Earlier today, the UK Chancellor of the Exchequer set out his Budget, which could be the final fiscal event prior to the General election.
Much of the talk in advance centred on the Chancellor’s room for manoeuvre for cutting tax in advance of a UK election expected later this year.
In the end, the Chancellor chose a 2p cut to the main rate of employee and self-employed National Insurance, deemed to be more pro-growth (not to mention less expensive) than the option of a cut in income tax. National insurance only applies to the working age population, as opposed to the wider scope of income tax, which would also have benefitted people above the state pension age who do not pay National Insurance and are set to see their state pensions increase by 8.5% next year.
As a reserved tax, National Insurance applies UK-wide, so Scottish taxpayers will benefit from this tax cut. This would not have been the case had the Chancellor opted to cut the devolved income tax – albeit that would have increased the size of the Scottish budget had the Scottish Government opted not to pass this on via a reduction to Scottish income tax.
The Budget was published alongside the usual Office for Budget Responsibility (OBR) Economic and Fiscal forecasts. So what were their judgements?
OBR forecasts
Inflation has come down faster than the OBR anticipated in its last forecast in November 2023, and the OBR expect it will sit below the Bank of England 2% target later this year. Markets also now expect interest rates to fall faster which the OBR note will alleviate some of the costs for households (like mortgage payments) and government finances (like debt interest payments). However, this is less good for those with savings.
The medium term GDP forecast hasn’t really changed since the previous forecast in November, despite higher than expected population growth. With overall GDP broadly the same, combined with a higher UK population, this means that GDP per head (a better indicator of economic performance) is forecast to fall.
What are the Scottish budgetary impacts?
In advance of the Budget, the Deputy First Minister (DFM) and Finance Secretary had urged the Chancellor to prioritise public spending over tax cuts.
She will have been disappointed therefore, that the Chancellor opted to keep indicative spending plans as they are at 1% real terms growth in day-to-day spending. Having said that, these are only indicative spending plans – we will only see more concrete spending plans beyond 2024-25 after the UK election.
There were some confirmed Barnett consequentials announced, however, which will boost the Scottish budget for 2024-25 by £293 million.
£237 million comes from the additional resource allocated to the NHS in England in 2024-25 and £48 million reflects Scotland’s share of extra funding to Council Budgets in England announced in January 2024. A few smaller movements stemming from the Film Studio Relief and support for processing increased volumes of disability benefit claims take you up to the £293 million figure.
There will be no additional funding for capital in 2024-25 arising from this Budget.
Other policy announcements
Many of the announcements made by the Chancellor were widely trailed in advance of the Budget and, surprisingly, there were no “rabbits” pulled from the Chancellor’s hat.
Some of the policy announcements were as follows:
- From next year, full child benefit will be paid to households where the highest earning parent earns up to £60,000 (up from the current limit of £50,000). Partial child benefit will be paid where the highest earner earns up to £80,000. The Chancellor signalled an intention to base child benefit on household earnings rather than individual parent earnings from 2026.
- The current “non-dom” regime, for UK residents whose permanent home is overseas, will be replaced with new rules from April 2025.
- There will be a new tax on vaping products from October 2026, which will be linked to the levels of nicotine.
- Fuel duty is frozen again.
- The windfall tax on energy company profits, which had been scheduled to end in March 2028, has been extended by another year.
- Tax breaks for owners of holiday let properties will be scrapped.
What’s next?
With an additional £293 million in Barnett consequentials to be added to the 2024-25 Scottish budget, the Scottish Government has some additional resources that it had not anticipated at the time of the Scottish budget, which was recently approved by Parliament. The Scottish Government can choose how to allocate these, although it has a commitment to pass on any health-related Barnett consequentials to its own health budget, so the health budget should benefit from at least an additional £237 million in 2024-25 beyond what has already been allocated. This addition, along with remaining Barnett consequentials will not receive formal Parliamentary approval until the Autumn 2024 or Spring 2025 budget revisions.
The next Scottish fiscal event comes in May 2024 when the Scottish Government publishes its Medium Term Financial Strategy (MTFS) alongside the latest forecasts from the Scottish Fiscal Commission. As mentioned in a recent SPICe blog, this is expected to be accompanied by a range of Scottish Government documents, updating infrastructure and multi-year plans, that were previously promised alongside the Scottish Budget.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit