Scottish Budget 2025 to 2026: distributional analysis of the Scottish Budget

Annex: Methodology

Modelling Approach

This analysis uses UKMOD, an open-access microsimulation model developed by the Institute for Social and Economic Research (ISER) at the University of Essex. The model applies tax and benefit rules to a set of individual and household-level data, allowing the user to simulate and compare alternative scenarios. Public spending analysis links supplementary information to the UKMOD output dataset in order to estimate where households are likely to receive public spending, and reflect the average spend in a given area across the household income distribution.

The input data in UKMOD is derived from the Department for Work and Pensions' Family Resources Survey (FRS). The analysis of tax and benefits in this paper uses two years of FRS data, 2021-22 and 2022-23, while the public spending work uses four years, 2019-20 to 2022-23. ELC uses the additional year 2018-19 to obtain a better sample size. Data from 2020-21 is excluded in all cases due to the impacts of the pandemic on survey collection. To pool the data, the grossing weights used to scale the FRS sample to the whole population are divided by the number of data years.

The income components and other monetary variables are then scaled to the year being analysed (2025-26) based on the Office for Budget Responsibility (OBR) latest forecasts. No adjustments are made for demographic change.

All modelling includes adjustments to take-up rates of social security payments to reflect the latest take-up estimates. Overall amounts are reviewed against published outturn statistics. The model does not include any behavioural effects associated with tax policies.

Analysing the distribution of income

Analysis in parts one and two shows the effect of policies on net household income, before housing costs whereas part three shows an allocation of government spending across the household income distribution.

In this context, household income is after taxes and social security payments.

Equivalisation means income is adjusted based on household size and composition, to allow for the fact that larger households will require a higher income to maintain a similar standard of living as a smaller household. This analysis uses the modified OECD equivalence scale, following the same approach as used in UK and Scottish Government poverty analysis. Further detail on the equivalisation calculation is available in the definitions section of Poverty and Income Inequality in Scotland 2020-23.

Household income means that all income is assumed to be shared across all members of the household. This analysis uses the Family Resources Survey definition of a household (i.e. one person living alone or a group of people (not necessarily related) living at the same address, who share cooking facilities and share a living room or sitting room or dining area.)

Before housing costs means that no deductions are made for rent or mortgage payments from household incomes.

To summarise impacts across the income distribution, households are ranked from the lowest equivalised household income to the highest, then divided into ten or five equal groups called deciles or quintiles respectively.

Results in parts one and two are reported based on the average gain or loss of income within these household income deciles. In part three they reflect the average government resource spending per person within household income quintiles. There may still be considerable variation around the estimated averages.

As an indication of the income levels in each decile, table A1 below shows the median gross (i.e. pre-tax and pre-social security) unequivalised household income in each decile.

Scope

Tax and benefits

The following policies are devolved taxes or social security payments which are explicitly modelled in this analysis:

• Scottish Income Tax
• Council Tax, excluding water and sewerage charges
• Council Tax Reduction^[21]
• Scottish Child Payment
• Discretionary Housing Payments (DHPs) used to mitigate the bedroom tax and benefit cap.^[22]
• Carers Allowance Supplement
• Best Start Grant and Best Start Foods
• Child Winter Heating Payment
• Pension Age Winter Heating Payment

In addition to the payments listed above, the Scottish Government also has responsibility for a range of disability benefits, which have been replaced by the Adult Disability Payment, Child Disability Payment and Pension Age Disability Payment.

These benefits are reflected in the underlying survey data, but the impact of the changes introduced by the Scottish Government are not modelled. Consequently, differences in policy on these aspects of the social security system do not account for any of the differences shown in figures 2 or 3 above. As more data becomes available on the effect Scottish Government policy changes have on take-up, we may revisit modelling of these aspects of the social security system.

Figure 1 presents analysis of a wider segment of the tax and social security system, including several reserved policy measures, and so additionally includes:

• Employee National Insurance Contributions
• Income tax on savings and dividends income
• Universal Credit, and the legacy benefits it replaces
• Pension Credit
• Child Benefit
• State Pensions
• Statutory sick pay
• Statutory maternity pay

Public spending

In 2021 Scottish Government published a feasibility study^[23] of distributional analysis of taxes, social security and public services which has been used to develop the public spending methodology.

In order to model the distribution of public spending, it is necessary to identify who uses public services. For ELC and schools there is evidence in the FRS about service use and that data is used in our modelling. For other services, data from other sources is combined with the FRS to assign service usage based on individual characteristics. Resource spending is aggregated to household level and all charts show resource spending allocated at household level in order to be comparable to the analysis of taxes and social security in parts one and two.

This has limitations, such as assuming people with the same broad characteristics access a service in the same way. More information can be found in this IFS report on modelling public service spending.

