Slow wage growth dampens Scottish income tax forecasts

The Scottish Fiscal Commission has published its latest report ‘Scotland’s Economic and Fiscal Forecasts – May 2018’, which shows that the outlook for the Scottish economy remains subdued over the next five years. GDP growth is expected to remain below 1.0 per cent a year over the forecast period, reaching 0.9 per cent in 2023.

Despite slow economic growth, unemployment is expected to remain low, with employment continuing to increase over the next five years.

New analysis by the Commission shows a continuing weakness in wage growth, which has consequences for the Commission’s forecasts of income tax receipts.

Real wage growth has been weak in Scotland over recent years: real wages are lower now than they were a decade ago. As a result of new analysis, the Commission has revised down its outlook for real wage growth in Scotland. Real wages are now anticipated to fall by 0.5 per cent during 2018, before levelling off in 2019 and starting to grow slowly from 2020 onwards.

This outlook for wages feeds through to the income tax forecast, which has been revised down from the Commission’s previous forecast by £209 million (or 1.7 per cent) in 2018-19. Income tax is expected to raise £12.0 billion in 2018-19, increasing to £14.5 billion by 2023-24.

The Commission forecasts Scottish tax revenues of £15.8 billion in 2018-19; forecasts of social security expenditure amount to £428 million in the same year.

Chair of the Fiscal Commission, Dame Susan Rice, said:

“Our view of the Scottish economy has not fundamentally changed since December – the outlook is for subdued growth in Scotland over the next five years. The drivers of this are modest population and productivity growth; with productivity forecast to improve slowly from the weak performance experienced over 2016 and 2017.

“We have reduced our expectations for wage growth which feed through to a reduction in income tax revenues throughout our five year forecast.”