And we’re off: Scottish Budget 2019-20, the parliamentary debate begins

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This is an initial analysis of the Budget. More detailed SPICe briefings and additional blogs will follow in due course.

Derek Mackay presented the Scottish Government’s spending and tax plans for 2019-20 this afternoon. These will now be debated in Parliament in the coming weeks, in advance of the new financial and tax year in April 2019.

This year’s budget is overshadowed by ongoing uncertainty around Brexit.

The potential effect of Brexit on Scotland remains highly uncertain. Presenting their outlook for the Scottish economy, the Scottish Fiscal Commission (SFC) forecast over a five-year horizon broadly assumes a relatively smooth and orderly Brexit process. The SFC expect slightly higher growth throughout the forecast period than they did in May. However, overall they expect economic growth to be subdued in the longer term, averaging just over 1 per cent over the next five years.

In his statement to the Chamber, the Cabinet Secretary stated that “if the UK does end up in a no deal Brexit, I may be required to revisit the priorities in this Budget”.

So, what has the Scottish Government presented today and are these proposals likely to change?

Spending outlook: better than previously thought

The overall spending picture in 2019-20 is somewhat better than previously expected due to Barnett consequentials flowing to the Scottish budget from the recent UK Budget.

The amount allocated to Fiscal Resource (which funds day-to-day spend on public services) will grow in real terms by 1.8% in 2019-20 on the current year.

The Budget for infrastructure will also improve. Capital, including financial transactions and borrowing will grow by 12.8% in real terms in 2019-20.

The document includes provision to borrow the full £450 million capital limit in 2019-20 for the third year in a row, taking the Cabinet Secretary closer to his £3 billion limit – if he continues to borrow the full annual borrowing amount, he will hit his limit in 2022-23.

Health remains the budgetary priority

As expected, the Scottish Government has passed on all Barnett consequentials from the recent UK Budget to the NHS, and provided a bit more. Total Health spend will increase by over £700 million. This will result in Health spending comprising 50% of day-to-day spending in 2019-20.

Other areas will feel the squeeze

By passing on the Barnett consequentials to Health, other Budget areas will continue to feel the squeeze. Although the overall budget settlement is better than previously thought, with Health now comprising an increasing share of the Budget, other areas inevitably see their share of the budgetary cake fall.

Local government

As has been the case in recent budgets, a number of different presentations of the local government settlement are possible.  In this blog, we set out some of the headline figures.  More detailed analysis will follow in the FSU’s Budget Briefing and in a further dedicated briefing looking at the allocations to local authorities.

In his statement, the Cabinet Secretary referred to “an overall real-terms increase in the total local government settlement of more than £210 million.”  This figure (a 2% increase in real terms) is derived from the total allocation to local government in the Local Government Finance Circular (Table 6.14 of the Budget). As well as the core revenue grant, this also includes specific revenue grants and capital grants, along with revenue funding in other portfolios.

The core local government revenue settlement – General Resource Grant and Non-Domestic Rates Income combined (see Table 6.10 in the Budget) – falls in real terms by £319 million (-3.4%).

Within that, Non-Domestic Rates Income is forecast to increase in 2019-20 (by around 6% in real terms). This increase is helped by £100m in forecast income brought forward from future years.

Tax Policy – freezing the Higher and additional rate thresholds

The Scottish Government proposes to retain the same five-band income tax structure it introduced for 2018-19.

However, the Starter and the Basic rate bands will rise in line with inflation. The intermediate rate will apply over a narrower range of income and the thresholds at which the Higher and Top rate of tax are due will be frozen.

The SFC estimate that these policies will raise an additional £68 million, relative to what would have been raised if all thresholds had risen in line with inflation.

The impacts of these policy changes on individual earning levels are presented in the following table.  More detail is in a separate blog on income tax.

Table 3: Differences between Scottish and rUK income tax, 2019‑20

Scottish Government proposals

£ per year

Difference compared with 2018-19

£ per year

Difference compared with rUK

£ per year

15,000                480 -130 -20
         20,000             1,479 -130 -20
         25,000             2,480 -140 -20
         30,000             3,530 -140 30
         35,000             4,580 -140 80
         40,000             5,630 -140 130
         45,000             6,994 -140 494
         50,000             9,044 -140 1,544
         60,000          13,144 -140 1,644
         70,000          17,244 -140 1,744
         80,000          21,344 -140 1,844
         90,000          25,444 -140 1,944
       100,000          29,544 -140 2,044

On the fully devolved taxes, the Scottish Government proposes changes to the Land and Buildings Transactions Tax (LBTT). The Additional Dwelling Supplement (ADS), charged on purchases of second homes, will increase from 3 per cent to 4 per cent. The SFC estimate that this policy will raise an additional £27m per annum.

Non-residential LBTT will also see changes to the lower rate from 3 per cent to 1 per cent, and increases to the upper rate from 4.5 per cent to 5 per cent, with the starting threshold of the upper rate being reduced from £350,000 to £250,000. The SFC state that this policy

“raises £13 million in 2019-20, increasing to £15 million in 2023-24. We estimate a limited forestalling effect of £2.3 million revenue brought forward into January. Some lower value transactions will delay until after the tax change, and some higher value transactions will be brought forward.”

Will these plans be changed?

Given the parliamentary arithmetic, where no single political party commands a majority, it is likely that the SNP will have to strike a deal with another political group.

So far in this session of Parliament, the Green Party has voted for an amended Budget containing changes to the higher rate income tax threshold and increased local government spending. By already having proposed to freeze the higher and additional rate, the Scottish Government’s room for manoeuvre on income tax may be more limited than it has been in the past.

This time Green MSPs are demanding reforms to local taxation. The budget document states the following:

“The Scottish Government is committed to making local taxation more progressive whilst improving the financial accountability of local government and we endorse the primary conclusion from the Commission on Local Tax Reform’s 2016 report that ‘the present council tax system must end’.”

The coming weeks will reveal if SNP-Green votes will combine to pass the tax rate resolution and budget bill, or whether new budget alliances might need to be formed.

Ross Burnside, Senior Researcher, Financial Scrutiny Unit