what extent these limits really are as hard as they seem at first, and therefore to what extent they actually constrain public spending. Even if we exclude the 2019 and 2020 Spending Reviews, for which spending took place during the pandemic and obviously required time-sensitive increases in spending, there is evidence that the Government has topped up budgets significantly during spending review periods.
Chart 1 shows the annual increases in limits set to departments in nominal (i.e. in cash) terms. This is what spending reviews should be good at: passing on the risk to departments by setting cash budgets, which mean that each area needs to then manage competing demands within a set limit.
Instead, what we see is that apart from the austerity years – in which cuts actually exceeded plans – spending growth has been consistently higher than that projected in each spending review. The gap has grown over time, with spending in the SR 2015 period more than three times that planned by George Osborne, largely as a result of Philip Hammond’s looser policy. Growth in the SR 2021 period has also been twice as fast as Rishi Sunak intended as Chancellor, even with him eventually stepping into Number 10.
Chart 1: Nominal annual increases in departmental expenditure limits in each SR period
Source: HM Treasury, OBR, FAI analysis
This consistent pattern of top-ups and policy between spending reviews is not really surprising. In some sense, it merely reflects the fact that the spending review process – for all the work it generates in Whitehall – is not actually a major macroeconomic event. That place is taken by Budgets and Summer/Autumn/Fiscal Statements (Winter has so far been avoided in the title, presumably to avoid headlines writing themselves in the case of bad news), in which the Chancellor does actually have to balance tax, spending and borrowing in line with political, economic and market conditions. All that is absent from a spending review.
What about real-terms spending?
When the PES was introduced, it was meant to be a solution to the excessive control exercised by the Treasury, which created a barrier to expansion based on population demands for additional government provision of goods and services. In particular, the planning system was changed to be on the basis of volumes rather than prices; the Government would decide what it needed to do in terms of quantities, and would then provide funding for any inflation effects.
This is largely what caused the loss of control over spending in the 1970s, resulting in the imposition of cash limits. Of course, what this actually meant was that if inflation was below forecast, departments would be able to increase spending within that envelope and provide more goods and services. But if it were higher than forecast, then departments would have to live within their limits and cut provision. Essentially, the inflation risk was outsourced to departments.
Chart 2: Real-terms planned and actual spending by departments during each SR period
Source: HM Treasury, OBR, FAI analysis
In fact, that is largely the pattern that we see since the 1998 CSR. Chart 3 shows this in more detail, breaking down the difference between planned and actual real-terms spending into an inflation effect and the provision of additional funding by the government in periods after the spending review. Note that the inflation effect is positive when inflation is lower than forecast – that is, lower inflation frees up funding for higher increases in real-terms government spending.
Chart 3: Breakdown of difference between planned and actual real-terms increases in spending during SR periods
Source: HM Treasury, OBR, FAI calculations
In the period after the 1998 and 2000 spending reviews, inflation was significantly lower than forecast, which allowed the UK Government to increase spending considerably above what it had planned originally. But even then it also engaged in significant top-ups during the SR period, meaning that the pattern of not sticking to the announced limits has been a feature of the system since its introduction.
The austerity years also show that the Osborne Treasury used lower than predicted inflation to slash spending more aggressively, essentially offsetting any loosening that could have come from that inflation surprise. It also cut aggressively the totals for 2015-16 after the SR 2013.
The Hammond loosening is very evident in this chart as well, bringing annual growth in spending to 2.3 percentage points above Osborne’s plans from 2015. And finally, the return of the inflation erosion of the purchasing of departmental budgets is clear from the SR 2021 bars. Jeremy Hunt increased totals in his budgets, but not by enough to mitigate the inflation effect: spending fell by 0.7% a year in real terms, compared to the already significantly tight 0.1% fall pencilled in by Rishi Sunak.
What can we expect next week?
As we’ve outlined above, the envelope for the 2025 Spending Review has been set since March. There may be some small movements either way, but ultimately it will be very close to what the Chancellor included in her plans at the Spring Statement and the OBR scored in its Economic and Fiscal Outlook.
We’ll focus on RDEL, which is day-to-day spending and therefore the most crucial allocation for public service delivery in the short-run. Table 1 shows just how uneven the profile is for growth in spending: slower in 2026-27 already, and down to only 1% a year from 2027-28 onwards.
