This is an initial blog analysis of the 2020-21 Budget. More detailed SPICe briefings and additional blogs will follow in due course.
This afternoon, Kate Forbes MSP, Minister for Public Finance and Digital Economy presented the Scottish Government’s proposed spend and tax plans for 2020-21.
Context of uncertainty
Budget 2020-21 comes against the backdrop of the UK’s recent departure from the European Union. The Scottish Fiscal Commission’s judgement is that this does not end the economic uncertainty for the coming year, as the trade terms on which the UK will leave the EU have yet to be determined. As such, the Scottish Fiscal Commission (SFC) has continued to forecast relatively subdued economic growth of 1.0% in 2020, 1.1% in 2021, and 1.2% in the subsequent 3 years.
As discussed in a previous SPICe blog, the Scottish Budget is being published later than normal and in advance of the UK Government’s Budget which is scheduled for next month. The later than normal publication has implications for the time available for parliamentary scrutiny of the Scottish Government’s proposals. Preceding the UK Government’s Budget also means that the total Scottish spending envelope for 2020-21 is still uncertain.
So, what has the Scottish Government proposed in its budget for 2020-21?
The spending outlook for 2020-21
The overall spending outlook for 2020-21 is better than it has been for some time, due in large part to Barnett consequentials from UK Government announcements. On top of that, the Scottish Government is proposing to use Reserve monies, and Resource and Capital borrowing to boost its spending power.
In terms of what is actually being allocated in the Budget (presented in the Annex of the document) growth in Resource (or day-to-day spend) is projected to increase after inflation by 16% next year.
However, this whopping increase is largely down to the transfer of financial responsibility (and associated funding) for £3.2 billion of Social Security spending, and a transfer of £472 million from HM Treasury for Farm Payments. But even with Social Security and Farm payments stripped out, growth in day-to-day spend is still around 4% in real terms.
Spend on Capital is also expected to increase significantly, by 12% after inflation with Social Security included and 10.9% with Social Security excluded.
Health the clear budgetary priority again
Health remains the most significant budgetary priority of the Scottish Government, projected to grow by around £750 million in real terms in 2020-21. This results in Health spending comprising over 40% of day-to-day spending in 2020-21.
Local government
In recent years, the amount of money going to local government has dominated the parliamentary debate on the spending side of the budget. As ever with the local government budget there are a wide range of interpretations that can be produced, depending on what is included in the calculation. In this initial blog we cover some of the headline numbers.
First, using the numbers in the Budget document:
- The combined general revenue grant + non-domestic rates income figure (i.e. the amount of money to deliver services over which local authorities have control) falls slightly in real terms in 2020-21, by 0.3%, or by £29.3 million.
- Once specific, ring fenced resource grants are included, then the combined figure for the resource budget increases by 1.6% in real terms, or by £159.3 million.
- The total capital budget sees a decrease in real terms this year, of 31.0%, or £336.0 million, mostly driven by a decrease in general (as opposed to specific) support for capital.
In her statement, the Minister stated that the budget provided “a real terms increase in local government revenue support.” This was based on comparing the March 2019 local government finance circular figure for “total revenue” to the same figure in the circular published today, and results in a 3.0% real terms increase, or an increase of £303.2 million.
However, while acknowledging that there was a “cash increase of £495 million”, in its initial budget response, COSLA stated that “the reality behind this figure unfortunately is quite different” and that in their view there was “a cut to Local Government core budgets of £95 million.”
This, COSLA says, is because alongside the £495 million cash terms increase, there is also £590 million worth of Scottish Government commitments.
Much more detail on all of the possible interpretations will be provided in forthcoming briefings.
Social Security – big money, with budgetary risks
Last year’s budget contained Social Security spending of £575 million. In 2020-21, that figure will rise to £3.7 billion due to the transfer of financial responsibility for certain social security payments amounting to £3,203 million.
The SFC forecast for spending on these new Social Security responsibilities is £3,213 million, meaning that the forecast spend on Social Security will be £10 million higher than the money actually being transferred.
Although the SFC forecasts and the Social Security Block Grant Adjustment (BGA) are forecast to broadly match in 2020-21, future years are less likely to be so closely aligned. The SFC in their Economic and Fiscal Forecasts report state:
“Almost all the social security forecasts reflect current UK Government policy because the DWP will continue to administer the benefits during 2020-21. This is important because once the forecasts are based on Scottish policy, we expect the forecasts of Scottish spending to increase given Ministerial announcements and the passage of the Social Security (Scotland) 2018 Act. Any differences between spending and the BGAs will have to be managed within the Scottish Budget.”
Climate emergency
Much of the pre-budget media coverage related to this being a Budget to address the climate emergency. In her speech, Kate Forbes stated that £1.8 billion of capital investment was being allocated to specific projects to reduce emissions.
This includes the funding of existing, new and expanded schemes to decarbonise heat, transport and agriculture. It is worth noting that the Government’s own Carbon Assessment actually reports an increase over the year in the emissions associated with the purchase of goods and services through its budget. Total emissions attributed to the 2020-21 Budget is estimated to be 9.5 million tonnes carbon dioxide equivalent (MtCO2e) compared to 7.0 MtCO2-equivalent in 2019-20 (much of this increase relating to farm payments previously attributed to the EU).
