This is an initial blog analysis of the 2024-25 Budget. More detailed SPICe briefings and additional blogs will follow in due course.
As this is an extended blogpost, we’ve added a contents popout here to make navigation easier.
Earlier today the Deputy First Minister (DFM) and Cabinet Secretary for Finance, Shona Robison MSP, presented to Parliament the Scottish Government’s tax and spending plans for 2024-25. Despite stating in this year’s Medium-term financial strategy (MTFS) that they would publish multi-year budgets, the DFM delivered a single-year Budget in a move that will undoubtedly disappoint local government and public bodies.
She stressed how challenging the budget setting had been, particularly due to the ongoing impacts from inflation.
As usual, the government’s plans were underpinned by Scottish Fiscal Commission (SFC) forecasts for economic growth and devolved tax revenue and social security spend.
Scottish Fiscal Commission forecasts
Inflation drives earnings and revenues but growth fragile
The SFC forecast that inflation will be higher and more persistent than anticipated last year. Higher inflation has fed-in to higher earnings growth, and the SFC has revised up its forecast of real disposable income per person – however the SFC note that the fall between 2021-2024 is still the largest reduction in Scottish living standards since Scottish records began in 1998.
The SFC forecast that economic growth will remain fragile in the medium term, albeit the Scottish economy has proven more resilient in 2023 than previously forecast. In December 2022, the SFC was forecasting Scottish GDP would fall by 1% this year, but now expects GDP growth of 0.2% in 2023-24.
Fiscal overview – different numbers as usual
As ever, there is a plethora of figures flying about in relation to the overall change in the size of the budget and we will explore these more fully in our detailed briefings that will follow this initial blog.
The Scottish Government presents its budget document on a “budget to budget” basis meaning that all budget lines are presented in comparison to the previous year’s budget as passed by Parliament. This has been an established convention for budgetary presentation over a number of years.
However, this approach fails to take into account in-year budgetary movements. In 2022-23 and 2023-24 these in-year changes have been significant as revised paydeals and cost-of-living interventions have been required to combat soaring inflation. The result of these changes is that the usual “budget-to-budget” comparisons could be, in some circumstances, misleading, or at least not give the full picture of the effect of the changes in budget from one year to the next.
Helpfully, the SFC provides a fiscal overview setting out the changes in-year against the plans for next year. This shows that the Scottish Government’s budget next year is set to increase by £1.3 billion from the latest position for 2023-24. This is a rise of 2.6% in cash terms, or a 0.9% rise after taking inflation into account (so called real terms).
The SFC note that most of this budget increase comes from an improved income tax net position, which will be £1.4 billion higher than the BGA removed from the Scottish budget for the devolution of income tax (more on this below).
Tax policies
Income tax policy – a new band for Scotland
Given that it is the main tax policy lever for generating additional resource for the Scottish Budget, income tax policy for next year has been the source of much speculation for some time. As widely expected, the Scottish Government decided to introduce a new tax band for those earning between £75,000 and £125,140. Earnings in this range will now be taxed at 45p. Scotland now has a 6-band income tax policy, compared to a 3-band policy in the rest of the UK.
As well as introducing a new band, the top rate of income tax (for earnings above £125,140), was increased from 47p to 48p. The tax rates for other bands remained unchanged. The starter and basic rate bandwidths were increased in line with inflation, while the higher rate threshold was frozen.
According to the SFC, the combined impact of these changes will result in an additional £82 million in income tax revenues in 2024-25, after taking account of the expected behavioural responses of taxpayers. The majority of the additional revenue comes from the new 45p rate. The increase in the top rate from 47% to 48% is expected to raise only £8 million, with most of any expected increase offset by higher earners taking steps to reduce their exposure to the higher rate of tax. For more discussion about behavioural responses to income tax changes, see an earlier SPICe blog.
The net income tax position improves markedly
The amount by which SFC income tax forecasts are higher than the income tax Block Grant Adjustment (BGA) removed from the Budget results in what is known as the net income tax position (see an earlier blog for more details). The SFC estimates that the net income tax position for 2024-25 will be £1,412 million. In other words, income tax revenues are expected to exceed the amount removed from the Scottish Budget for income tax devolution by £1,412 million. This is roughly equivalent to the extra amount that Scottish taxpayers will be paying as a result of the different tax policy adopted by the Scottish Government.
The SFC note that “projections of the income tax net position are uncertain and are subject to change between forecasts”. However, it is also noteworthy that for some while, the net position has been less favourable and the Scottish budget has not seen the full benefit of the extra tax paid by Scottish taxpayers. The shift in this position largely reflects stronger growth in income tax revenues in Scotland than had been previously forecast and also stronger earnings growth relative to the rest of the UK.