Table 1: RDEL allocations from the Spring Statement 2025 and Main Estimates 2025-26
2024-25
2025-26
2026-27
2027-28
2028-29
RDEL (£bn)
487.5
514.8
535.5
551.6
567.7
Assumed RDEL excluding international aid (£bn)
476.5
502.6
529.0
544.9
560.8
Real-terms growth
2.9%
2.3%
1.0%
1.0%
Real-terms growth excluding international aid
2.8%
3.5%
0.9%
1.0%
Source: HM Treasury, OBR, FAI analysis
The totals in the Spring Statement already had the shift from international aid to defence spending, which when we put it all together actually leaves slightly more room for manoeuvre in the first year of the Spending Review on the resource side for all other departments than might seem at first.
But that is very much short-lived. And with the health service, schools and defence likely to be boosted in real terms, it leaves a very difficult settlement for the final years of the Spending Review.
Chart 4 illustrates a plausible scenario in which the English NHS sees an increase of 3.6% a year in real terms, with schools and defence also seeing around a 2% boost a year. None of these are historically large, but even this mild scenario would leave unprotected departments having to cut spending significantly, by 1% a year in real terms. This would fall disproportionately on 2027-28 and 2028-29, as there is a significant boost in the first year. It might mean 2.5% to 3.5% cuts a year in real terms in two consecutive years.
In this scenario, the Scottish Government’s block grant would mechanically move similarly to the overall envelope. This is because many of the changes to unprotected departments lead to Barnett consequentials, but so do the larger boosts to health and education, which offsets those changes.
Chart 4: Illustrative RDEL scenario for the Spending Review based on announced policy and total envelope
Source: FAI analysis
It is of course for the Chancellor and the UK Government to decide on the path of public spending – and it might well choose different paths for spending. But chart 5 is not an implausible extrapolation of the figures that are already in the OBR forecasts and which guide the Spending Review totals.
And it does not look like a particularly deliverable plan. It promises a sort of ‘mañana austerity’, with strong growth in spending for another year while continuing to promise to cut spending at pretty heroic rates in a few years’ time. In fact, it’s almost a perfect reverse image of what then-OBR Chairman Robert Chote termed George Osborne’s spending ‘rollercoaster.’ Maybe we’re just on a different section of the ride.
Chart 5: Implied annual real-term growth rates from the illustrative RDEL scenario for the Spending Review
Source: FAI analysis
But as chart 3 showed, spending reviews are far from the only time at which fiscal policy is announced. A cynic might suspect that the Chancellor knows this and is planning on finding a way of not having to deliver those planned cuts in 2027-28 and 2028-29 – perhaps by hoping for economic growth to bail her out, or raising taxes significantly at a coming budget. Either way, she’ll want to avoid trade-offs on public services that are hard to stomach.
But that seems to be for another day, may even another year. Augustinian fiscal policy is alive and well.
This week the First Minister John Swinney unveiled an earlier than usual Programme for Government covering the final year of this parliament ahead of Scottish elections in May 2026 (write Fraser of Allander Institute’s MAIRI SPOWAGE and EMMA CONGREVE).
The rationale for the Programme for Government is that it sets out the parliamentary programme for the year ahead. The FM said that this is being presented now to ensure a “year of delivery” in the run up to the election.
Since the last PfG, there have been a number of changes to this programme with some dropped (Misogyny Bill), some being substantially re-drafted ahead of being introduced (Heat in Buildings Bill) and others that are already going through Parliament being substantially scaled back (National Care Service Bill). As such, it makes sense for the government to be updating how it intends to make the best use of the scarce parliamentary time in the year ahead.
However, this also provides a convenient time to make some noise about the good things the government is doing in Scotland. The timing, shortly after was expected to be, and indeed was, a difficult week for Labour and Conservatives in elections in England, doesn’t feel entirely accidental. But enough of the politics – what was in the substance of what was discussed?
What were the top priorities?
The key themes of the programme for Government are growing the economy, eradicating child poverty, tackling the climate emergency and ensuring high quality and sustainable public services.
On the economy, the First Minister was keen to first set out the measures that the Scottish Government had pursued to reduce the cost of living for citizens in Scotland, in particular focussing on the decision to partially reinstate the winter fuel payment given it is now a devolved benefit. He also referenced global economic developments, and announced a new “Six Point Export Plan”, which will focus on unlocking target markets. It will be good to examine in the coming months how this lines up with previous efforts such as the Trading Nation Strategy.
