Digging into the budget - Fraser of Allender looks closer for Scotland

18th March 2023

We've had our usual fun this week in the Fraser going through the detail of the Treasury and Office for Budget Responsibility (OBR) material that was published on Wednesday alongside the budget. In this blog, we cover some of the main discussion points that have emerged since the budget was published.

A stooshie with the Scotch Whisky Industry
One of the immediate reactions to the Budget in Scotland was more about what wasn't mentioned. The Chancellor may be delighted with his ‘Brexit Pubs Guarantee' but the Budget also confirmed that an increase in most alcohol duties (in line with RPI) was going to go ahead in August 2023 as planned.

For spirits, and therefore for Scotch Whisky the rate is £28.74 per litre of pure alcohol, and will rise to £31.64 from August - a 10.1% rise.

Our first look at the RPI tables left us scratching our head. The RPI monthly figures have never been 10.1%. As it turned out, the costings document that is published by the Treasury (top of page 71) confirms that Q2 RPI is used for indexation of Alcohol duties. But it gets more complicated than that.

The very helpful analysts at the OBR told us that the figure used for the August uprating is the forecast for annual RPI between Q2 2022 and Q2 2023, which is indeed forecast to be 10.1% in the spreadsheets published by the OBR on Wednesday.

There are a number of interesting things about this method of uprating.

The 10.1% that will be used for the uprating is a forecast, but this will be used no matter what happens to RPI between now and August, by which point the Q2 2023 outturn figure will be available. This is a very different approach from what we are used to for benefits, where the September outturn figure is used to uprate benefits for the following April - no forecasts are used.

The August 2023 uprating had been originally planned for February 2023 before being delayed by the UK Government. The default for future years is that further uprating will happen to alcohol duties every February, using this Q2 RPI (forecast) measure. So, alcohol duties are currently expected to be uprated again in February 2024 by RPI growth between Q2 2023 and Q2 2024 (currently forecasted to be 1.6%).

The actual figure used to perform the uprating will be the forecast for Q2 2024 produced at the time of the Autumn Statement. It may be the case that the increase is delayed or even cancelled, but it's helpful to know the method to get to the default policy assumption. It was certainly news to us.

Finally, it is not clear why a discredited measure of inflation (which is well known to systematically overestimate inflation) is being used by the Government to uprate duties. This is why benefits are uprated using CPI, not RPI.

Extra money for the Scottish Budget - but where is the detail?
The Chancellor announced that there was extra money for the Scottish Government in his speech, but from the off, it was not clear how many years this money covered and how it was profiled. This is extremely unhelpful for anyone trying to understand the implications for Scotland, and (as we seem to do at any fiscal event from both the SG and the UKG) we would like to push for more transparency when this money is announced.

In the Chancellor's speech, he said, "For Scotland, Wales and Northern Ireland this Budget delivers not only a new Investment Zone but an additional £320 million for the Scottish Government, £180 million for the Welsh Government and £130 million for the Northern Ireland Executive as a result of Barnett consequentials."

So at this point, we did not know whether this was for next year (2023-24), the remainder of the spending review period (2023-24 and 2024-25), or even for more years. This matters hugely, as the policies which we thought were likely to generate significant consequentials kick in in 2024 and 2025 mainly, so it was important to understand which period this covers.

It was only after the Chancellor sat down that we were able to look at the detail of the years this covers, in paragraph 2.13 on page 38:

"As a result of decisions at the Spring Budget, the devolved administrations are receiving an additional £630 million through the Barnett formula over 2023- 24 and 2024-25. The Scottish Government is receiving £320 million, the Welsh Government £180 million and the Northern Ireland Executive £130 million."

So now we know it is over the next two years, but not what the split is between the years. Using some calculations we did ourselves, we figured that it was likely that the lion's share was for 2024-25 rather than 2023-24 we thought maybe a 75/25 split, but no official numbers were published.

At the time of writing, to our knowledge no official numbers have been published even now, but we understand that the split is £67m for 2023-24 and £252m for 2024-25, which is broadly in line with what we had calculated.

It is not particularly unusual for there not to be an official source of publication for a few days: quite often these figures get into the public domain by the Scottish Parliament publishing figures provided to them by the Government.

But it is fair to ask why this has to be the case. We haven't heard a compelling reason for why the consequentials can’t be published alongside the Budget. There is a process for agreeing them with the Devolved Administrations, but if the total figure can be announced in the Chancellors’ speech, then the detail of annual allocations should at least be in the documents published on the day.

Our calculations also suggest that £400-£500m is likely to be generated for the Scottish Budget for the subsequent few years if the UKG proceeds with its stated childcare policy (see more on this below). As far as we are aware, the Treasury has not calculated (or at least has not shared with Devolved Administrations) the Barnett consequentials for 2025-26 and won’t for the foreseeable future as this falls outwith the current spending review period.

This obviously is not ideal for planning for the Scottish Government for any sort of expansion of childcare provision based on this funding. It may be safer for the Scottish Government to not assume anything given the likelihood of a Westminster election before 2025 and the uncertainty that will create.

Childcare in Scotland - it’s different
It’s worth a reminder, again, that the provision for 3- and 4-year-olds in Scotland is very different already to that provided in England - mainly in that the places are provided for all children, rather than those whose parents are working. The genesis and outcomes of the policy are focussed more on early learning and development, rather than just being about the provision of childcare for parents to work, although obviously it provides that benefit too.