What the new income tax policy means for individual taxpayers
Compared to last year, the vast majority of taxpayers will see a small reduction in what they pay in income tax – for those earning up to £75,000 their income tax bills will reduce by around £10 per year. However, as a result of the new income tax band for those earning more than £75,000, income tax payments will increase for a small number of taxpayers in 2024-25. Someone earning £100,000 will pay an extra £740 in income tax over the year, while someone earning £150,000 will pay more than £2,000 more in income tax next year. The Scottish Government note that increased tax payments will affect only 5% of taxpayers.
Compared to the rest of the UK, the Scottish Government’s income tax proposals mean that all taxpayers earning below £28,850 will pay less income tax in Scotland than they would if they lived elsewhere in the UK. However, the differences are small for this group of taxpayers – only £23 per year for most in this group. For those earning above this amount, the gap between what they pay in Scotland and what they would pay elsewhere in the UK widens rapidly as earnings increase. Those earning £50,000 will pay around £1,500 more in Scotland than they would elsewhere in the UK, while someone earning £150,000 will pay almost £6,000 more over the year. The divergence for higher earners has widened considerably with the introduction of the new 45p rate for those earning over £75,000.
Other devolved taxes
There are no changes proposed in the rates and bands of Land and Buildings Transaction tax, and legislation will be introduced to increase the Scottish Landfill tax rates in line with planned UK Landfill tax increases.
Despite much pressure from the sector, the Scottish Government opted not to replicate the UK government’s policy of 75% rates relief to the retail, hospitality and leisure sector in England. The Basic Property Rate (“poundage”) has been frozen, but rates for larger businesses (with a rateable value of over £50,000) are increasing.
Council tax freeze
As we mentioned in our blog last week, the key factor many were watching in relation to the proposal to freeze council tax was how much the Scottish Government were going to transfer to Local Government for delivery of this policy in what is a local tax.
The figure landed on was, at £144 million, considerably lower than some had predicted – for example, the Fraser of Allander had estimated compensation to councils of £330 million – although that figure included an estimate for not implementing the change in ratios for higher council tax bands that had been consulted on.
However, this figure can’t be seen in isolation as it forms part of the wider settlement to Local Government.
The next part of the blog considers the local government settlement and other budget allocations.
Allocations
Local Government
Local Government’s wish list for this year’s Budget probably included a hope for increased funding, an expectation of less ring-fencing from central government and an ask for some multi-year certainty. In some of these areas, the Budget has delivered, in others it has not. We can see that the Scottish Government provided some festive cheer in the form of an above inflation increase to Local Government’s revenue funding, but there is also a wintery chill in the significant reduction to its capital budget.
Total revenue funding – used for day-to-day spending such as salaries and the purchasing of goods and services – will go up by 5% in real terms. The proportion of this funding formally ring-fenced for national policies is also smaller than last year. This should allow councils more flexibility over how they spend their allocations, and councils will presumably welcome the opportunity to use more of their budgets to fund local solutions for local problems.
This is the first budget since the much trumpeted Verity House Agreement, signed by the Scottish Government and COSLA in June. A commitment to reducing ring-fencing was part of this, but so too was an agreement to provide multi-year spending plans “wherever possible”. Councils will likely be disappointed that this year’s budget, once again, is for a single year only. Such a situation makes medium-term financial planning difficult for councils and is arguably counter to the Verity House Agreement’s stated aim of supporting the delivery of sustainable public services.
Health spending continues to be prioritised
As has been the case for many years now, the health budget has been awarded higher increases than other areas of spending. The total budget for health and social care is going up 3.4% in cash terms, or 1.7% in real terms. The Scottish Government explicitly state that their decision to prioritise health spending has resulted in them being less able to offer support to the business sector.
This represents over £600 million in additional funding and goes beyond the Scottish Government’s commitment to pass on any additional funds that it receives as a result of increased UK government spending on health. Pay demands are likely to present ongoing challenges for the health budget and there is also a commitment to increase pay for adult social care workers to £12 per hour, which comes at a cost of £200 million.
The progress of the Scottish Government’s flagship National Care Service (NCS) Bill has been delayed and costs have been revised. The budget document does not make clear how much has been set aside for the NCS, with NCS funding included under the broader heading of ‘National Care Service / Adult Social Care’. Much of the £1 billion included under this heading will ultimately be transferred to local government for the delivery of social care.
Social Security spend is now significantly higher than the block grant adjustment (BGA) added to the budget
Some elements of social security spending are devolved. The headline decision in this Budget was to increase devolved benefits in line with September’s inflation rate of 6.7%, as had been widely expected.
