UK Budget 2018: Spending increases with tax choices to come

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The Chancellor of the Exchequer delivered his final pre-Brexit Budget on Monday. It was noticeable for presenting better than anticipated tax revenue figures, despite economic growth forecasts continuing to be below trend and similar to that forecast by the OBR in March.

But, what implications does this UK fiscal event have for Scotland’s Budget, which will be delivered on 12 December?

We now have the Treasury allocations to Scotland for 2019-20 and a list of Barnett consequentials through to 2020-21. Scotland has received an additional £950 million in Barnett consequentials over the three year period 2018-21.

The latest Scottish allocations from Treasury are presented in the following table. These represent an improvement on the position at the last UK fiscal event, with Resource spending now expected to grow after inflation by 0.7% next year. Capital spending will grow by 10.4% in real terms in 2019-20.

Table 1: Scottish Treasury allocations (real terms, 2017-18 prices)

£ million
% change

Note, numbers exclude Financial Transactions.

The Budget document, unlike previous iterations, did not include the block grant adjustment (BGA), which is an Office for Budget Responsibility (OBR) derived estimate of the revenue foregone by the UK exchequer from devolving taxes to Scotland.

So what has changed from the last UK Budget?

The main change to the spending picture stems from Barnett consequentials arising from the UK Government’s June commitment to increase funding for the NHS. This policy generates an additional £550 million in Barnet consequentials next year.

There had previously been discussion over how this commitment would be funded. The Chancellor confirmed that this would all be funded from the better than expected tax revenue receipts and that no new tax increases were required.

Arguably the most significant political development in the budget was the changes made to the income tax personal allowance and the higher rate threshold. The Personal Allowance, which is reserved to Westminster, will increase to £12,500 in April 2019 (one year earlier than previously planned). This change will affect Scottish taxpayers.  The Chancellor also announced he would bring forward by one year his Higher rate tax threshold increase to £50,000. This change will not affect Scottish taxpayers.

These changes have some potential impacts on the revenues being generated from Scottish non-savings non-dividend Income Tax revenues.

Under the Fiscal Framework, the increase in the Personal Allowance won’t have a direct impact on the Scottish budget, as there will be an offsetting adjustment made to the block grant to compensate for the reduction in revenues.

However, given that Scotland has a higher proportion of lower earning taxpayers, there is the potential that reduced tax revenues from this Personal Allowance increase impacts the Scottish income tax receipts disproportionately harder than in the rest of the UK.

The increase in the earnings threshold at which the rUK higher rate tax of 40% kicks in to £50,000 in 2019-20 does not apply in Scotland. In Scotland, the higher tax rate of 41% applies on earning above £43,430 in 2018-19 (compared to the current UK threshold of £46,351). This difference in the higher rate thresholds raises approximately £200m in revenues for public spending in Scotland, compared with what would be generated from replicating the UK higher rate tax thresholds.

The Fraser of Allander Institute estimate that even if the Scottish Government were to increase the Scottish higher rate tax rate by inflation in 2019-20, the gap between the higher rate threshold in Scotland and rUK would mean that someone earning £50,000 in Scotland would pay £1,100 more in income tax than those in rUK.

Moreover, Scottish taxpayers would face a very high marginal rate of earnings taxation of 53% over an increasingly large proportion of income (employees with income between the Scottish HRT and the rUK HRT would be taxed at 41% by the Scottish Government, plus 12% for National Insurance Contributions; the employee NICs rate drops to 2% above the UK HRT).

In the coming weeks, the Scottish Government will have a decision to make in terms of whether to move towards the UK higher rate threshold or not and whether to make other changes to its income tax policy.

Of course, yesterday’s UK fiscal event only tells us part of the story.

We won’t know the actual amount of money Scotland will have available until the Cabinet Secretary for Finance, Economy and Fair Work publishes the Government’s Budget proposals in December.

The Scottish Budget will set out the proposed Scottish Government spending and tax plans. The amount available will be underpinned by forecast tax revenues produced (and published alongside the Budget) by the Scottish Fiscal Commission.

Ross Burnside, Senior Researcher, Financial Scrutiny Unit