Therefore, any expansion to 1 and 2 year olds - or younger children - is likely to have a larger price tag in Scotland than the scheme in England if we assume that the Scottish Government keeps to their universal coverage commitment.

The estimates vary, but we might be talking about potentially double the cost compared to Barnett consequentials generated from the scheme in England. This would mean the funds for this would have to be found from elsewhere in the Scottish Budget.

Technical Recession avoided – but it probably won’t feel like it
The Chancellor made much in his speech of the fact that the OBR now do not think that the UK will enter a technical recession this year.

A technical recession means 2 consecutive quarters of contraction in the economy, instead we’ve had a contraction in Q3 2022 followed by growth in Q4 2022. The OBR then expect a contraction in Q1 2023, followed by no (flat) growth, before returning to growth in Q3.

So, no technical recession at the moment, but 2023 is going to be pretty poor growth-wise – contracting 0.2% over the year if the OBR are correct.

Energy Price Guarantee extended
The biggest measure directly affecting most households is the extension of the Energy Price Guarantee for a further 3 months to the end of June. This limits the unit price so that a household with typical use can expect to pay roughly £2500 per year.

Although this continues the previous level of the guarantee, it will still feel to most households that their bills are rising, due to the of the Energy Bills Support Scheme, which provided most households with a £400 energy discount from October to March.

There was, however, nothing new for businesses or charities above what had already been announced in January as part of the Energy Bills Discount Scheme. What this means in practice is that any of these organisations who have not fixed their bills are going to see a substantial rise in their energy prices from April.

Fiscal Headroom and use of temporary measures – not a good look
One of the jobs of the OBR at every fiscal event is to assess the outlook for the public finances against the Government’s "Fiscal Rules". When a new Chancellor is appointed, at least since the OBR has been in existence, they are likely to set out a new set of these rules that they wish to abide by.

Jeremy Hunt set out two new fiscal rules when he became Chancellor:

To have underlying debt falling as a share of GDP by year five of the forecast
To have the deficit not exceed 3% of GDP in that same year.
These rules were met in the Budget presented on Wednesday. Indeed, the deficit is under 3% by year 3 of the forecast, which is a better outlook for the deficit than had been the case when forecasts were published alongside the Autumn Statement.

There is an interesting and growing phenomenon in recent fiscal events, of temporary tax or spending measures that the Chancellor makes clear he would make permanent "when fiscal conditions allow". Examples of this in this budget was the 100% capital allowance and also increases in defence spending. By having these measures fall out of the forecast in year 3 or 4, it improves the fiscal situation and therefore allows the Chancellor to meet these fiscal rules.

But, as the OBR flag, this is a risk to the fiscal outlook, as it seems clear that the government would look to continue these in some form. We’ll be looking out for this in future events, as it adds further risks above increases in duty that always get cancelled, like fuel duty.

How will reforms to disability benefits apply in Scotland?
As we discussed in our blog on Wednesday, a key announcement in the Budget was that the Work Capability Assessment (which determines a premium for Universal Credit for disabled people) will be abolished and the existing assessment for receipt of Personal Independence Payment (PIP) will be used instead as a passport.

This will not come into force until the next parliament, so there is some time to work out the detail on this. UK wide, there is the question of how to deal with the fact that somewhere close to a million people who get this premium currently are not PIP claimants.

In Scotland, though, it get even more complicated. PIP is being replaced by a new devolved benefit called Adult Disability Payment (ADP). If ADP has more generous eligibility criteria than PIP, then there will be a question whether this can also be used to passport claimants onto the higher UC premium. And also how it will work for non-ADP claimants in Scotland.

Based on previous statements by the UK Government, we think there are 3 possible eventualities

ADP is used in Scotland as the ‘passport’ onto disability premiums in UC instead of PIP and UK Government swallows the additional UC premiums in Scotland if ADP eligibility changes.

The Scottish Government pays the difference in UC premiums claimed if ADP eligibility changes. The risk of this eventuality could be enough to prevent the Scottish Government from altering ADP eligibility further (i.e. it could alter the cost/benefit ratio quite considerably)

The UK Government could decide that ADP eligibility is likely to move too far away from PIP and they find another way of determining eligibility for premiums in UC – maybe keeping WCA capability in Scotland for example.

This is something which perhaps will be worked through in the fiscal framework review. We’ve still not seen any discussion, or even a reference to this issue, in anything published by the UK Government around the Budget which is disappointing – this stuff really matters for effective policy making both north and south of the border.

Eezer Goode?
Finally, I’m sorry to add to the excessive punning that’s gone on about this budget (although a shout out to SPICe, RESFO and Newscast for their "Hunt for Growth" monikers) but I’ve had The Shaman in my head all week so I’m going to drag you down with me. (Of course, the younger members of the team have no idea what I was on about. They suggested Es everywhere all at once, which is very current unlike the early nineties reference above.)

The chancellor restated his 4 "Es" to describe his overall approach to growth – Employment, Education, Enterprise, and the slightly torturous Everywhere, to refer to policies on Levelling Up. It’s interesting that Everywhere seems to get dropped when looking at some of the press releases to do with the Budget, flagging that, thankfully, it may not persist as a snappy framing of government economic policy.

Authors
Mairi Spowage
Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.

Emma Congreve
Emma is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute

https://fraserofallander.org/