The Welsh Government^[24] present distributional analysis of public spending at individual level rather than household level, so spending amounts will not be directly comparable.

Health

The health spending modelling uses an insurance based approach where age and sex are used to assign spending. A further adjustment is made to account for additional needs based on the area where an individual lives. However, this is a minor adjustment as we only have location data at a high level. The approach is similar to the NRAC formula which is used to allocate NHS funds to health boards in Scotland^[25] and uses the same cost curves for age and sex. The total is then scaled so that it equals the total health budget from the Level 4 spend tables.

This methodology differs from the Welsh Government’s as we do not have adequate data on service usage to take account of variation in expected usage based on other characteristics such as income.

Funded Early Learning and Childcare (ELC)

ELC refers to up to 1,140 hours a year of funded childcare for three or four year olds, and some eligible two year olds. As the years of data being used are pre and post ELC 1,140 expansion hours are estimated for the pooled data.

To analyse how public spending on funded early learning and childcare (ELC) is distributed across income quintiles, we use data on the amount of money spent on ELC (using all spending on ‘pre-primary education’ from the Local Government Finance Official Statistics^[26]) along with data about which households use funded ELC, and how many hours they use, from the Family Resources Survey, the ELC Census^[27] and Improvement Service ELC reporting data.

The total amount of public spending on funded ELC is divided by the total number of funded ELC hours used, and then allocated to income quintiles based on the number of hours used by households in each quintile.

FRS households record the type and number of hours of childcare received and whether this is funded ELC. Where data does not align with the ELC sources it is adjusted. For 3 and 4 year olds this is adjusted upwards by considering all households using any formal childcare (which brings the number of households recieving funded ELC more closely in line with the ELC Census figures). Hours are also adjusted upwards by including all formal and informal hours in the calculation (which brings the average number of hours used more closely in line with the data from Improvement Service ELC collections).

Schools

The schools modelling uses the FRS to identify children who attend state-run primary, secondary or special schools. It uses the Local Financial Returns to allocate spending to each child based on the type of school they attend and the Local Authority they live in. This is then scaled so that the total equals the total schools spend in the Local Government statistics.

Transport

The transport modelling uses information from the Scottish Household Survey to predict the likelihood of using a car, bus, train and concessionary bus passes based on a person’s characteristics. Individual’s characteristics in the FRS are then used to estimate their usage of each transport mode. Modelled probabilities are used to proportionally allocate expenditure among individuals. This is then scaled so that the total equals the transport resource spend in the Level 4 spending lines. As a sense check, results for particular demographics are compared to the Transport and Travel in Scotland (TATIS) survey.

Counterfactuals

Table A2 below summarises the parameters used for each of the two counterfactuals reported on in this analysis.

(Table A2) counterfactual parameters

Policy: Income Tax

rUK policy counterfactual for 2025-26: Income Tax rates and bands as in place in England & Northern Ireland for 2025-26, based on Autumn Budget announcements.

No policy change counterfactual for 2025-26: Personal allowance frozen, as per UKG policy. All other bands uprated by CPI (1.7%). All rates unchanged

Policy: Council Tax

rUK policy counterfactual for 2025-26: Excluded from comparisons made against counterfactual

No policy change counterfactual for 2025-26: Average Band D Council Tax uprated with CPI

Policy: Scottish Child Payment

rUK policy counterfactual for 2025-26: Policy not in place.

No policy change counterfactual for 2025-26: Awards uprated with CPI. Eligibility criteria remain unchanged.

Policy: Discretionary Housing Payments to mitigate bedroom tax and benefit cap

rUK policy counterfactual for 2025-26: Policy not in place.

No policy change counterfactual for 2025-26: Awards uprated with CPI. Eligibility criteria remain unchanged

Policy: Carer’s Allowance Supplement

rUK policy counterfactual for 2025-26: Policy not in place.

No policy change counterfactual for 2025-26: Awards uprated with CPI. Eligibility criteria remain unchanged.

Policy: Child Winter Heating Payment

rUK policy counterfactual for 2025-26: Policy not in place.

No policy change counterfactual for 2025-26: Awards fixed in cash terms. Eligibility criteria remain unchanged.

Policy: Best Start Grant & Best Start Foods

rUK policy counterfactual for 2025-26: Replaced with Sure Start and Healthy Start grants

No policy change counterfactual for 2025-26: Awards fixed in cash terms. Eligibility criteria remain unchanged.

Policy: Council Tax Reduction

rUK policy counterfactual for 2025-26: Excluded from comparisons made against this counterfactual, as grouped as part of Council Tax

No policy change counterfactual for 2025-26: Eligibility criteria and calculation approach remain unchanged

Policy: Pension Age Winter Heating Payment

rUK policy counterfactual for 2025-26: Targeted Winter Fuel Payment

No policy change counterfactual for 2025-26: Universal Pension Age Winter Heating Payment