Why Scottish Budget is not quite what it seemed, according to top economist

It was clear from the accompanying documents that this was added late in the day. No cost was attached to it in the Budget document itself, the Equality and Fairer Scotland Budget Statement or the Scottish Fiscal Commission’s analysis. Very provisional estimates point to costs in the region of £200 million a year, so it’s not insignificant by any means – so the lack of detail is not a great state of affairs.

When this is implemented, this should have a significant effect on taking children out of poverty, although it is unclear when it will actually come into force. The 2026 target date was heavily caveated as depending on UK Government data being shared. A relatively cynical view might be that the Scottish Government will be hoping that the UK Government will take similar action on this in the intervening period, allowing it to claim the moral high ground while not having to fund it themselves.

Only limited rates relief

After years of clamouring for replication of the retail, hospitality and leisure rates relief that successive UK Governments have made available for businesses in England, Shona Robison has acquiesced – but only partly, and to a much lesser degree than it might initially appear.

For one, only hospitality businesses will benefit from the 40 per cent relief, excluding retail and leisure premises. But even then it’s more restrictive: it only applies to premises that are liable for the basic property rate – those valued at less than £51,000. Most premises in this category are eligible for either partial or the full amount of small business bonus, and so the new relief sounds much more generous than it turns out to be.

This is why the cost is only £22m – much lower than the £147m generated in Barnett consequentials at the UK Budget, and lower still than the over £200m which we estimate a relief replicating that available in England would cost in Scotland.

ScotWind plans may not match rhetoric

We also heard from the Finance Secretary that less of the ScotWind proceeds will be used to plug gaps in day-to-day spending, which had been pencilled in during her September emergency statement. This is welcome, and it's in line with our projections that the UK Budget’s increase in funding had made it significantly easier to balance the Budget this year.

It is also welcome to hear Shona Robison state that the ScotWind proceeds should be used for long-term investment – but it’s not clear the Budget plans fully match the rhetoric, as not all the usage for day-to-day spending has been removed.

In an unexpected development, the Scottish Fiscal Commission’s documents published alongside the Budget revealed that the increased cost of employment from the rise in employers’ National Insurance contributions has not been factored into plans for next year. That’s an odd state of affairs: the Scottish Government might not know exact what the level of compensation from the Treasury will be, but the cost clearly needs to be recognised – even if just the extra amount from the expected level of cover.

Not doing so is a real risk to the Budget plans, and one which has echoes of what happened in this current financial year. The Scottish Government significantly underestimated the wage-bill costs it would face, and ended up in a situation where it had to take action midway through the year to rebalance the books.

Financial planning lessons not learned?

On top of our warnings at the Fraser of Allander Institute, both the Scottish Fiscal Commission and Audit Scotland have recently highlighted the risks of Scottish Government decisions focussed on the short-term, making choices harder down the line. It is important that these lessons on financial planning and setting aside provisions for known or likely costs are learned and implemented. Looking at this Budget, one would be hard pressed to confidently state that has been the case.

On tax, there have been two significant announcements. One is that income tax thresholds for the lowest bands are increasing with inflation, but not those for the higher rate and above. This has now been continual Scottish Government policy for a number of years, and will continue to bring in significant numbers of people into higher rates of tax.

Of course, it’s the Finance Secretary’s prerogative to increase taxes, but this is a rather opaque way that governments in both Holyrood and Westminster have become fond of in recent times.

Alongside these threshold freezes, there continues to be an emphasis on setting income tax rates at the lower end so that people below median incomes pay less than they would at rates in the rest of the UK. But that difference is negligible, at just over £20 a year.

And it is a very expensive measure, because it benefits both those on low and high incomes – the lower rate of 19 per cent applies to every taxpayer’s earnings just above the personal allowance. Others may decide whether this is a worthwhile difference.

Councils face difficult decisions

On council tax, there will be no repeat of last year’s freeze. In fact, there is no cap on increases, though the Finance Secretary stated she saw no reason for large increases this year. Of course, the decision is for elected councillors in each of Scotland’s 32 local authorities to make, and they may well disagree.

Councils will be acutely aware of the fact that this Budget has brought them no more certainty over to what extent they will be compensated for the increase in employers’ National Insurance they themselves face or whether they must find that funding from their own sources – and that may weigh heavily on their decisions in the coming months.

Dr João Sousa is deputy director at the Fraser of Allander Institute at the University of Strathclyde