Figuring it out: five issues emerging from the Scottish draft budget

The week before Christmas might not seem an ideal time to be mulling over the minutiae of economic forecasts and the implications of tax changes. But on Monday morning, the Fraser of Allander Institute (FAI) review of last week’s Scottish draft budget attracted a big turnout, and helped make sense of the numbers announced by Scotland’s Finance Secretary, Derek Mackay.

Here are some of the key issues to emerge from yesterday morning’s presentations.

  1. Growth: degrees of pessimism

Last month, the UK Office for Budget Responsibility revised downwards its growth forecast for the UK economy to less than 2%. The FAI, meanwhile, has forecast a slightly lower growth rate for the Scottish economy of between 1% and 1.5%. However, the independent Scottish Fiscal Commission (SFC) is much more pessimistic, forecasting growth in the Scottish economy of less than 1% up to 2021. If the SFC’s forecast turns out to be accurate, this would mean the longest run of growth below 1% in Scotland for 60 years.

Dr Graeme Roy, director of the FAI, suggested that the SFC’s gloomy outlook is based on the view that the Scottish working-age population is projected to decline over the next decade. In addition, the SFC also believes that the slowdown in productivity, which has been a blight on the Scottish economy since the 2008 financial crisis, will continue.

  1. Income tax rises: reality v perception

Mr Mackay proposed big changes in Scotland’s tax system, with five income tax bands stretching from 19p to 46p. While these measures attracted the biggest headlines for the budget, the FAI believes that most people will see little meaningful impact in their overall tax bill (relative to income). Charlotte Barbour, director of taxation at the Institute of Chartered Accountants of Scotland, also suggested that the tax changes are unlikely to result in any significant behavioural changes in the way people pay tax in Scotland. And, as has been noted elsewhere, high taxation does not necessarily lead to unsuccessful economies.

However, as the FAI highlighted, perception is important, and if Scotland comes to be seen as the most highly taxed part of the UK, this could have serious implications for business start-ups and inward investment.

  1. Taxation: two systems, multiple implications

Charlotte Barbour also highlighted some of the implications of the tax changes in Scotland that haven’t featured widely in press coverage. How the changes interact with areas such as Gift Aid, pensions, the married couple’s tax allowance, Universal Credit and tax credits will need careful examination in the coming weeks.

  1. Public spending: additional resources, but constrained settlements

The FAI’s David Eiser noted that Mr Mackay was able to meet his government’s commitments to maintain real terms spending on the police and provide £180m for the Attainment Fund. He also announced an additional £400m resource spending on the NHS. But these settlements are constrained in the context of the Scottish Government’s pay policy,

Mr Mackay’s plan offers public sector workers such as nurses, firefighters and teachers earning less than £30,000 pounds a year a 3% pay rise, and those earning more than that a 2% rise. For the NHS alone, this could cost as much as £170m.

In addition, analysis published yesterday by the Scottish Parliament Information Centre (SPICE) has estimated that, if local authorities were to match the Scottish Government’s pay policy, this would cost around £150m in 2018-19.

  1. The budget’s impact on poverty

If the growth forecasts are correct, even by 2022 real household incomes in Scotland will be below 2007 levels. Dr Jim McCormick, Associate Director Scotland to the Joseph Rowntree Foundation, looked at the Scottish budget in the context of poverty, and suggested that three principles need to be addressed before the budget can be finalised: there are opportunities both to increase participation by minority groups in employment and to improve progression in low-wage sectors, such as hospitality and retail; energy efficiency is one important way of lowering household bills and improving housing quality in the private rented sector; and options such as topping up child tax credits and more generous Council Tax rebates are better at reducing poverty than cutting income tax.

Finalising the budget

As all of the speakers noted, the Scottish draft budget is not a done deal. The minority Scottish National Party government in the Scottish Parliament needs the support of at least one other party to ensure its measures are adopted. The most likely partner is the Scottish Green Party, which has indicated that the budget cannot pass as it stands, but could support the government if an additional £150m is committed to local government.

It took until February this year before the Scottish Government’s 2016 draft budget could be passed. Time will tell whether a budget announced shortly before Christmas 2017 can finally be agreed before Valentine’s Day 2018.

The complete collection of slides presented at the Fraser of Allander Institute’s Scottish budget review are available to download here.