The FM was keen to reiterate that eradicating child poverty was at the heart of the SG’s programme, and highlighted the impact that the Scottish Child Payment was directly having on child poverty. The modelling suggests that the measure reduces child poverty by 4 percentage points in 2025-26, which represents about 40,000 children in Scotland. Having said that, as we covered extensively recently, the SG have missed their interim statutory child poverty targets. If these statutory targets are to be met, the child payment will not be sufficient on its own.
Tackling the climate emergency did not feature prominently in the FM’s speech, but there is more in the document on this than was presented in the chamber. The removal of peak fares was presented as a cost of living measure, but is also discussed as a measure likely to support modal shift.
This announcement is interesting in the context of the Government ending the pilot of peak fare removal in September 2024, as (according to the government’s evaluation) it didn’t encourage enough modal shift to pay for itself, and generally helped out those from better off households, rather than those in the poorest households.
Finally, there was the section on public services, which had as the headlines the commitments on the health service that had been well-trailed, including an extra 100,000 GP appointments.
While this had been covered as dealing with the “lottery of the 8am call”, it would appear to be a more general commitment to increase capacity, which the government will hope will improve the way that people experience their interactions with primary care.
The Programme for Government’s claim that additional GP appointments will “address the root causes of ill health” appears to contradict much of the Scottish Government’s own public health messaging—as well as broader expert consensus—which emphasises the importance improving living conditions (also known as Primary Prevention) as the key to improving health outcomes, rather than relying on healthcare services alone. A new Population Health Framework is due to be published in the next month – we’ll have to wait and see how this all fits together.
It goes without saying that none of these issues can be solved in 12 months. And while they may be government priorities, we do not have the detail on delivery. A high-level document is not the place to be setting out the nuts and bolts of this, but the concern is that rather than sparing us the detail, the government lacks the enough of a grasp on the issue to solve it and has even less of a plan on how progress will be measured and evaluated.
For example, on GP appointments. How many GP services are unable to meet demand? Why are some having to operate restrictions on appointment booking and others are not? How will the government monitor whether additional resource allocated is making a difference? How is this compatible with some GPs currently not able to take on staff because of funding restrictions?
To be clear, allocating additional resources to a problem is not the same as delivering an improvement.
Fiscal pressures limit ambition
The PfG usually comes out a few months before the Scottish Budget meaning that pledges set out by the First Minister could then make their way into the budget process with money allocated and available for the start of the next financial year.
With the Scottish budget likely to be at least 6 months away, and the next financial year 11 months away, this PfG had to fit into the fiscal envelope already set. And this is an envelope already under pressure, with more potentially to come.
The Scottish Government has got less than it wanted from the UK Government to compensate for the increase in employer National Insurance Contributions, and this money will need to be found within existing budgets for 2025-26.
We are also yet to see the conclusion of pay deals for 2025-26, an issue that has seriously derailed government budgets in previous years; and there was no provision for the likely progression of staff on pay scales, which will add further pressure.
Unfortunately, the Cabinet Secretary for Finance has said today that the Medium-Term Financial Strategy (MTFS), which should normally kick off the year-round budgeting process (see here for more MTFS chat), has been delayed until the end of June. Shona Robison has said in a letter to the Scottish Fiscal Commission, released this afternoon, that it is due to the timing of the UK Spending Review. This has been known for some time and a further delay to the MTFS is disappointing.
What was missing?
As mentioned, the Heat in Buildings Bill is being revised and this involves taking out some of the more ambitious elements related to mandating replacement of domestic heating systems. Other, non-legislative but still PfG relevant, pledges around reducing car use have been dropped recently following an Audit Scotland report citing minimal progress towards its target.
The FM reiterated the government’s commitment to ending the two-child limit on benefits, but there was little extra detail on the delivery timetable for this given the repeated statements the FM has made on introducing this before April 2026 if possible.
As part of our ongoing work on the lives of people with learning disabilities, we continue to track the latest research, policy developments, and data shaping their experiences (writes Fraser of Allander Institute’s DAVID JACK).
In previous round-ups, we’ve explored topics ranging from employment and social care to education and healthcare access. For this edition, we turn our attention to the rollout of annual health checks for people with learning disabilities in Scotland.
What are Annual Health Checks?
