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UK Budget 2021: paying for the pandemic (but not yet)

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Coming in the midst of the COVID-19 pandemic, this was not a typical budget.  

Since the Chancellor announced his last Budget one year ago, there have been 13 major fiscal announcements made in response to the pandemic. The combined effect of higher spending and lower tax revenues contribute to the UK Government expecting to spend around £350 billion more than it expects to collect in revenue in 2020-21. While the vaccine rollout provides some justified optimism for this year and beyond, it is likely that spending plans may have to evolve again this year in response to events.

While the Chancellor knows that the recent war-time-like levels of borrowing cannot go on forever, high borrowing will continue into the next financial year, with the continuation of the furlough scheme and support to the self-employed and business well into the next fiscal year.

The Chancellor did, however, signal that there would be a need to bring down the accumulated debt in the coming years and decades.

Economic forecasts – a stronger bounce back than previously thought

Given the unprecedented context in which this Budget was published, the Office for Budget Responsibility (OBR) forecasts underpinning the Budget must surely be described as even more uncertain than normal.

The OBR predict that GDP will have fallen in 2020 by just under 10%, before growing by 4% this year and 7.3% next year. The OBR forecast that the economy will return to pre-pandemic levels in the middle of 2022, six months quicker than previously predicted. This compares with the significantly more pessimistic timeframe of a Scottish return to pre-pandemic levels in 2024 predicted by the Scottish Fiscal Commission (SFC) in January. The SFC forecast a Scottish GDP fall of 10.7% in 2020-21, before growth of 1.8% in 2021, 7.5% in 2022, 1.6% in 2023 and 1.6% in 2024.

On borrowing, the OBR forecast that this will be £355 billion this year (less than the £394 billion forecast in November) and will still be an eye-wateringly high by historic standards £234 billion next year. The Chancellor stated in his speech that this was manageable in the short-term due to low interest rates but will have to be tackled in the medium to long term.

The Chancellor signalled his early thinking on how we come out of the crisis and begin to pay back the massive levels of debt that have been taken on this year. He pointed at tax rises to come.

Taxing times ahead

In terms of tax policies which are devolved to the Scottish Parliament, the English Stamp Duty holiday will continue until June 2021. This means that zero Stamp Duty will be paid on residential property purchases up to £500,000 in England.  In Scotland, the equivalent LBTT holiday (which sees zero LBTT paid on residential properties up to £250,000) will end at the end March 2021.

The Chancellor’s business rates relief policy will be less generous than the package offered in Scotland. The 100% rates relief for eligible businesses in Scotland will apply for the full financial year. However, in England 100% relief will continue for three months, before falling to two-thirds relief for the rest of the financial year.

On income tax, the Chancellor announced that income tax Personal Allowance and higher rate threshold (HRT) will be uprated in line with CPI as planned in April 2021, then maintained at those levels until April 2026.  As the Personal Allowance is reserved, this decision will affect Scottish taxpayers.  However, the HRT decision will not apply to Scottish taxpayers.

The big tax announcement came around Corporation tax, a tax that is fully reserved to the UK Parliament. The Chancellor announced that from 2023 the rate of corporation tax will increase from 19% to 25%, although this will not apply to smaller businesses.

Another freeze on fuel duty will disappoint environmental campaigners and perhaps sends mixed messages in responding to the “climate emergency”.

What does the Budget mean for Scotland’s public finances?


The Budget confirmed an additional £1.2 billion of Barnett consequentials for the Scottish Budget in 2021-22. This is in addition to the £1.1 billion recently added to the 2021-22 spending envelope as carry over from 2020-21.

This provides the Scottish Government with an additional £2.3 billion to allocate next year over and above what was known about at the time of the Scottish Budget’s introduction. The Scottish Government had already factored in £500 million in its budget plans, on the assumption that Barnett consequentials would be forthcoming. And the Cabinet Secretary indicated last month where she intends to allocate the £1.1 billion carried over from 2020-21. But, this still leaves some £700 million available for allocation in next year’s Budget. As the Budget Bill moves to Stage 2 and 3 of the Parliamentary process next week, it will be interesting to watch where the Scottish Government signals it will be allocating this resource. 

The Block Grant Adjustment

The Scottish budget introduced in January was underpinned by a provisional block grant adjustment (BGA) for devolved taxes and social security. This was due to the Scottish Budget preceding the UK Budget, and meant that these provisional BGAs were derived from Office for Budget Responsibility (OBR) forecasts from November 2020.

As regular readers of this blog will know, BGAs remove funding where the Scottish Government is now raising its own tax revenue and add funding where the Scottish Government is responsible for social security payments.

These provisional BGAs amounted to a block grant reduction of £12,398 million for taxation in 2021-22, and a block grant addition for Social Security in 2021-22 of £3,310 million.

However, the Scottish Government agreed with Treasury that the BGA based on the latest OBR forecasts could be used instead of the provisional BGA applied to the Budget if it was favourable to the Scottish spending envelope.

At the time of writing, we still do not have the updated BGAs. So, it is still not clear whether the provisional BGA or the latest BGA will apply to the 2021-22 Scottish budget. It is likely the Scottish Government will write to the Finance and Constitution Committee on this matter in due course.

What happens next?

The Scottish budget will be considered at Stage 2 on Monday 8 March and Stage 3 on Tuesday 9 March. It remains to be seen whether the Scottish Government will amend the face of the Bill and allocate the new monies announced yesterday, or wait for an in-year Budget Revision to do so.

There certainly appears to be plenty fiscal scope for a deal with another political party or parties which would allow the Bill to pass into law.

Ross Burnside, Senior Researcher, Financial Scrutiny Unit