Budget 2018-19 – where now?

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As we enter a new year, Parliament’s attention turns to the setting of the Budget for financial year 2018-19.

Initial spending and tax proposals were made by the Scottish Government in its Draft Budget published on 14 December 2017. However, it is likely these will need to be changed in order to command a parliamentary majority.

So what changes might be required?

The Conservative party propose Scottish rates of tax no higher than those set in the rest of the UK. Achieving this would require a reversal of the Draft Budget tax proposals presented in December and a number of changes to the amounts available for allocation. The Cabinet Secretary for Finance and the Constitution appears to have ruled out any reduction in his draft income tax plans.

The other three political parties propose increasing the size of the 2018-19 spending envelope to varying degrees.

So how might changes to the Draft Budget be made? And what options exist for the Scottish Government to generate additional revenues?

One option is to re-prioritise the draft spending allocations made in December, adjusting down certain budgets in order to increase spend in other priorities. On tax, re-prioritisation is also an option. For example, at Finance Committee last week there was debate around the merits of policies that reduced non-domestic rates income by £96m relative to using that money for public spending.

Last year, during the setting of financial plans for 2017-18, the Cabinet Secretary found an additional £220m to allocate during the Budget Bill’s passage through Parliament.

Over half of this package (£125m) was found from underspends from the previous year being carried over into 2017-18; £60m came from the non-domestic rates pool; £29m from revenue raised by lowering the higher rate threshold relative to the initial draft budget proposal; and £6m from lower than expected borrowing costs.

Scope for changing the Budget Bill 2018-19 from underspends from the current year may be limited. This is because the draft proposals published in December already contain £158m of underspends from 2017-18. There may still be some additional underspends emerging beyond that £158m figure, but room for manoeuvre in this regard may be limited.

There is also likely to be limited scope to boost 2018-19 spending from the non-domestic rate pool. At the end of the most recent year for which we have information (2016-17) the non-domestic rate account showed a deficit balance of £297m. The Scottish Government has signalled an intention to bring the NDR account back into balance by the end of 2018-19. With the Scottish Fiscal Commission (SFC) forecasts implying a deficit of £153m at the end of the current financial year, additional spending power in 2018-19 arising from use of the non-domestic rate pool may, as with underspends, be limited.

This leaves tax changes as a potential vehicle through which 2018-19 spending power might be boosted. Income tax may be the most likely avenue.  The proposed Scottish Tax Rates and Bands for non-savings non-dividend income are as follows:

Proposed band Band name Proposed rate
Over £11,850 – £13,850 Starter 19%
Over £13,850 – £24,000 Basic 20%
Over £24,000 – £44,273 Intermediate 21%
Over £44,273 – £150,000 Higher 41%
Above £150,000 Top 46%

Last year the Cabinet Secretary opted to freeze the higher rate tax threshold at £43,000. Were he do something similar with the higher rate (which is now proposed to be set at 41% in a five-band structure), SPICe estimate that, before any behavioural effects, this would generate around £100m additional revenue in 2018-19 relative to the plans set out in the draft budget – still short of the additional revenue proposals being made by the Labour, Green and Liberal Democrat parties.

Last month, SPICe produced a briefing on Income tax in Scotland which included revenue calculations from various tax policy measures.

Concluding thoughts

Last year was the first year where amendments were made to the face of the Budget Bill via underspends and non-domestic rate pool monies. With scope for doing the same appearing somewhat limited this year, it may well be that tax revenues make up the majority of any amendment package for 2018-19. That is, unless the Cabinet Secretary has a new revenue raising mechanism available.

Ross Burnside,  Senior Researcher, Financial Scrutiny Unit