An Annual Health Check is a yearly check-up offered to individuals with learning disabilities to help identify and manage their health needs. It typically includes a review of medical history, physical health measurements (such as weight and blood pressure), checks on long-term conditions, discussions about mental health and lifestyle, assessment of healthcare access difficulties, medication reviews, and the development of a health action plan if required. The goal is to detect potential health issues early and support overall well-being.
Why Annual Health Checks Matter
Annual health checks are seen as a vital tool in addressing health inequalities. Many people with learning disabilities face challenges in communicating their symptoms, making proactive health assessments essential. Research consistently highlights the poorer health outcomes this group experiences, including higher rates of undiagnosed conditions, preventable illnesses, and premature mortality.
Just this week, researchers at the University of Glasgow released new findings revealing that young adults (aged 25-34) with learning disabilities are nine times more likely to die from treatable causes than their peers in the general population. The study, led by the Scottish Learning Disabilities Observatory, underlined the severe health inequalities faced by this group—particularly young women, who were found to be at disproportionately higher risk of premature death from treatable conditions.
Scotland’s Commitment and the Reality of Implementation
In May 2022, the Scottish Government pledged to offer annual health checks to all adults (aged 16+) with learning disabilities by 31st March 2023. To support this, NHS Boards were allocated £2 million annually. However, implementation struggles led to a revised deadline of 31st March 2024.
The first official data on Scotland’s progress has now been released by the Scottish Government. The 2023/24 figures reveal that despite identifying 23,758 eligible individuals, only 1,405 (6%) health checks were offered, with just 1,128 completed. This means fewer than 5% of eligible individuals have received a health check—highlighting that the rollout remains far from comprehensive. Notably, while 80% of those offered a check went on to complete it, the vast majority of eligible adults have yet to be given the opportunity.
The failure to fully implement the annual health check programme points to deeper systemic challenges within Scotland’s healthcare system. While the Scottish Government has made reassurances that health checks remain a priority, the delay of the Learning Disabilities, Autism, and Neurodivergence (LDAN) Bill has raised concerns about long-term commitment.
In a letter to the Health, Social Care, and Sport Committee, Minister Maree Todd reaffirmed the Scottish Government’s dedication to expanding health checks, including exploring new settings such as the State Hospital and prisons. However, these recent figures suggest that rather than expanding, the programme is struggling at a foundational level. The challenge appears not to be a lack of policy ambition but a failure in execution, which risks slowing or even obstructing progress in reducing health inequalities in Scotland.
A Troubling Lack of Progress
While 2024 marks the first year of formal reporting, and some allowances can be made for scaling-up challenges, the level of delivery remains lower than expected, particularly given the dedicated £2 million in annual funding. The current data does not include a breakdown of uptake by NHS Board—an important detail that should be incorporated into future reporting. The next set of figures, due in June 2025, will be key in providing greater transparency on regional disparities, and we also encourage the publication of more detailed demographic data when appropriate.
Back in November 2024, media reports stated that none of Scotland’s NHS Boards had fully met the target of offering health checks to all eligible individuals. In some areas, such as NHS Lanarkshire and NHS Shetland, there were indications that not a single eligible patient had received a health check. Greater clarity on this is needed through more detailed official statistical reporting to ensure timely, accurate and transparent data on progress.
Encouraging NHS Boards to report on how they are utilising the allocated £2 million per annum could provide valuable insights and help address delivery challenges. Additionally, assessing the effectiveness of public awareness campaigns would help identify what has worked well and what could be improved to ensure that people with learning disabilities and their families are fully informed about their right to an annual health check.
Varied Approaches
The Scottish Government provided directives outlining the framework for annual health checks, while allowing flexibility in local implementation. This flexibility has resulted in varied delivery models across NHS Boards, reflecting differences in workforce capacity, healthcare structures, and local resources. Some Boards will conduct checks primarily through GP practices, while others may incorporate community-based assessments, specialist learning disability health teams, or partnerships with third-sector organisations.
For example, NHS Lothian recommended a model where Community Learning Disability Nurses work closely with GP practices. Other Boards are integrating health checks into community services or collaborating with third-sector organisations to improve outreach. However, these varied approaches risk creating inconsistencies in data recording, as different systems are likely being used.