Reconciliations being managed by Resource borrowing
Reconciliations mean that the 2020-21 Budget will be reduced by a total of £207 million in 2020-21, almost all of that arising from income tax receipts being £204 million out from the level forecast when the 2017-18 budget was set.
The documents state that the Scottish Government plans to manage this downward reconciliation by using its Resource Borrowing powers, as laid out in the Fiscal Framework. This £207 million in planned borrowing will need to be repaid in subsequent years.
The income tax reconciliation outlook is looking more gloomy for subsequent years. Latest SFC forecasts and Office for Budget Responsibility (OBR) BGA forecasts (from March 2019) for 2018-19 point to a negative reconciliation of £555 million to be made to the 2021-22 Budget and a reduction of £211 million in the 2022-23 Budget from latest 2019-20 outturn forecast.
Although these outturn reconciliations are indicative, the Scottish Government will have to consider how it manages these reconciliations in subsequent years. The SFC state in its report that “it would seem that the Scottish Government is not building up its reserves to deal with the large income tax reconciliations expected to reduce the Budget in 2021-22 and 2022-23.”
Tax policy
The Scottish Government proposes to retain the same five-band income tax structure it introduced for 2018-19.
However, the starter (19%) and the basic (20%) rate bands will rise in line with inflation. The intermediate (21%) 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.
Table 1: Proposed Scottish tax bands and thresholds, 2020-21
Bands |
Band name |
Rate (%) |
Over £12,500* – £14,585 |
Starter |
19 |
Over £14,585 – £25,158 |
Basic |
20 |
Over £25,158 – £43,430 |
Intermediate |
21 |
Over £43,430 – £150,000** |
Higher |
41 |
Above £150,000** |
Top |
46 |
* Assumes individuals are in receipt of the standard UK personal allowance (assumed to remain at £12,500 in 2020-21)
** Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000
The SFC estimate that these policies will raise an additional £51 million, relative to what would have been raised if all thresholds (other than the top rate threshold) had risen in line with inflation.
The impacts of these policy changes on individual earning levels are presented in the following table. More detail will follow in a separate blog on income tax.
Table 2: Income Tax comparisons by level of earnings
Annual earnings |
Scottish Government proposals 2020-21
£ per year |
Difference compared with 2019-20
£ per year |
Difference compared with rUK
£ per year |
15,000 |
479 |
-0.36 |
-20.85 |
20,000 |
1,479 |
-0.36 |
-20.85 |
25,000 |
2,479 |
-0.84 |
-20.76 |
30,000 |
3,528 |
-2.50 |
27.57 |
35,000 |
4,578 |
-2.50 |
77.52 |
40,000 |
5,628 |
-2.50 |
127.57 |
45,000 |
6,992 |
-2.50 |
491.57 |
50,000 |
9,042 |
-2.50 |
1,541.57 |
55,000 |
11,092 |
-2.50 |
1,591.56 |
60,000 |
13,142 |
-2.50 |
1,641.57 |
65,000 |
15,192 |
-2.50 |
1,691.52 |
70,000 |
17,242 |
-2.50 |
1,741.56 |
75,000 |
19,292 |
-2.50 |
1,791.60 |
80,000 |
21,342 |
-2.50 |
1,841.52 |
85,000 |
23,392 |
-2.50 |
1,891.56 |
90,000 |
25,442 |
-2.50 |
1,941.60 |
95,000 |
27,492 |
-2.50 |
1,991.52 |
100,000 |
29,542 |
-2.50 |
2,041.57 |
The proposed income tax policy for 2020-21 means that all taxpayers will be paying less income tax than in 2019-20. However, the differences are very small – only 36p over the year for those on incomes below £25,000 rising to £2.50 per year for those earning more than £26,000.
Those earning less than around £25,000 are paying £20.85 less income tax than they would in the rest of the UK. However, those earning more than £50,000 will be paying at least £1,500 more income tax per year than they would in the rest of the UK.
Will these proposals change?
With the parliamentary arithmetic as it is, it is likely that the SNP will have to strike a deal with another political party.
On spending, the political battlegrounds of recent years have centred on the settlement available to Local Government. Whether that happens again this year remains to be seen.
On tax, it is at least possible that these rates and thresholds might change in order to secure parliamentary support, or in response to the UK Budget next month. Scottish income tax policy for 2020-21 has to be confirmed in a ‘Scottish Rate Resolution’ (SRR) before the Budget Bill can pass and Scottish tax rates and bands cannot be changed once the financial year has started.
However, if the Scottish Government feels it needs to respond to the UK policy position on income tax after the Budget Bill is passed, it can propose that the SRR is cancelled and propose a new one, provided it is done before the start of the tax year (i.e. before 6 April). If the Scottish Government feel that anything in the UK Budget has unexpected budgetary implications for Scotland, this can be handled via an in-year budget revision (subordinate legislation subject to scrutiny by the affirmative procedure in the Scottish Parliament).
Ross Burnside, Nicola Hudson and Allan Campbell, Financial Scrutiny Unit