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.

The Scottish budget 2016-17: what does it mean for digital?

THe Scottish Parliament, Holyrood, Edinburgh

The Scottish Parliament. Image by dun_deagh via Creative Commons

By Steven McGinty

Last week, the Scottish Finance Secretary, John Swinney, published his budget for the next financial year. Unsurprisingly, it begins by outlining the financial challenges facing the Scottish Government. Mr Swinney highlights that the Scottish Budget will continue to fall year-on-year, and by 2020 will have fallen by 12.5% in real terms since 2010. These figures paint a very bleak picture for Scotland’s public finances.

However, with this pressure on public funds, the Scottish Government has given a clear commitment to digital. The budget states:

The Government will take steps to extend digital applications in public services, increase the use of shared services, secure further value from procurement developments, ensure effective use of assets and reduce overlap between public services. The digital agenda will both produce savings and improve the quality of our services.

What funds have been made available?

In cash terms, the funding for Scotland’s digital strategy has more than doubled to £116 million. This has been achieved by merging a number of distinct budgets, which, according to the Scottish Government, reflects the integrated nature of the strategy. The majority of the funding has been allocated to capital expenditure projects, which have increased their share to £92.2 million.

It’s expected that these resources will cover areas such as digital infrastructure, digital participation, digital public services, and the digital economy.

What digital initiatives have been introduced?  

The Budget makes a number of commitments to support digital change in Scotland, although, very few details are given about specific digital projects.

The main initiatives outlined in the report include:

  • Spending over £100 million to improve broadband services, as part of the £400 million Digital Scotland Superfast Broadband (DSSB) programme. It’s expected that by the end of 2015, 85% of premises will be connected to a next generation broadband network, rising to 95% by the end of 2017.
  • Establishing an ‘Alpha Fund’ to help improve the efficiency and quality of digital public services. It’s hoped that this can be achieved – like most digital transformation programmes – by developing common services that can be used across government.
  • Supporting the Digital Transformation Service to develop digital public services from a user perspective and to realise the benefits of digital technology.
  • Developing the National Records of Scotland’s (NRS) digital services, including progressing with the ‘Data Linkage Framework’ strategy, which is expected to deliver data research projects that benefit the public. The NRS will also be preparing for the next Census, in 2021, which will mostly be delivered digitally.

What other announcements may impact digital?

For the ninth consecutive year, the Scottish Government have continued with their manifesto commitment to freeze council taxes. Councillor Michael Cook, who is vice president of COSLA, the Convention of Scottish Local Authorities, has argued that Scottish Government cuts to local government revenues are “unprecedented”, and are coming at a time when local government are already facing massive pressures. He suggests that this could lead to job losses and changes to services.

In addition, the Scottish Government has chosen not to change the Income Tax rate for Scotland – a power recently devolved to Holyrood. Mr Swinney argues that this new power is limited, and any changes would go against the principle that taxation should be proportionate to the ability to pay.

Both of these decisions will have implications for the digital sector. For instance, companies that provide services to local government may find some new challenges as local government revenues have been cut by 3.5%.  It may mean that companies will have to further prove their value, as local government looks to reduce their costs or improve the services they provide. Yet, it could also bring opportunities, as the need for technical solutions that provide efficiencies has never been greater.

The decision not to raise Income Tax may also benefit Scotland’s digital sector. If Income Tax had risen in Scotland, recruitment might have become more challenging, or at least more expensive, as skilled staff might have been tempted by lower taxes elsewhere in the UK.

Final thoughts

The Budget has not provided any real surprises. Local government needs to make savings, and politically, increasing taxes would be difficult, especially with the Scottish Parliamentary elections next year.

Therefore, the digital sector needs to focus on addressing the challenges highlighted in the Budget. This includes providing creative, efficient, technological solutions that support the everyday needs of both central and local government.

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Further reading: if you liked this blog post, you might also want to read our other articles on digital policy.