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Edinburgh Chamber Scottish Budget Briefing

Posted: 12th December 2018
    • FORECASTS The Scottish Fiscal Commission has forecast that GDP growth will be 1.2% in 2019, falling to one per cent in 2020 and 2021, 1.1% in 2022, and 1.2% in 2023, given the uncertainties of Brexit, falling productivity growth and a shrinking working age population.
    • BREXIT Derek Mackay has claimed that the Scottish government would have “no choice” but to revisit this budget in the event of a no deal Brexit.
    • INCOME TAX Rates will remain the same as last year. The starter and basic rate threshold will be increased at the rate of inflation and the higher rate threshold will be frozen.
    • HEALTH Health will receive the bulk of this Budget’s spending rises, including an increase of almost £730 million, with £27 million for mental health.
    • PUBLIC SECTOR A three per cent pay raise was announced for those earning £36,500 or less.
    • EDUCATION £180 million will be invested to raise attainment in schools.
    • ECONOMY £5 billion capital will be invested to modernise infrastructure, including the creation of a Town Centre Fund and a £130 million investment in the Scottish National Investment Bank.
    • BUSINESS RATES A relief package worth over £750 million will be introduced with a below-inflation cap on business rates, ensuring that more than 90% of properties in Scotland will pay less than the rest of the UK. The out-of-town levy proposed in the Barclay Review will not go ahead at this time.
    • HOUSING £825 million will be allocated to housing, as part of a total package of three billion pounds to deliver 50,000 affordable homes over the course of the Parliament.
    • EDINBURGH The Scottish Government will continue to support the City Region and Growth Deals, including in Edinburgh, to the tune of £187 million. It has also confirmed it will establish a UNICEF data and informatics hub at the University of Edinburgh.

    Analysis

    POLITICS

    Compared to last year’s budget – which broke with British fiscal uniformity by creating five rates of income tax in Scotland, as against three in the rest of the UK – this was a steady-as-she-goes affair. In Scottish parlance, finance secretary Derek Mackay delivered a “ca’ canny” – or go cautiously – package of measures.

    The most radical revenue-raising policy was freezing the higher rate income tax threshold in Scotland – paid by the top 15% of earners – at £43,430, at a time when UK chancellor Philip Hammond announced plans in his budget for the threshold elsewhere in the UK to move to £50,000 from next April.

    However, to put this into perspective, the measure is forecast to deliver an extra £68 million – or just around 0.25% of the total Scottish budget. Meanwhile, around 55% of income tax payers will pay less tax next year than if they lived in England, Wales or Northern Ireland.

    To some extent, steering a relatively middle course invites criticism from both sides: higher tax for some, but not sufficient to transform the public expenditure outlook.

    However, at a time of crisis and confusion at Westminster, and with no clarity as to what the UK’s future relationship with the European Union is to be, the Scottish Government has concluded that both in terms of policy and presentation, “ca’ canny” is the right path for Scotland at this time.

    Nonetheless, the independent Scottish Fiscal Commission (SFC) report, published once the finance secretary sat down, warned that a higher marginal tax rate for higher earners “will start to affect taxpayer behaviour, for example decisions on how many hours to work.”

     

    BUSINESS

    In total, more than £5 billion in capital spending is planned for the coming year, including £1.7 billion in transport infrastructure, £825 million in housing, and £180 million for city and region deals.

    A key headline for businesses was the announcement that a tax on out-of-town premises – a recommendation of the Barclay report on non-domestic tax rates – will not be implemented at this time, however, the matter will be kept under review.

    Business groups had been vocal in their calls for no new business rates levy to be brought in, with 21 organisations – including the Scottish Chambers of Commerce, Freight Transport Association, British Soft Drinks Association, Scottish Tourism Alliance and the Scottish Grocers’ Federation – signing a joint letter to Mackay back in November.

    However, acknowledging the struggles of local high streets, Mackay announced that a new £50 million fund will be introduced to support the diversification and development of town centres.

    Other key measures include: £130 million to support the establishment of the Scottish National Investment Bank, a £15 million increase in business R&D funding, £8.3 million to progress the new National Manufacturing Institute Scotland, and £150 million for the Building Scotland Fund which will provide debt and equity support to the private sector and organisations, such as housing associations and universities.

    And the imperative of focusing on economic growth is starkly illustrated by Scottish Fiscal Commission report.

    Economic growth is forecast by the SFC to be “relatively subdued” over the next five years, primarily as a result of slow productivity growth. Trend productivity growth “has been declining in Scotland since the early 2000s”, and while it is projected to “gradually increase” over the next five years, the Scottish economy clearly needs all the help it can get.

    Derek Mackay went to great lengths to contrast the economic performance with the “economic and social vandalism of the UK government”, pointing to growth outpacing the UK as a whole in the first six months of 2018.

    Changes to Land and Buildings Transaction Tax were also announced. The additional dwelling supplement (ADS) will increase from 3% to 4%.

    Non-residential LBTT will be reduced from 3% to 1% and the upper rate increased from 4.5% to 5%, with the starting threshold of the upper rate falling from £350,000 to £250,000.

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