The Scottish Government has emphasised the need for standardised data collection across all Health Boards. A uniform approach is essential for assessing the effectiveness of health checks and ensuring equitable service delivery. The Annual Health Checks National Implementation Group aims to assist NHS Boards in aligning practices and reporting methods, with members expected to share real-time delivery data to collaboratively address challenges, overcome barriers, and provide peer support.
Beyond the Census: How Health Checks Could Bridge the Data Gap
If Scotland’s annual health checks for individuals with learning disabilities had been fully implemented as intended, they could have provided a valuable and reliable dataset on the number of people with learning disabilities in the country. Interestingly, the number of adults (23,758) identified through the Annual Health Check Survey Return to the Scottish Government already exceeds the number of adults reporting a learning disability in Scotland’s 2011 Census (21,115) by 12.5%.
This first set of published data for the Annual Health Check Survey states, “The method by which eligible people are identified varies by Health Board – the numbers identified only represent people with learning disabilities who are known to services.” Coupled with the fact that these checks are not yet being delivered at full capacity, this suggests that the true number of adults with learning disabilities in Scotland is likely to be higher than 23,758.
Scotland’s 2022 Census faced significant challenges in identifying the learning disability population. Instead of reporting learning disabilities separately, the published data currently combines them with learning difficulties and developmental disorder—a disappointing step backward compared to 2011.
The National Records of Scotland (NRS) identified learning disability as the primary category of concern, noting an “unrealistically large increase” in the number of people selecting this category compared to the previous census. As we previously explained, quality assurance efforts primarily relied on triangulating data with Scotland’s Pupil Census, which only captures those in school education and does not account for the broader adult population.
A fully functioning health check system could have served as an essential alternative data source, refining population estimates, improving census accuracy, and informing future data collection. Crucially, it could have also helped assess discrepancies in reported numbers—and given the challenges with learning disability recording in the 2022 Census, it still could—helping to clarify the scale of potential misrepresentation and ensuring that individuals with learning disabilities are properly represented in National Statistics and policy planning.
Policy Changes in England: A Warning for Scotland?
Recent developments in England signal changes to the NHS’s approach to annual health checks for individuals with learning disabilities. In an effort to prioritise reducing waiting times, Health Secretary Wes Streeting has announced a reduction in the number of NHS targets from 32 to 18.
This streamlining includes the removal of the specific target to provide annual health checks to 75% of people with learning disabilities across England. It is worth noting that unlike England’s previous approach, Scotland’s current policy is to offer a health check to all eligible individuals, without a set percentage target for delivery.
The Health Secretary’s recent decision has raised concerns that removing these targets could also lead to the loss of ring-fenced funding in England. Historically, funding has been directly tied to national targets to support their delivery, and without this financial safeguard, there is a risk that annual health checks could be deprioritised.
Mencap has warned that removing this target could have “deadly consequences,” as people with learning disabilities already face a life expectancy up to 23 years shorter than the general population.
While healthcare policy in Scotland is devolved, pressures on workforce capacity and financial resources remain significant challenges. If services continue to be overstretched, there is a risk that learning disability healthcare may receive less focus. This could make it more difficult to address health inequalities, potentially leaving those already at high risk of poor health outcomes further marginalised.
Conclusion: Turning Commitment into Action
The rollout of annual health checks for people with learning disabilities in Scotland remains a work in progress, with ongoing challenges still to be addressed. Despite the Scottish Government’s assurances that expanding access remains a priority, the reality is that progress has been slow, and only a small percentage of eligible individuals have received a health check so far.
Beyond improving individual health outcomes, a fully implemented programme could play a crucial role in shaping policy by providing more accurate data on Scotland’s learning disability population—particularly given the shortcomings of the 2022 Census.
As concerns over widening health inequalities grow and policy shifts in England raise further questions about long-term commitments, Scotland must ensure that these health checks move beyond ambition and become a fully embedded, effective service.
FRIDAY’S ‘fiscal event’ contained some of the most substantial tax policy changes seen in recent decades (writes Fraser of Allander’s DAVID EISER). Combined with last week’s announcements on the Energy Price Guarantee and Energy Bill Relief Scheme, this constitutes a huge change in the fiscal outlook.
In this context, the decision not to involve the Office for Budget Responsibility (OBR) is irresponsible. It might be billed as a ‘Growth Plan’, but today’s announcements are a budget in all but name. The OBR plays an essential role in scrutinising tax and spend forecasts, assessing the likely impact of policy announcements on growth, the deficit and debt. Its exclusion from the process weakens transparency around the impacts of the proposals.
