Benefits of decentralisation?

The IFS has published an analysis of Scottish Government finances under so-called full fiscal autonomy, as called for in the SNP manifesto. The Scottish Labour party have highlighted the figures from this analysis as they try to claw back some ground in the opinion polls before the coming general election. And the figures certainly are not comfortable reading for the SNP, with a projected fiscal balance for Scotland in 2019-20 of -4.6% of GDP compared with a whole UK figure of +0.3%. Nicola Sturgeon has responded by describing the IFS figures as “academic projections for a status quo situation” which could be improved with extra powers for the Scottish parliament. So the argument from the SNP seems to be an acceptance that the public finances in Scotland are worse than the UK public finances, but an expectation that more powers would lead to an improvement in these finances. Continue reading

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Is the SNP the anti-austerity party?

In a speech in February, Nicola Sturgeon suggested she was in favour of a policy to increase departmental spending by 0.5% per year in real terms during the next Parliament. By making the case for a 0.5% real terms increase in departmental spending, at a time when the three main UK parties were all planning for real terms departmental spending freezes, Sturgeon could claim that the SNP was the only anti-austerity party.

Since then, two things have happened that appear to undermine this claim. First, since the end of 2014 the general outlook for the public finances has improved somewhat (falling inflation lowers the servicing costs of index-linked government bonds, whilst lower oil prices are believed by the Treasury to lift onshore tax revenues and growth prospects by more than the damage done to offshore revenues), enabling Labour (and other parties) to plan for more generous departmental spending increases in the next parliament while remaining within their fiscal targets.

Second, it emerges that, although the SNP’s spending plans imply a rise in spending equivalent to a 0.5% per annum real increase in departmental spending, the SNP manifesto does not commit the party to spend this additional resource on departmental spending specifically (broadly, departmental spending is spending on public services, as opposed to social security spending). Given what the SNP has said about the tax changes it would make in the next parliament, combined with the spending commitments they have made on welfare, it emerges that the SNP would actually have relatively less resource available to support departmental spending relative to Labour. These are the findings of an excellent analysis of the parties’ post-election spending plans, published yesterday by the IFS. How so? Continue reading

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Inequality in the 21st Century

For a long time in economics it was believed that issues of distribution could be considered separately from issues of economic growth. As far as welfare was concerned, the consensus was that growth was of first order importance and the inequality in the distribution of the benefits of this growth was a relatively minor second order concern. Indeed, following Kuznets (1955) it was believed that while the process of development might initially lead to an increase in inequality, as societies developed it appeared that the forces for convergence in the distribution, such as the diffusion of knowledge and skills, became stronger. It looked as if equality was a normal good which societies would increasingly choose as they became wealthier. This belief was underpinned by the observation of high levels of inequality prior to World War I, and lower levels of inequality in the period from 1950 – 1980.

However, since 1980 inequality has been rising again in advanced economies, and this issue exploded from a relatively minor issue in the economic literature to the top of the best sellers lists with the publication of Piketty (2014) “Capital in the Twenty-First Century”. Continue reading

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How will the general election result and new tax powers affect the Scottish budget?

With all the recent discussion about the Smith Commission and devolved taxation, it’s perhaps easy to forget that the block grant from Westminster will continue to account for the major part of the Scottish budget for the next few years at least. But how will the spending plans of the next UK Government affect the size of the Scottish grant and therefore the Scottish budget? And to what extent will Scotland’s new tax powers enable the Scottish Parliament to vary its budget further? Continue reading

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The distribution of wealth

At Scottish Fiscal and Economic Studies, we have, and are continuing to develop, a microsimulation model of UK and Scottish households which we can use for distributional analysis. For example we can say what a particular change in fiscal policy means for net household income for those households in the bottom decile and for those households in the top decile. Analysis of this sort underlies the paper we published last year, Constitutional change and inequality in Scotland, which investigated the distributional impacts of the various policy levers associated with different degrees of devolution and autonomy. There are many microsimulation modes which can analyse income distributions, but most, due to a lack of data availability, do not allow for the analysis of wealth distributions. The ScotFES model will be developed to include such capability in a model based on the Understanding Society dataset, complemented by a microfounded life-cycle economic model, calibrated to the Office for National Statistics Wealth in Great Britain data releases. In this post I outline the data available, and discuss why wealth is a particularly interesting topic from a Scottish point of view. Continue reading

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How different has Scotland’s recession and recovery been from the UK’s?

