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.

Spreading the word on the living wage

By James Carson

Last week, Church of England bishops issued a letter calling for a new direction that they believe political life in the UK ought to take. Among the bishops’ recommendations was support for the living wage:

“It represents the basic principle that people are not commodities and that their lives cannot adapt infinitely in response to market pressures.”

It didn’t take long for the media to find flaws in the Church’s own approach to paying its staff. This week it was reported that a Church job in Canterbury was being advertised at £6.70 per hour. The living wage, calculated from the basic cost of UK life, is currently £7.85 an hour outside London.

Low pay seems likely to be one of the key issues in the general election campaign, so a new report from the Joseph Rowntree Foundation (JRF) is especially timely.

Low pay is endemic

The report describes low pay as “endemic” in the UK labour market, noting that more than one in five workers in the UK experience low pay, a proportion that has changed little in more than 25 years.

Among the research findings:

  • More than a third of low-paid workers (38.4%) experience a period of worklessness over a four year period;
  • Being low paid increases the probability of experiencing a period of worklessness by around 10%, after accounting for a host of individual, family-level and employment characteristics;
  • Those low-paid workers on temporary contracts, and those with work-limiting health conditions or disabilities, are the most likely to experience a spell of worklessness over a four-year period.

The authors of the report express concern that when many of those workless individuals who were formerly low paid return to employment, it is to a similarly low level of earnings.

“This low-pay, no-pay cycle means many find it difficult to escape low living standards and advance in the world of work.”

In addition, the JRF report highlights  the significant burden on the state of having large numbers of low-paid workers alternating between employment and worklessness, and suggests that significant fiscal savings could be made if job security for those in low-paid positions was strengthened.

While the paper does not propose any specific policy recommendations to tackle the employment insecurity of low-paid work, the authors suggest that several areas of policy offer potential for co-ordinated solutions to this problem, including:

  • extending access to skills and training to those who are in work and lack qualifications;
  • limiting the burden of unplanned absence from work to employers through the targeted re-introduction of schemes such as statutory sick pay recovery;
  • providing support alongside incentives for low-paid workers to progress through in-work conditionality within Universal Credit.

The movement to encourage more employers to pay the living wage has picked up pace in recent months. Organisations such as Citizens UK and the Living Wage Foundation have campaigned to encourage more employers to pay the living wage. Even so, by the end of 2014, only 60,000 people in the UK were covered by this pay rise, with none of the big supermarkets or large care firms involved. Some local authorities, however, including Glasgow, Cardiff, Birmingham, Newcastle and the Greater London Authority, have adopted the living wage.

As the JRF report underlines, paying the living wage to employees results in reduced welfare benefits and extra taxes. Which means that, whether the employer is Tesco or the Archbishop of Canterbury, the living wage can give people basic rights and a sense of dignity in work, while making good economic sense for the nation’s coffers.

Further Reading

We’ve previosuly blogged on the living wage and addressing the causes of in-work poverty.

Other resources which you may find interesting (some may only be available to Idox Information Service members):

Wealth: having it all and wanting more

The benefits of tackling worklessness and low pay

Ten years of the GLA’s London Living Wage

Bare minimum is not enough (living wage)

Low pay Britain 2014

Guest blog: Martyn Evans of The Carnegie UK Trust on Measuring Wellbeing


by Martyn Evans, Chief Executive at The Carnegie UK Trust

When looking for good practice at an international level it comes as a bit of a shock to find it on your own doorstep. The Carnegie UK Trust, based in Dunfermline in Scotland, has had a focus on wellbeing since 1913 when Andrew Carnegie signed the Trust deed requiring us to “improve the wellbeing” of the people of the UK and Ireland. Our recent work in this area builds on the excellent programme run by the New Economics Foundation. Two years ago we set out to learn more about how wellbeing was being measured. We led on research and international study trips with IPPR North. We concluded, to our surprise and delight, that the Scottish National Performance Framework, now called Scotland Performs, is a global pioneer. Our view was later corroborated by a Professor Stiglitz in his address to the OECD World Forum in India, in 2012. Continue reading

Dementia – the new normal?

elderly woman reading to children

by Alan Gillies

A report published last week by dementia care specialists Red & Yellow Care, in association with the Alzheimer’s Society, argues that the stigma attached to dementia is getting in the way of people with the condition living their lives, as they are “deflated by the ‘nothing can be done’ attitudes of hopelessness that pervade not just public, but some professional attitudes”. Continue reading