The new Chancellor (above) used the first part of his speech to reiterate the government’s unavoidably large interventions in the energy market to protect households and businesses from energy price rises. In the remainder of the speech he announced a host of measures designed to stimulate economic growth through a combination of tax cuts and regulatory changes.
Tax changes – implications in Scotland
There were two ‘tax cuts’ that are more accurately described as reversals in recent or planned increases.
A planned increase in the Corporation Tax rate from 19% to 25% will now not go ahead. The Treasury estimates this will cost £12bn in reduced revenue compared to its previous plans in 2023/24, and more in subsequent years.
The Health and Social Care Levy has also been scrapped, together with the 1.25% increase in dividend tax rates. These changes will cost almost £18bn in reduced revenues in 2023/24 compared to previous plans.
Both of these changes had been pre-announced and apply UK-wide.
The big surprises came on income tax. Here the government announced the biggest reforms (at UK level) since 2009.
The basic rate will be reduced from 20p to 19p one year earlier than expected, applying from April 2023 rather than April 2024.
The 45p additional rate will be abolished in April 2023.
Income tax changes and implications for Scotland
Of course, with income tax being devolved, neither of the changes will apply in Scotland. Instead, the Scottish Government will see a smaller reduction in its block grant next year than it was expecting, boosting the resources available to it in 2023/24 (the reduction to the Scottish Government’s block grant is broadly designed to reflect what the UK government would have raised from income tax in Scotland if income tax had not been devolved, and if the UK government income tax policy had continued to apply in Scotland).
In the context of this additional resource through its block grant, the Scottish Government will then need to decide whether and how to respond through its own tax policy.
It could of course keep Scottish tax policy unchanged. This would enable it to use its additional block grant to invest in public services in Scotland. The cost of it doing this politically would be that the gap between Scottish and rUK tax policy would widen substantially. Almost all Scottish income taxpayers would pay more income tax than they would in rUK. A Scottish taxpayer with an income of £29,000 would face liabilities around £160 higher. A Scottish taxpayer with an income of £50,000 would face liabilities almost £2,000 higher (Chart 1, black line).
Chart 1: Potential difference in income tax liability between Scotland and rUK, in 2023/24
Alternatively the Scottish government could mirror UK tax cuts with tax cuts of its own. It could for example decide to reduce the starter, basic and intermediate rates by 1p. This would broadly retain the difference in tax liability for individuals between Scotland and rUK at current levels (Chart 1, grey line). It would allow the Scottish Government to retain its treasured mantra that ‘the lowest income half of Scottish taxpayers pay less tax than they would in rUK’. But such a policy would cost the Scottish government around £400m in foregone revenues.
Other policy decisions are possible. The Scottish government could decide to cut just the starter and basic rates in Scotland, rather than the intermediate rate as well, at a revenue cost of around £250m.
How the Scottish Government responds to the UK Government’s abolition of the Additional Rate will also be interesting. The Scottish Fiscal Commission is likely to forecast that abolition of the Additional Rate wouldn’t be extremely costly in revenue terms (there are expected to be around 22,000 Additional Rate taxpayers in Scotland in 2023/24 so charging them a few pence less tax on their income above £150k might not have a significant affect in aggregate, particularly if it is assumed, as the SFC will, that the tax reduction will induce some element of a positive behavioural response).
The Additional Rate policy therefore puts the Scottish Government in a difficult political position. If it retains the Additional Rate it will be accused of undermining the ‘competitiveness’ of the Scottish economy, for little direct revenue gain (without any changes to existing policy, a taxpayer with an income of £200,000 would face an additional £5,900 in income tax liabilities in Scotland compared to an equivalent taxpayer in England).
But abolition of the Additional Rate would provide a significant tax cut for the highest income 0.5% of the Scottish adult population (an individual with income of £200,000 would be better off to the tune of £2,500 if the Additional Rate is abolished). The regressivity of a cut to the top rate in Scotland is difficult to reconcile with the Scottish Government’s aspirations for progressivity.
Stamp Duty changes and implications for Scotland
The Chancellor also announced changes to Stamp Duty in England and NI, amounting to an increase in the threshold at which Stamp Duty applies to residential transactions.
