The Impact of Brexit on the Scottish Budget

 

The Impact of Brexit on the Scottish Budget

Background

The new financial powers and the Fiscal Framework provide both opportunity and risk for the Scottish Parliament and the Scottish Government. In particular, the size of the Scottish budget is now much more dependent on the performance of the Scottish economy relative to the performance of the UK economy. So, there is now an opportunity for the Scottish Government to increase the size of its budget through growing the economy and increasing tax receipts. At the same time there is a risk to the size of its budget if tax receipts are lower as a result of weak economic growth. Essentially, for the Scottish budget to benefit there needs to be a faster growth in per capita devolved tax revenues than the per capita growth of receipts from the equivalent taxes in rUK.

It is also the case that a decline in Scottish tax revenues per capita does not necessarily mean a decline in the size of the budget. If rUK revenues per capita also decline to the same extent then the adjustment to the block grant will also decline and therefore offset any fall in tax revenues. As such, if Scottish revenues per capita grow at the same rate as those in rUK, the Scottish budget is no better/worse off than it would have been without the devolution of the relevant taxes.

Brexit

A key question for the Committee, therefore, is whether there will be a different impact from Brexit in Scotland than in rUK.

The Scottish Government states in its methodology note on the devolved taxes published alongside Draft Budget 2017-18 that the outcome of the EU referendum “inevitably increases the economic uncertainty faced in Scotland and in turn the future path of tax revenues.”  It anticipates that the impact in the short-term is likely to be as follows -

  • “The depreciation of sterling pushes up inflation, which in turn depresses real wages and, coupled with an increase in economic uncertainty, depresses consumption;
  • Increased economic uncertainty delays or suppresses business investment;
  • Lower economic growth in the rest of the UK, Scotland’s largest trading partner, reduces intra-UK trade;
  • This is partly offset by the depreciation in sterling providing a boost to Scotland’s international exports.”

The Committee noted in its report on Draft Budget 2017-18 that the Scottish Government is likely to likely to face additional spending pressures from rising inflation arising from Brexit. This is due to both the declining real terms value of budgets and the increased costs of commitments to maintain spending in real terms.

The Committee also noted in its report on Draft Budget 2017-18 that the Scottish Government is likely to likely to face additional spending pressures from inflationary pressures arising from Brexit. This is due to both the declining real terms value of budgets and the increased costs of commitments to maintain spending in real terms.

The Committee is interested in hearing views on the short-term impact of Brexit on the public finances.   In particular –

  • Are there any indications of a differential economic impact in Scotland separately from rUK?
  • What additional spending pressures are there on the public finances as a consequence of Brexit?
  • What should the Scottish Government’s priorities be in formulating Draft Budget 2018-19 in response to the initial economic impact of Brexit?
  • Given that increased inflation is likely to disproportionately impact on the poorest, what measures should the Scottish Government take in its Budget to address this?
  • What issues require to be considered from the loss of EU funding mechanisms arising from Brexit?

How to submit your evidence

The closing date for responses is Friday 18 August 2017.

All responses should be sent electronically (in Word format – no confirmatory hard copy required) to finance.constitution@parliament.scot. Written responses will be handled in accordance with the Parliament’s policy for handling written evidencereceived in response to calls for evidence. All written evidence received may be published by the Parliament and will be treated as a public document. If you wish to submit evidence in confidence or anonymously please read the policy at the link above.

What happens next?

The Committee will consider all written evidence received before deciding upon those witnesses from whom it wishes to hear oral evidence in due course.

Contact

Should you require alternative formats of this information or further assistance in making a written submission to the Committee, please do not hesitate to contact the clerking team of the Committee via the email address above or by telephone on 0131 348 5205.