Overall, the Scottish Government has continued to choose to spend more on social security than would have been the case if reserved policy applied in Scotland. For example, they have established new benefits that are unavailable in the rest of the UK, such as the Scottish Child Payment. They have also changed the application process for the Adult Disability Payment, which results in a higher number of claimants. The result is that the difference between social security funding through Block Grant Adjustments (BGAs) and the spending that must be met from within the Scottish Budget will reach £1,092 million in 2024-25, and is forecast to rise to £1,502 million in 2028-29. This places significant pressure on other parts of the Budget.
What has been de-prioritised or cut?
As ever, our detailed briefing will contain more information on spending changes. There are resource spending cuts planned in the Deputy First Minister/Finance, Rural Affairs, Land Reform and Islands and Wellbeing Economy, Fair Work and Energy portfolios. – As noted above, the decision to protect health spending has been made explicitly at the cost of offering more support to businesses.
Capital budgets have also been hard hit – falling by 6% in cash terms, although this will vary across different portfolio areas. Reflecting constrained capital budgets, the Scottish Government had previously stated that it planned to “publish a reset of the Infrastructure Investment Plan project pipeline” alongside the Budget to provide “transparency over which projects may now be delivered over a longer timescale”, but this does not appear to have been published as yet.
Enterprise agencies have been particularly impacted, most significantly Scottish Enterprise which effectively loses all Financial Transactions (FT) funding, falling from a net £28m in 2023-24 to zero. All agencies face falling resource budgets in cash terms, while the Scottish National Investment Bank’s (SNIB) FT budget drops from £240m to £181m, the lowest budget settlement since 2019-20 when SNIB was launched. Another area within the Wellbeing Economy, Fair Work and Energy portfolio to face a material fall in allocations is capital funding for the energy transition, which falls by around £30 million. However, capital funding for digital is boosted by £60 million, mostly related to the delivery of the R100 broadband programme.
Public service reform plans
The budget document contained no detail on the Scottish Government’s latest thinking on public service reform. However, in a letter sent to the Finance and Public Administration Committee, a Public Service Reform progress update was provided. This will be scrutinised by the Finance and Public Administration Committee in the coming weeks.
There was nothing in the document around the Scottish Government’s thinking on workforce numbers, or public sector pay policy for next year, although the Scottish Government does say that it will “set out pay metrics for 2024-25 following the [UK] Spring Budget”.
Climate and public spending
The Scottish Government had pledged to ‘expand and enhance’ the existing taxonomy of capital spend to cover capital and resource spending. This follows a joint working group which aimed to improve the information around the impact on the climate of public spending decisions in Scotland. More detail on this working group and its recommendations was recently covered in a SPICe blog. The new taxonomy published alongside the 2024-25 Budget has certainly been expanded – rather than covering only capital it now covers all capital and most resource spending. The resource assessment covers around 81 per cent of total resource spending in the Budget, as local government expenditure has not been included. Of this 81 per cent, 75 per cent is categorised as neutral. The degree to which the taxonomy has been enhanced is less clear, however.
The previous taxonomy categorised capital spending as either low, neutral or high carbon. There is some additional detail in the new taxonomy – low and high carbon spend has been renamed positive and negative to indicate how it aligns to the Scottish Government’s intended outcomes, and split to identify low and high impact spend within these categories. However, these ‘enhancements’ do not tackle the big challenges in understanding how this spending will contribute to meeting Scotland’s climate targets. We do not know what outcomes will be achieved by this spending – do the current allocations of negative spending set Scotland on a path to meet the emission reduction targets, to what degree is ‘positive’ spending offset by ‘negative’, and how will spending decisions in 2024-25 contribute to emissions in future years?
Unfortunately, this new taxonomy does little to increase the ability of parliament to understand or scrutinise the impact of the Budget on Scotland’s climate.
Response to Committee reports
As per the Budget Process Review Group recommendations in 2017, individual ministers are required to respond to committee pre-budget letters within five sitting days of the Budget being published, and the Budget document should include a summary of how the submissions from committees have influenced the formulation of the proposals. This has been the adopted approach by the Scottish Government since the 2019-20 budget.
This year, this detail is not included in the main Budget 2024-25 document. Instead, it has referenced at the very end of the document that this will be published online only, and users must click through four links to find it.
This might be considered to go against the Written Agreement between the Scottish Government and Finance and Public Administration Committee which states that “The Budget document should include a summary of how submissions from the Parliament’s committees have influenced the formulation of the Budget”. This would appear that this is a step back in terms of both accountability and transparency, particularly in the context of committees looking for more detail on the impact of their recommendations.
What next?
We now move to the Parliamentary scrutiny phase of the Government’s budget proposals, where Committee and plenary discussions will focus on weighing up these plans.
Ross Burnside, Ailsa Burn-Murdoch, Andrew Feeney-Seale, Nicola Hudson, Greig Liddell, Rob Watts
Financial Scrutiny Unit, SPICe Research