As with income tax, these changes will not apply in Scotland. As with income tax, the changes to English policy will pose dilemmas for the Scottish Government when considering its policy on the Land and Buildings Transaction Tax.
The Scottish Government has until now set LBTT in such a way that homes sold in Scotland for less than around £335,000 pay less tax than an equivalent property in England. Above this price, transactions in Scotland face noticeably higher tax liabilities. The changes announced by the UK government today mean that – if there are no changes to the existing Scottish LBTT rates – all property transactions in Scotland would face higher tax liabilities than they would in England (see Chart 2).
The Stamp Duty cuts in England will generate some additional resources for the Scottish Government via its block grant. In ballpark terms the increase in resource might be around £80m. It could use this additional resource to fund public services, or to cut LBTT rates in order to maintain existing tax differentials.
Chart 2: Residential property transactions tax liabilities in Scotland and England
Investment zones – an option for Scotland but at what cost?
The UK government announced the establishment of several dozen ‘investment zones’. It is hoped that these zones will ‘drive growth and unlock housing… by lowering taxes and liberalising planning frameworks’.
Policies implemented within the investment zones will include business rate reliefs for newly occupied or expanded premises, and stamp duty relief on land bought for commercial purposes, and a zero-rate of employer National Insurance Contributions for new employees earning below £50,270.
The hoped-for impacts of these investment zones on UK-wide economic activity – as opposed to their effect on displacing economic activity within parts of the UK – is based more on hope than on empirical evidence.
Several dozen potential zones have been identified in England. The UK government says that it will work with the Scottish government and local authorities to identify zones in Scotland.
What is not yet clear is how the costs of investment zones in Scotland – in the form of reliefs on business rates and stamp duty (which are devolved) and NICs reliefs (which are not devolved) – will be distributed between the Scottish and UK governments. The Treasury’s costing document does not seem to give an indication of the funding associated with the planned investment zones in England, so it is difficult to get a sense of the fiscal scale of these interventions at this stage.
U-turn on IR35
In another regulatory reform design to unlock growth, the chancellor announced the repeal of the anti-avoidance legislation commonly known as IR35. This legislation was designed to reduce so-called “disguised employment”, whereby workers could work long-term for businesses as self-employed contractors rather than employees – and in so-doing reduce the tax liabilities faced by both themselves and the company that they were contracted to.
The IR35 regulations were introduced for public authorities in 2017, and for medium and large enterprises in 2021. The regulation has big impacts on the nature and shape of the workforce in particular sectors.
The introduction of IR35 has been a huge undertaking by public authorities and corporations to ensure compliance with the legislation, so the change announced today is a big deal. It is a shame that we don’t have the view of the OBR of the impact this could have on Income Tax and National Insurance Contributions: but the costing published today by the Treasury suggests it could cut tax receipts by £1.1 billion in 2023-24, rising to £2 billion by 2026-27.
The Energy profits levy – the existing windfall tax
Interestingly, although the Prime Minister has made it clear that additional windfall taxes were not going to be introduced on oil and gas companies, we need to remember that the Energy Profits Levy announced in May is still in place.
This is a 25% additional surcharge on the extraordinary profits that are being made by the oil and gas companies. When it was announced in May, it was expected that this could raise £5 billion this year, although there was a great deal of uncertainty about this.
Under current plans this levy will remain in place until December 2025, and on the basis of the costings published today, the Government has no plans to end it early. The policy is now forecast to raise £28 billion over the next 4 years (including this year). This is another area of costing that it would be particularly useful to get independent scrutiny from the OBR.
Summary: a gamble on growth with long odds
It is undeniably the case that the UK (and Scottish) economies have been characterised for the last 15 years by very weak growth. This has resulted in stagnation in household incomes and living standards, and constrained the growth of government revenues – with implications for investment in public services.
It makes sense therefore for the government to put the objective to raise economic growth at the centre of its strategy. But setting a 2.5% annual growth target, as the UK government has done, is much easier said than achieved.
The government’s decision to reverse the Health and Social Care Levy and cancel the planned Corporation Tax increases merely take policy back to where it has been in the recent past. It is a return to orthodoxy rather than a break from the norm, and in this sense it is difficult to see that it will make any difference to growth.
