With an election to the Scottish Parliament fast approaching, yesterday the Scottish Government presented its new Budget. The announcements by the Finance Minister highlight how many of the challenges funding public services experienced in Northern Ireland are also impacting Scotland, but also the additional powers devolved to Scotland and some different approaches being taken in Edinburgh.
The key difference between the devolved powers available to Finance Ministers in Scotland and Northern Ireland is the devolution of income tax to Holyrood. This has resulted in a significant divergence in tax policy between Scotland and the rest of the UK. The Scots now have six bands of income tax, ranging from 19% to 48%. The new Budget proposals increase the tax thresholds for the lower paid, creating a small tax cut for lower earners, while the bands for higher earners have been frozen – meaning increases for these taxpayers.
According to the Institute of Fiscal Studies, the result is that most basic rate payers will see their income tax bills fall slightly, by at most £40 a year. However, a Scottish taxpayer earning £50,000 a year will now pay £1,480 a year more than in the rest of the UK, and a taxpayer with an income of £125,000 will pay approximately £5,200 more. The Budget also saw tax increases on houses valued over £1 million, and on the use of private jets. With Scottish Parliamentary elections due in May, attitudes towards tax are a key political battleground. The impact of these changes on tax revenue and the wider economy will be of interest to policymakers across the UK.
With a focus on cost of living, the Budget proposes an increase in the Scottish Child Payment – a benefit available to Scottish children from families in receipt of benefits such as Universal Credit. From 2027 this benefit will grow by a third to £40 a week for children under one. Different approaches and better outcomes when tackling child poverty have been a marked feature of Scottish policy in recent years. There are also plans to extend free breakfast clubs to every primary and special school, echoing a recent policy change in England.
Overall, this remains a tight funding settlement for Scottish public services. Analysis by the Fraser of Allander Institute suggests the figures indicate a cut in day-today spending compared to spending proposals put forward in June, and operating with a significant underlying deficit of £659 million. Funding future public service pay settlements within this context will be a key challenge, whoever forms the next Scottish Government. Despite additional money allocated for Further Education, the FE college sector in Scotland is under financial strain. Furthermore, despite, proceeds of the proposed ‘mansion tax’, local government funding is a particular area of concern and large increases to Council Tax are forecast.
Reflecting the pressures many businesses are experiencing across the UK, and specific concerns about a planned business rates revaluation in Scotland, there will be small cuts to the three business rate bands. Capital spending has also been cut, raising concerns about whether planned infrastructure projects will proceed, as well as broader questions regarding a growth strategy.
As with the rest of the UK, within a tight funding envelope health spending has been prioritised but there remain concerns that increased NHS budgets will nonetheless struggle to meet increasing demand and costs. The potential, and indeed the requirement, for public service transformation is a key policy challenge and debate for Scotland and the rest of the UK.
Reflecting on the sweep of issues raised by the Scottish Budget, it is clear governments across the UK and beyond face many similar challenges. Most notably with regard to pressures on public services, overspends and deficits, improving infrastructure, welfare and tackling poverty, and searching for higher economic growth.
