Implications of the UK Government fiscal statements for the Scottish Government Budget: expert panel interim commentary

Executive Summary

Introduction

On 27^th September, the Scottish Government appointed us as its panel to provide economic advice on the implications for Scotland of the UK Government's UK Growth Plan (or mini budget) of 23^rd September.

Since then, the UK Government has made further fiscal statements, reversing around two thirds of the tax cuts announced in the mini budget. Political and economic uncertainty remains heightened with a further UK Government fiscal statement having been delayed until 17^th November.

In this interim commentary, we have provided independent economic advice to the Scottish Government on:

• the current challenges in the economic and fiscal context;
• the uncertainty relating to the UK Government's fiscal statements; and
• the implication of these for Scottish economic and fiscal policy.

We set out our thinking on how the Scottish Government could respond to the challenges it is facing through the tax system and the wider implications for public services and the economy.

Uncertainty and Planning

Even with the reversal of tax cuts, the uncertainty generated by the mini budget has had a material impact on the Scottish economy and the outlook for the Scottish Government's budget.

It has introduced significant volatility not just for markets but also for the Scottish Government's own budget, generating uncertainty that inhibits planning. Specifically, in a period of less than a month, the Scottish Government's indicative funding has fluctuated by £890 million on foot of the series of U-turns on its mini budget. Instead of seeing a potential £660 million increase to its funding position over the period 2022-23 to 2024-25, the Scottish Budget now faces a cumulative net loss of £230 million over the same period.

This is in advance of any significant UK public expenditure cuts, which would impact on the Scottish Government budget through the fiscal framework.

This level of uncertainty is not conducive to proper fiscal and economic planning.

Policy Responses and Considerations

A clear and consistent economic and fiscal policy is required in order to provide certainty to households and businesses so that they can make informed spending and investment decisions.

With pressure on public expenditure, which is already being significantly eroded by inflation, the Scottish Government will need to consider the extent to which it can offset expenditure reductions through taxation, which in turn impacts on incentives and relative competitiveness.

The recent UK Government policy announcements have again underlined the risk of behavioural responses from different tax regimes across the UK. The Scottish Government must consider, in any tax changes, whether it also creates risks of tax competition, and possible tax-induced migration between Scotland and England, particularly of top-rate taxpayers. Behavioural changes may take several years to realise their full effect on behaviour, if the tax change is marginal. The inter-connectedness of UK and Scottish tax changes through the fiscal framework, the uncertainty relating to the UK position as well as the potential time lag on behavioural change, lead us to call for caution in tax policy responses.

Whilst offering support to households and businesses affected by the cost crisis is a priority for the Scottish Government, the actions that it takes need to be balanced across a range of priorities:

(i) providing short-term support to vulnerable households and businesses; and

(ii) investing to grow and improve the productivity and resilience of the economy in the medium to longer term.

Increasing productivity growth is a complex process that cannot be achieved overnight, and needs concerted and joined up actions across a range of economic areas. It is also important to achieve the right type of growth: growth that is sustainable and in line with other wider policy objectives, such as reducing inequality and the transition to net zero.

The Scottish Government's National Strategy for Economic Transformation identifies many of the key economic areas and opportunities for Scotland and recognises the need for consistent and detailed action and delivery. Improving productivity requires a systems approach, as an economy is only as good as its weakest link.

Alongside focusing on key investment areas reflecting political priorities, we would suggest a continued focus on economic resilience and on the opportunities to improve productivity and growth.

In the face of such uncertainty, we suggest a cautious fiscal response. As well as supporting households and businesses through the current crisis, Government policy must not lose sight of the longer-term objectives of building a stronger, more resilient economy.

Professor Sir Anton Muscatelli

Professor Frances Ruane

Dr. Mike Brewer