Scottish Budget: Austerity deferred, but not by much and not for long

By Ray Perman, Director

You wonder why they continue to try to get away with it? Any UK Chancellor of the Exchequer delivering his budget speech should know that sleight of hand will be spotted by the Institute of Fiscal Studies before he sits down – and in Scotland we now have an equally vigilant watchdog.

The Fraser of Allander Institute, after a fallow period following the retirement of Professor Brian Ashcroft, has been reinvigorated by the University of Strathclyde. Graeme Roy, previously deputy chief economic adviser to the Scottish Government, has been brought in as director – a gamekeeper turned poacher – and the relentlessly incisive David Eiser has been recruited from Stirling.

Their analysis of the Scottish budget, the first to be delivered by Derek MacKay since he became Finance Secretary last May, exposed a pretty shallow piece of semantics to try to turn a cut in local government funding into an increase in local government services. The forensic dissection of the figures exposed not only how the trick was done, but an element of double counting too – the same £107 million being used to claim a boost to spending on local government services and to the health service.

However, this did not stop Mr MacKay in his interview with Andrew Neil  trying to claim that Fraser of Allander supported his interpretation. Clearly either he had not read the Fraser report or he was gambling that Andrew Neil hadn’t read it. Maybe both were true.

Silly tricks aside, what should we make of the budget? Judged as a whole it is extraordinarily cautious. Given the SNP rhetoric on Tory inequality and austerity – and the fact that the Scottish Government does not have to face re-election for another four years –  it is surprising that with their first opportunity to make meaningful changes, there are only a few timid tax measures.

On income tax, from next April Scottish taxpayers will start paying the 40% rate slightly sooner than those in England. The top three council tax bands are to be increased, meaning that those living in larger houses will pay more. And there is a cut to non-domestic rates, which will help businesses. Added together the two tax increases will raise around £200 million, while the cut in business rates will take away half of this. Hardly significant in a total budget approaching £30 billion.

The caution may be the consequence of the Scottish Government badly over estimating the yield from property sales taxes. The forecast that £1.8 billion would be generated by increases in Land & Buildings Transaction Tax has had to be cut by around £750 million. Some of the difference can be explained by the Aberdeen housing market, which virtually ground to a halt following the collapse in oil prices, but there is also a suggestion that the increased tax is persuading some people either not to move at all, or to buy cheaper properties.

For higher rate taxpayers the two budget tax rises will mean around £600 extra in central and local tax per year. No-one likes paying more, but if you are already paying upwards of £10,000 a year, it is hardly likely to make you move to England.

What the budget does do is continue the Scottish Government’s centralisation policy. The squeeze on local government has been going on for at least eight years, forcing many councils to make deep and unpopular cuts in services and to increase borrowing. They have been forced by the Government to freeze council tax rates and some of the money they have been given has come with strict guidelines on how it is to be spent – on teacher numbers for example.

Next year they are to be allowed to raise council tax rates by up to 3%, but for most this will be insufficient to offset the reduction in their direct funding from central government and restore the cuts they have already made.

Local accountability has been reduced. Central direction has been increased.

The other organisations to suffer repeated lower funding are the enterprise agencies – particularly Scottish Enterprise. Instead the government has been introducing new programmes, such as the Scottish Growth Scheme (advertised as worth £500 million over three years, but in fact loan guarantees, so dependent on demand), extra spending on housing, infrastructure and on broadband. These are all central government initiatives.

These downgrades combined with the review of the enterprise agencies and the announcements that their individual boards are to be replaced by one central oversight body, makes you wonder how much longer they can stay at arm’s length from ministerial control.

The new economic initiatives are all welcome, but are unlikely to make much impression on Scotland’s low productivity and lack of investment. Yet the weak economy remains the Scottish Government’s biggest problem. Growth lags that of the rest of the UK and, as again Fraser of Allander points out, under the Smith Commission changes, lower growth means lower public spending. Home grown austerity may not be far off.