It’s been another busy budgetary week, with an unexpected announcement here at Holyrood on Tuesday, followed by the UK Autumn Statement on Wednesday.
On Tuesday, the Deputy First Minister (DFM) announced additional in-year (2023-24) savings to fund emerging priorities in the current financial year. These total £680.3 million reallocated or reprofiled from other budget areas, including the Scottish Funding Council, Agricultural support and Mental Health spending.
In a letter to the Finance and Public Administration Committee on Tuesday, the DFM set out the budget lines where savings will be realised and spoke in general terms about the areas where these would be utilised. Precise allocations were not presented but the letter states that the £680 million in savings were to fund things like public sector pay deals, the Scottish Child Payment and the Fuel Insecurity Fund and inflationary pressures within the Health and Social Care budget.
Yesterday, the Chancellor of the Exchequer presented his Autumn Statement to Parliament. As we approach a UK General Election, it felt more significant than usual Autumn Statements (which are typically less impactful than Spring Budgets). The Office for Budget Responsibility (OBR) also set out a new set of forecasts alongside the Autumn Statement.
So what was in the Statement, and what does this mean for Scotland and the Scottish budget?
Some Barnett consequentials for this year and next
The Autumn Statement allocates around £545 million Barnett consequentials to the Scottish budget. £223.1 million is added to the current year’s (2023-24) spending envelope and £320.6 million for 2024-25.
Reflecting on her £680 million in-year 2023-24 savings on Tuesday, the DFM stated:
“In the absence of additional funding from the UK Government, I have no option but to make these tough choices. This is critical, to balance the Scottish Government budget, whilst working to ensure that our resources are focused on our three critical missions outlined in the Policy Prospectus.”
It is unclear why the DFM chose to set out these budget savings the day before the Autumn Statement. The additional Barnett consequentials could go some way towards offsetting the savings required in 2023-24, but the exact impact will remain unclear until the Scottish Government’s Spring Budget Revisions (expected in January or February 2024).
However, the Chancellor did signal that spending would remain tight in the medium term with day-to-day (Resource spending) increasing by on average 1% in real terms (adjusted for inflation) from 2025-26 to 2028-29. The Autumn Statement also reiterated the UK Government’s intention that Infrastructure (Capital) spending will be held flat in cash terms through to 2028-29, and therefore fall in real terms. This means that the Treasury allocations for Scottish and UK departmental spending will grow more slowly than in recent years.
Tax cuts, but tax as % of GDP remains high
Heavily trailed in advance, there was a cut made to National Insurance Contributions (NICs) which the Chancellor said was now affordable due to the reduction in inflation. Employee NICs will be cut from the current 12% rate to 10% and this will be introduced “in-year” from 6 January 2024 (rather than the start of the next tax year in April). As NICs are a reserved tax on income, this will be a UK-wide measure.
Another UK-wide tax cut comes in the form of the announcement to make full expensing permanent – it was previously scheduled to expire in 2026. This is a measure that allows businesses to offset investments in machinery and equipment against their tax bill.
While these tax cuts marginally reduce the tax burden as a % of GDP relative to the OBR’s March 2023 forecast, the overall UK tax burden is still expected to rise in each of the forecast years and to sit at a post-war high of 38% of GDP by the end of the forecast period.
One of the key reasons for this is the impact of “fiscal drag” from the combination of income tax thresholds being frozen alongside high inflation. With inflation pushing up earnings, and income tax thresholds frozen, more and more people are pushed into higher income tax rate bands resulting in much higher tax receipts for the Exchequer.
Economy more resilient than previously thought, but will grow more slowly over the next five years
The OBR’s forecast for economic growth was better than previously thought in the near-term. The March forecast showed GDP falling by 0.2% in 2023, but this was replaced with a forecast that GDP would increase this year by 0.6%.
Having said that, the OBR had a gloomier growth outlook for the UK economy from 2024-2027, which is now forecast to grow by an average of 1.5% per annum compared with a 2.1% per annum average forecast in March.
Inflation impacts not done yet
The OBR forecasts point to inflation being more persistent, and more domestically driven. This means that, on current OBR forecasts, interest rates will stay higher for longer, with implications for government as well as personal borrowing.
Relative to the previous OBR forecasts in March, higher inflation pushes up tax receipts over the forecast period to 2027-28, but also pushes up the likely cost of inflation linked welfare benefits, public sector pay, as well as interest payments on government debt.
Other policy announcements
National living wage
The UK’s national living wage will increase from the current £10.42 to £11.44 per hour from April 2024, and will apply to workers over 21. The minimum wage for 18-20 year-olds will increase to £8.60 from £7.49. For 16-17 year olds, the minimum wage will increase by over £1 to £6.40 per hour.
Benefits and pensions
The Chancellor confirmed that Universal Credit and other working age benefits will increase by September’s inflation figure of 6.7%. In the days running up to the Autumn Statement, there had been speculation that uprating might be in line with the lower October rate of 4.6%, which would have gone against usual practice.
The Chancellor confirmed the triple-lock formula for state pension rises would be implemented as usual, meaning the state pension will rise by 8.5% in line with average earnings.
The Chancellor also confirmed plans for a tightening of welfare measures, announcing plans that claimants unable to find work for more than 18 months will face losing access to welfare if they have not met a range of conditions, including taking part in work placements. Stricter penalties were also announced for long-term unemployed people who the government decide are not taking adequate measures in looking for jobs.
Self-employed National Insurance
The chancellor also said he would abolish the “Class 2” NIC charges for self-employed people. That measure removes a flat rate compulsory charge of £3.45 a week.
Self-employed people who pay “Class 4” NICs at 9% would see that cut by one percentage point to 8% from April 2024.
The Treasury claims these measures would save about two million self-employed people an average of £350 a year.
Whisky
There was speculation as to whether the Chancellor would increase tax applied to Scotch whisky beyond the 10.1% increase implemented from August 2023, but it will now remain at £28.74 per litre of alcohol, representing a duty of 73% on average priced bottle of Scotch Whisky, until August 2024. The rate of duty for all other alcohol has also been frozen.
Non-domestic rates
Non-domestic rates (or business rates) are fully devolved to the Scottish Parliament. However, the Chancellor announced another year of freezes for businesses with a rateable value up to £51,000 and that a temporary reduction in bills for retail, hospitality and leisure businesses of up to 75% would be extended for a further year.
This policy generated Barnett consequentials for the Scottish Budget (mentioned above) but it will be up to Scottish Ministers to decide whether to use this additional funding to make cuts to Scottish business rates, or for another policy priority. Temporary reliefs for retail, hospitality and leisure businesses in Scotland were withdrawn in 2022, having been introduced as a support measure during the pandemic.
What’s next?
The next big fiscal event will come next month when the Scottish Government introduces it spending and tax plans for 2024-25 on Tuesday 19 December.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit (FSU)