The substantial cuts to income tax do represent a bigger change to existing policy. But the hope that these will stimulate the economy is based more on blind faith than on any tangible evidence. There is no evidence internationally that countries with lower tax rates grow more quickly. Historically, UK growth rates were highest when tax rates were higher.
Whether today’s announcements unleash economic growth remains very much to be seen. Strikingly, what there was no mention of today was any plans for additional public sector investment. Despite the government’s rhetoric about reforming the ‘supply-side’ of the economy, there was little mention of the role that the skills and health of the population play in influencing the capacity of the economy to grow.
Whilst the government seems comfortable borrowing an additional £30bn or so a year to fund the tax cuts announced today, and is apparently relaxed about an over-growing burden of national debt, the path set out today will constrain the government’s room for manoeuvre on investment in public services in coming years.
At a time when parts of the public sector are struggling to deal with the legacy of the pandemic and other longstanding challenges, the implied prioritisation of tax cuts over public services investment will prove highly contentious, particularly given the regressivity of the cuts.
Households in the top 10% of the income distribution in Scotland will be better off by around £24 per week on average as a result of the cancellation of the Health and Social Care Levy, whereas those in the middle of the distribution will be only £4 per week.
The hope that the policies announced on Friday will boost growth and hence revenues despite cuts in tax rates is a big gamble with long odds.
… and a look ahead to a big day in the Scottish statistical calendar
This week saw the publication of two pieces of key economic news: firstly on the labour market and secondly the latest inflation data (writes Fraser of Allander Director MAIRI SPOWAGE) . To some extent, the figures were not surprising and were broadly what we were expecting.
Labour Market
New labour market data from the Office for National Statistics were released on Tuesday covering the period until the end of June 2022.
These data show that the Scottish unemployment rate remained stable at 3.2%, with the employment rate dipping slightly (-0.1%-point) to 75.4%. The rate of economic inactivity rose slightly to 22.0% (+0.1%-point) compared to the previous 3 months.
UK-wide data on employees’ pay shows that average total pay (including bonuses) over the past year was 5.1%, while over the same period the growth in regular pay (excluding bonuses) was 4.7%.
Adjusted for inflation, this means that total pay fell by 2.5% and regular pay fell by 3.0% over the year.
So, the tight labour market conditions are continuing. Interestingly, the latest vacancy data shows a slight fall in the number of vacancies in the latest period, although there is still almost 1.3 million vacancies across the UK.
Inflation
The labour market data was followed on Wednesday by the July inflation data. This showed that Consumer Price Inflation had reached 10.1% in July, yet another 40-year high for the measure. It doesn’t have to go much higher to breach the high in 1982 of around 11%.
The main drivers of this, compared to last month, are increases in food and non-alcoholic beverage prices – with an annual inflation rate of 12.7% for this class of goods.
Energy and fuel prices are of course contributing significantly to the annual inflation rate. Despite us all noticing that petrol and diesel prices have fallen back in the latter part of July, the average price in July was still higher than the average price in June; the level of fuel price in July 2022 was 47% higher than July 2021.
We have consistently discussed that these price rises are likely to be experienced differently by different groups of the population. ONS produce consistent measures of inflation experienced by different household groups, including by income.
Chart: Annual Inflation to June 2022 by income quintile (CPIH consistent)
Source: ONS
As we might expect, the data shows that those on the lowest incomes are likely to be experiencing the highest levels of inflation. Look out for more analysis of this really interesting dataset in our next Economic Commentary: or, alternatively, go here if you want to analyse it yourself.
And finally… take a deep breath and get ready for GERS 2022!
Government Expenditure and Revenue Scotland (GERS) is coming!! In late August each year, the Scottish Government releases these statistics to much amassed excitement from political commentators and fans of economic statistics.
These statistics are released next Wednesday. They show estimates of tax revenues raised in Scotland compared to expenditure on behalf of the people of Scotland, and present the balance between these two figures as a net fiscal balance.
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 couple of years ago, we also produced a podcast which you can enjoy at your leisure.
No doubt, as usual there will be plenty of different interpretations and arguments about what these statistics do, or don’t, mean for Scotland under different visions of its future, particularly given the stage the constitutional debate is currently at.
For the uninitiated, the GERS statistics seem to be pretty unique in terms of the fervour they generate and as with any fuss like that, it’s worth taking a step away to look at the facts for yourself.
We’ll be publishing analysis next week that breaks down some of the key figures to help with that, so stay tuned!
