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What does the draft Scottish Budget tell us about the economy?

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Summary

The Scottish Government’s draft Budget changed two major taxes and revealed differences in economic performance.

3 min read

Differences between Scotland and the rest of the UK attract a lot of attention.

Derek Mackay’s draft Budget widens some of those differences. Top of the list is the difference in higher rate income tax threshold which will remain at £43,430 in Scotland rather than rising to £50,000 south of the border. And then there’s the wedge in the property taxes as the additional home rate on LBTT rises from 3% to 4%.

But there are differences on the economic side too.

Average GDP growth for the next 5 years is forecast to be 1.1% for Scotland, compared to 1.5% for the UK as a whole. Most of the difference is down to population growth, or the lack of it. Scotland’s 16-64 year old population probably peaked in 2018. We will get some more workers from raising the pension age, but it won’t provide the boost to the economy that we’ve grown accustomed to. The age of ageing is upon us.

“Fourfold increases might sound spectacular, but that shows just how dismal growth had been.”

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If workers aren’t going to be as plentiful in the future as they were in the past then we really need to work smarter. Productivity growth has been in short supply in recent times and the good news is that the Scottish Government’s official forecaster the Scottish Fiscal Commission (SFC) has become slightly more optimistic on this front. It projects that productivity growth will increase fourfold over the next five years, from just 0.3% in 2018 to 1.2% in 2023.

Fourfold increases might sound spectacular, but that shows just how dismal growth had been. Even the 2023 forecast is a long way short of the pre-crisis experience. And it is productivity growth that shows up in people’s pockets. Back in May, the SFC expected it would take until 2020 for workers to get wage rises of more than 2%. Now it thinks that might have already happened, with pay increases for 2018 at 2.0%.

So the Budget reveals an economy that is changing. An important new phase of demographic change is upon us making it ever more important that we raise productivity growth. But Scotland’s economy has outperformed forecasters’ expectations in 2018 on many measures. That’s a trend we’d be very pleased to see continue.

KEY TAKEAWAYS

LBTT additional home rate to rise from 3% to 4%

Higher rate tax threshold frozen for Scottish Income Tax

Scotland’s working age population peaked in 2018

Productivity growth even more vital as ageing of economy now takes effect

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