Shona Robison now has more pieces of the budget puzzle

Article by our chair Professor Graeme Roy, first published in The Times on 22 November 2023.

Professor Graeme Roy

Although many of the Chancellor’s announcements apply across the entire UK, his ‘Autumn Statement for Growth’ also sets the scene for the Scottish Budget in less than four weeks’ time.

The Deputy First Minister will be thinking about how to balance her budget in what we know will be a challenging year. At the Scottish Fiscal Commission we are now busy preparing our tax and social security forecasts that will feed into those calculations. You’ll have to wait until 19 December to read the details. 

High inflation has increased forecast tax revenues across the UK and the Chancellor spent most of the increased fiscal headroom on tax policy measures rather than public spending.  

Cuts to national insurance rates and making 100% capital allowances for business investment permanent apply across the UK and so will benefit individuals and businesses in Scotland. Interestingly, the OBR expect newly announced cuts to national insurance will boost income tax revenues by incentivising people to work and earn more taxable income. 

Higher than previously forecast earnings growth have boosted forecast UK income tax. As always, whilst we might expect similar effects to be seen in Scotland it is the relative performance of income tax revenues in Scotland which will be critical for the Scottish Budget.  

Whilst devolved taxes are now a significant part of the Scottish Budget, the block grant remains a crucial determinant of the overall spending envelope available to the Scottish Government. In that context, the future outlook for the Scottish Budget remains closely linked to UK Government spending plans. 

In the immediate outlook, the Chancellor’s announcements provide the Scottish Government with £545 million extra over the current and next financial year. Partly from extending Business Rates relief to retail, hospitality and leisure businesses by one more year in England – the Scottish Government will decide its Non-Domestic Rates policy as part of the upcoming Scottish Budget.  

Over the medium term however, the outlook for UK public spending has deteriorated. Indeed, the outlook for UK spending has fallen in real terms over the next five years since the OBR’s last forecasts in March. This is likely to make the Scottish Government’s job balancing its own budget more challenging. 

In May this year the Deputy First Minister highlighted how resource spending requirements in 2024-25 were already likely to be £1 billion higher than the funding available. Since then, we have had further public sector pay deals which need to be funded. Earlier this week, the Shona Robison informed the Scottish Parliament that pay deals had added an estimated £1.75 billion to the pay bill across the Scottish public sector this year. 

Today’s announcements provide an important few pieces in the jigsaw that is the increasingly complex Scottish Budget puzzle. We will have to wait a few more weeks to see whether or not the Scottish Government’s own funding position has improved sufficiently to help tackle any gap in funding commitments or whether further difficult choices over tax and spending in key areas will be needed.  

Graeme Roy is professor of economics at the University of Glasgow’s Adam Smith Business School and chairs the Scottish Fiscal Commission