The UK ‘Summer Economic Update’: what does it mean for Scotland?

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On 8 July 2020, the UK Chancellor presented a Summer Economic Update ‘A Plan for Jobs’.  This represents the next phase of the response to the coronavirus pandemic.

Some measures will apply across the UK…

In total, the policies announced will cost up to £30 billion in 2020-21.  Many of the measures announced are GB or UK-wide schemes that will apply in Scotland, for example:

  • The Job Retention Bonus Scheme, which replaces the Coronavirus Job Retention Scheme (the ‘furlough’ scheme) through payment of a bonus to employers who take staff off furlough and keep them in employment until the end of January 2021. (Estimated cost: up to £9.4 billion.)
  • A cut in VAT from 20% to 5% until mid-January 2021 for accommodation, hospitality and visitor attractions. (Estimated cost: £4.1 billion.)
  • The ‘Kickstart’ scheme which will create 6-month work placements aimed at those aged 16-24 who are on Universal Credit and considered to be at risk of long-term unemployment. (Estimated cost: £2.1 billion.)
  • Measures to support worksearch, skills and apprenticeships, some of which will apply across Great Britain.  (Estimated cost: £1.6 billion, although some of this will not directly impact on Scotland – see below.)
  • The ‘Eat Out to Help Out’ scheme, whereby the UK Government will subsidise meals eaten out on Monday-Wednesday during August. (Estimated cost: £0.5 billion.)

Other measures do not affect Scotland directly…

Some of the policy announcements do not have a direct effect in Scotland.  These are:

  • Infrastructure investment (£5.6 billion)
  • Public sector and social housing decarbonisation (£1.1 billion)
  • Green Homes Grant (£2.0 billion)
  • A temporary cut in Stamp Duty Land Tax (£3.8 billion)

Investment in infrastructure in devolved areas would normally be expected to generate Barnett consequentials for the Scottish Government.  However, this only occurs where the investment involves additional funding.  In this case, the infrastructure announcements made at the Summer Economic Update involve re-prioritisation of pre-covid investment plans, so the money is not new, it is just being spent differently.  This means that no Barnett consequentials result from the spending.  So, if the Scottish Government wishes to replicate these schemes, it will also have to re-prioritise existing spending plans.

Stamp Duty Land Tax (SDLT) does not apply in Scotland as it has been devolved.  Scotland has its own land and property tax – Land and Buildings Transaction Tax (LBTT).  The increased threshold for SDLT will have the effect of reducing SDLT revenues in England and Northern Ireland.  For Scotland, this will mean a smaller amount is taken off the Scottish block grant to account for the devolution of the tax.      The Scottish Government has also announced plans to alter LBTT thresholds, increasing the threshold from £145,000 to £250,000 but this will not take immediate effect (while the changes in England and Northern Ireland take effect immediately).  The net effect on the Scottish budget will depend on the extent to which Scottish LBTT revenues fall relative to SDLT revenues in England and Northern Ireland.

Are there any Barnetts for Scotland?

The ‘Plan for Jobs’ itself resulted in relatively minor Barnett consequentials for Scotland.  Some of the spending on worksearch, skills and apprenticeships measures will not directly apply in Scotland, so there will be £20.6 million in Barnett consequentials as a result of new spending in these areas in 2020-21.

In addition, the Treasury used the Summer Economic Update to confirm additional Barnett consequentials in a range of other areas.  These newly-confirmed Barnett consequentials total £800 million and bring the total Barnett consequentials for Scotland in 2020-21 as a result of the coronavirus response package to £4,616 million.  A breakdown of this total according to the UK spending area from which the Barnett consequentials derive is shown below.

The Scottish Government set out how it planned to allocate some of the Barnett consequentials in its Summer Budget Revision of 27 May 2020 (see SPICe blog on the Summer Budget Revision).  However, this only reflected the £3.6 billion Barnett consequentials that were known about as at 15 May 2020 and there have been further announcements of Barnett consequentials since then (including the £800 million confirmed yesterday).  Further details of Scottish Government planned allocation of Barnett consequentials will be set out in future budget revisions in Autumn 2020 and Spring 2021.

How did the Scottish Government respond to the Summer Economic Update?

The Scottish Government welcomed the cut to VAT for tourism-related industries, but called for it to remain in place for longer.  Measures to support jobs were also welcomed.  However, the Scottish Government argued that the UK Government’s proposals fell well short of the proposals that it had set out in its ‘Blueprint for Economic Recovery’, which called for an £80 billion stimulus package.  The Scottish Government has also repeatedly called for greater devolution of fiscal powers to enable it to respond more effectively to the coronavirus pandemic, including calling for the ability to divert money from capital budgets to support day-to-day spending and calling for increased borrowing powers.

Nicola Hudson, Senior Analyst, Financial Scrutiny Unit