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Scottish Budget 2019/20 analysis

12th December 2018

The contrast between this year’s Scottish Budget and that of last year, could not be more different. Last year, with major reforms to Scotland’s income tax system announced, all eyes were on Finance Secretary Derek Mackay – but this year he has played second fiddle to the all-consuming Brexit drama unfolding across Westminster. 

Despite delivering the Budget in the shadow of Brexit, Mackay may not be too concerned he isn’t in the spotlight this time around. With little in the way of pre-announcements this year, it seemed as if this year’s Budget would contain only minor tinkering, using the increase in Barnett consequentials of £950m to boost spending in health and education and embedding the reforms of last year. 

Looking at the Finance Secretary’s headline announcements, this suspicion has largely been confirmed. There is an increase in real term funding for education, a boost to the NHS by almost £500m in real terms, and a £50m for a capital fund for town centres, however this is more of a continuity budget than a radical package of reforms. Given the political pressure on the government to address worsening outcomes in these key public services, it’s no surprise the Finance Secretary has shored up his revenue budget.

The Scottish Conservatives did their best to raise the prospect that the SNP would be seeking to increase the income tax burden for high earners; pushing their well-established attack line on Scotland being the highest taxed part of the UK. While Mackay has chosen not to follow Chancellor Philip Hammond’s move to raise the higher-rate threshold to £50,000 – he has not actually increased the rate on higher earners, providing relief to those who expected tougher measures.

Forecasted growth     
The Finance Secretary has outlined forecasted growth figures for Scotland’s economy for the coming years. GDP is set to grow 1.4% in 2018, faster than anticipated in the UK as a whole. 
Forecasts for the following years are:
•    1.2% in 2019
•    1% for 2020 and 2021    •    1.1% in 2022
•    1.2% in 2023 

Income Tax
In an attempt to protect low and middle earning taxpayers, the Scottish Government has only increased the “Starter” and “Basic” rate bands in line with inflation. Additionally, as widely expected, the higher rate will be frozen, meaning that a tax cut will not be given to those in the higher income bracket. As a result of this, an additional £230m will be raised in tax revenue – with higher rate earners not benefitting from the Chancellor’s move to raise the higher-rate threshold to £50,000 in the rest of the UK. 

Education and health 
The draft Budget has given significant attention to education, including more than £180m for raising attainment in schools and £120m for the Pupil Equity Fund allocated for discretionary spending by headteachers. With significant financial strain on health services in Scotland and uncertainty resulting from Brexit, the draft Budget has set aside significant funding for healthcare, with an increase of £729m in health and care services for 2019/20. This includes an increase in direct investment in mental health services by £27m which will target young people, support in schools, colleges and universities. A ‘Waiting Times Improvement Plan’ will be supported by £535m of resource funding and £320m of capital investment. 

Other announcements  
In the Scottish Government’s environmental services budget, £20m will support Zero Waste Scotland which will include the delivery of a Deposit Return Scheme in 2019/2020. In supporting economic growth, up to £1.3bn will be provided to support Scotland’s seven cities and their regions, with funding for current city deals – such as Tayside and Stirling Additionally, the Scottish Government will provide £50m in capital funding to help town centres across the country diversify and develop.

The opposition response fell along predictable lines, with the Conservatives hitting out on income tax- arguing that the £950m Barnett consequentials from the Chancellor’s Autumn Budget was more than enough to remove the justification for a higher income tax burden in Scotland. Labour took the opposite approach, arguing that the Budget failed to go far enough in reversing years of austerity, instead calling for more radical reforms to tax and spend. Meanwhile, the Liberal Democrats used the Budget announcement as a further opportunity to urge the SNP government to halt its drive for a second independence referendum. 

Brexit drama quashed the build up to this Budget, and it is likely to do the same to the level of coverage following it. By opting to largely maintain the course set at the 2018/19 Budget, Mackay is a Finance Secretary confident that his stewardship of Scottish finances are on the right trajectory, and that previous reforms will soon begin to bear fruit. 

However, the Finance Secretary will be acutely aware that if the realities of Brexit begin to bite – especially in a no-deal scenario – then what has been set out today may never come into being. Perhaps this offers an insight into the more cautious note struck in his proposals; not wishing to take any major gambles against such an uncertain political and economic background. 

The more interesting element to this Budget may actually be what comes next: the negotiations. Sometimes it is easy to forget that Nicola Sturgeon presides over a minority government, and as such relies on support of one of the opposition parties to pass the Budget. As Labour and the Conservatives vie to be seen by the electorate as the main opposition to the SNP, Mackay tends to turn to the Greens and Lib Dems to make a deal. However, both parties have appeared more hostile to the government this year – with the Lib Dems pulling out of negotiations altogether after the SNP refused to rule out an independence referendum this parliament. 

Slightly more concerning for Mackay is the stance of the Greens, usually the government’s budget bedfellows, have so far refused to enter formal talks again until the government offers meaningful reform on local government funding. The Greens will come to the table eventually, but how much Mackay is willing to give away remains to be seen. If he maintains the government’s opposition to tourist tax powers for local authorities, an offer to increase the block grant may be one of his options.

The budget will face its first vote in January, which should leave time for a deal to be struck – but then again, good deals are in short supply this winter. 

Scotland Public Affairs Team

Grayling Team

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