Our blog post on the Fraser of Allander Institute’s review of the Chancellor of the Exchequer’s 2017 Autumn Budget is available here.

Autumn Budget 2017: a wintry economic outlook

On a chilly morning in Glasgow last Friday, delegates gathered at the University of Strathclyde’s Technology and Innovation Centre in Glasgow for the Fraser of Allander Institute’s (FAI) post-Budget briefing.

Chaired by Alf Young, visiting professor at the International Public Policy Institute, the presentation focused on the economic and tax measures in the Chancellor’s first Autumn Budget and the implications for Scotland as the Scottish Government prepares to present its own Budget next month.

The economy

The FAI Director, Professor Graeme Roy suggested that arguably the most significant element was the substantial downward revisions in UK growth forecast.

In its forecast for the next five years, the Office for Budget Responsibility (OBR) has wiped off £60 billion from the UK economy. The principal reason for this is the OBR’s shift in its outlook for productivity. As recently as March this year, the OBR were forecasting a gradual acceleration of the economy, returning to growth of 2% by 2021. Now, however, they believe that weak productivity performance in the wake of the financial crisis can no longer be seen as temporary, and that the slowdown is evidence of structural weakness.

Professor Roy described the implications of this for household incomes as “nothing short of dismal”. Scotland will not be immune from these pressure, and the Scottish Fiscal Commission is likely to be just as (if not more) pessimistic as the OBR.

The reasons for the UK’s weak productivity – labour hoarding, flat investment, inefficiencies in the financial system and a lack of labour market slack – add to the pressures on the Chancellor, who also remains committed to fiscal restraint. This, Professor Roy suggested, means budgets will continue to be squeezed for the next 15 years.


Charlotte Barbour, director of taxation for the Institute of Chartered Accountants of Scotland went on to review the tax elements of the Autumn Budget.

She explained that it was a “predominantly English Budget”, with a number of measures that would not apply in Scotland, such as those concerning business rates, stamp duty, training investment, capital and resource funding for the NHS, and a number of measures affecting housing.

However, there were also measures which will affect the whole of the UK, including changes to the corporation tax main rate, freezing of the VAT threshold, a rise in income tax personal allowance and the raising of the higher rate threshold for income tax.

While the Autumn Budget contained relatively few taxation measures, Ms Barbour suggested that forthcoming issues are likely to have significant impacts, including moves by HMRC to make tax digital, taxation changes concerning the gig economy, the devolution of tax powers and, of course, Brexit.


David Eiser, research fellow at the FAI reminded his audience, that, as far as Scotland was concerned, the Chancellor’s Budget was the first of two important economic announcements this autumn. On 14 December, the Scottish Government’s Finance Cabinet Secretary, Derek Mackay, will deliver his Budget to the Scottish Parliament.

The Chancellor announced that Scotland is to receive an extra £2bn in block grant funding, spread over the next four years. But the Scottish Government has argued that £1.1bn of this money can’t be used to support day-to-day spending on public services, and has to be repaid by the Scottish government to the UK government”.

Mr Eiser noted that, while in principle it would be possible for the Scottish Government to offset grant cuts by raising income tax in Scotland, there is a still a need to consider the performance of the Scottish economy.

Mr Mackay will face pressure to match the Chancellor’s decision to reduce stamp duty land tax for first-time buyers on properties up to £300,000 in England. But Mr Eiser argued that there are more effective ways of addressing housing affordability issues in Scotland than reducing the broadly similar Land and Buildings Transactions Tax.

Overall, Mr Eiser assessed that there are opportunities in the Scottish Budget to increase public investment and to explore the use of fiscal transactions to stimulate the economy. But with the block grant – not to mention welfare and other reserved spending in Scotland – still driven by UK fiscal policy, the outlook for public spending in Scotland looks tough.

A wintry outlook

In Scotland, the focus now switches to Mr Mackay’s Budget speech next month. The FAI will be holding another post-budget review, and the Knowledge Exchange Blog will report on this shortly afterwards.

But, as Professor Roy suggested, the main story of the Autumn Budget was the outlook for the UK economy. It’s been reported that this has been the worst decade for UK productivity since the Napoleonic wars. That stark historic perspective presents a grim backdrop for the UK economy as it prepares to leave the European Union.

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