Compared to the recessions of the 1970s, 80s and 90s, the recent crisis in the UK has been characterised by several distinguishing features:

  • The fall in output has been more prolonged; the level of GDP did not recover its pre-recession level until the second half of 2013, some five years after the start of the recession.
  • However, employment (and total hours worked) have fallen less than the fall in output, and the labour market recovered much more quickly than output has done; employment had returned to its pre-recession level by early 2012.
  • Wages on the other hand have fallen by as much as 10% in real terms, and are yet to show any significant sign of increase.

The fact that output has fallen by more than employment (and hours worked) means that productivity has fallen, measured either as output per worker or output per hour worked. Continue reading

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Scotland’s 1%

There has been a lot of recent media attention on the top 1% of income earners. But what are the characteristics of Scotland’s top 1%?

The latest good data we have on incomes is for 2009/10 (the data is from HMRC and based on taxpayer returns; it includes income from a variety of sources, including bonuses). In that year there were around 4.32m adults in Scotland, so by definition when we talk about the top 1% we are talking about 43,000 people.

To be in this group in 2009/10 you had to have gross income (from all sources) of £93,500 or over. Continue reading

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The LBTT Revision

On 18th January 2015, the Cabinet Secretary for Finance, John Swinney, announced that he is revising the residential tax element of the land and building transaction tax (LBTT). Mr Swinney had  announced the rates for LBBT in his draft budget in October 2014. These are shown below:

Residential transactions Non-residential transactions Non-residential leases
Rate Rate Rate
Up to £135,000 nil Up to £150,000 Nil Up to £150,000 nil
£135,001 to £250,000 2.0% £150,001 to £350,000 3.0% Over £150,000 1.0%
£250,001 to £1,000,000 10.0% Over £350,000 4.5%
Over £1,000,000 12.0%

Source: Scottish Government

In December 2014, the Chancellor of the Exchequer announced new rates and a new structure for Stamp Duty Land Tax (SDLT) in the rest of the UK. This new structure was introduced from December 4, 2014. Its rates are shown below:

Continue reading

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The Scottish Budget under the Smith Proposals

David Bell and David Eiser

The Smith Commission proposals seek to increase the powers of the Scottish Parliament and to secure a corresponding increase in the Parliament’s accountability and responsibility for the effects of its decisions and their resulting benefits or costs.

How has this ambition been translated into concrete proposals for fiscal responsibility? On the spending side, the Scottish Parliament will control benefits associated with long-term disability and sickness, along with some relatively small benefits for older people, and the Work Programme – the UK Government’s key programme for supporting people into work. In total, this will transfer benefits worth around £2.5bn to the Scottish Parliament (in addition the Scottish Parliament would gain some limited ability to vary the housing cost elements of Universal Credit, and top-up other benefits).

On the revenue side, the Scottish Parliament will gain the ability to vary income tax rates and thresholds (but not the personal allowance). Half of VAT revenues raised in Scotland will be assigned to the Scottish Parliament (the VAT rate and exemptions cannot be varied). And Air Passenger Duty (APD) and the Aggregates Levy will be fully devolved. Continue reading

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How should the Barnett Formula be adjusted to reflect devolved taxes? A question of allocating risk (wonkish)

David Bell and David Eiser

The UK parties have committed to retaining the Barnett Formula to allocate grant to Scotland. The way in which the Barnett Formula is adjusted to reflect devolved taxes will have important implications for the budgetary risks facing the Scottish and UK Parliaments. This blog discusses two possible approaches to adjusting the Barnett Formula. It shows that the adjustment approach proposed in relation to the Scotland Act powers exposes Scotland to a different set of risks on the spending side relative to the revenue side which seems inconsistent. This approach also exposes Scotland to UK policy decisions, and these could affect Scotland positively or negatively. An alternative approach is discussed which overcomes these problems, but exposes Scotland to a higher rate of convergence in per capita spending with rUK. Continue reading

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