Scotland's Changing Fiscal Framework through the Prism of Understanding Society

.

David BellUniversity of Stirling

The Scottish Electoral Map in 2010 and 2015

The Changing Settlement: Timeline

843 - Kenneth MacAlpin – first king of Scotland

1707 – Union of the Parliaments

1998 – Scottish Parliament established

2012 – Scotland Act 2012

2015 – Scotland Act 2015?

? – Independence (again) or full fiscal autonomy (FFA) within the UK?

Scottish Rate of Income Tax (SRIT)Land and Buildings Transaction TaxLandfill Tax

(Nearly) all of income taxShare of VATAir Passenger DutyWelfare Powers

Referendum (Sep 2014)The “Vow”The Smith Commission (Nov 2014)Draft legislation (Jan 2015)

Power to vary basic rate of incomeTax by (up to) 3p. Never used.

Outline

• How is Scotland the same as the rest of the UK?

• How is it different?

• The present arrangements - funding, policy environment

• The UK’s changing fiscal environment

• Conclusions

How is Scotland the same?

wales

northern

east

midl

north ea

st

yorks

hire

south w

est

scotla

nd

north w

es

west m

idl

east

of engla

nd

south ea

st

london£0

£500

£1,000

£1,500

£2,000

£2,500

£3,000M

onth

ly P

ay

Source: Understanding Society Wave d

Potted view of Scottish economic performance before and after introduction of Scottish Parliament in 1998

The Social Environment

• Identity

rUK Scotland05

101520253035404550

Proportion of US Respondents Describing Themselves as "British" by Area of Residence

Prop

ortio

n of

Adu

lt Re

spon

dent

s

20012002

20032004

20052006

20072008

20092010

20112012

20132014

05

101520253035404550

Percent of LFS Respondents Describing Themselves as “British” by Area of Residence

Living in Scotland

Living in rUK

Perc

ent o

f Res

pond

ents

Slightly more authoritarian?

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20123.4

3.45

3.5

3.55

3.6

3.65

3.7

3.75

3.8

3.85

Libertarian-Authoritarian Scale

Scotland Rest of Great Britain

Libe

rtar

ian

<-->

Aut

hori

tari

an

Source: British Social Attitudes Survey

More left wing?

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132.1

2.2

2.3

2.4

2.5

2.6

2.7

Left-Right Scale

Scotland Rest of Great Britain

Left

<--

> Ri

ght

Source: British Social Attitudes Survey

More sympathetic to welfare?

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132.65

2.7

2.75

2.8

2.85

2.9

2.95

3

3.05

3.1

3.15

Welfarism

Scotland Rest of Great Britain

Uns

ympa

theti

c <-

-> S

ympa

theti

c

Source: British Social Attitudes Survey

Inequality of income?

Scotland London rUK0.335

0.34

0.345

0.35

0.355

0.36

0.365

0.37

Household Net Incomes

Wave bWave cWave d

Gini

Coe

fficie

nt

Scotland London rUK0.36

0.37

0.38

0.39

0.4

0.41

0.42

Gross Pay From Employment

Wave bWave cWave d

Gini

Coe

fficie

nt

Source: Understanding Society

Satisfaction with health, life

completely d

issatisfi

mostly d

issatisfied

somewhat diss

atisfied

neither s

atisfied or

somewhat satisfied

mostly s

atisfied

completely s

atisfied05

10152025303540

Satisfaction with health

rUKScotland

Perc

ent (

%)

completely d

issatisfi

mostly d

issatisfied

somewhat diss

atisfied

neither s

atisfied or

somewhat satisfied

mostly s

atisfied

completely s

atisfied05

10152025303540

Satisfaction with life overall

rUKScotland

Perc

ent (

%)

Source: Understanding Society

How is it different? Proportion of adults born outside UK

northern

ireland

north east

scotla

ndwales

yorks

hire and th

e hum

north w

est

south w

est

west midlands

east of e

ngland

east midlands

south east

london0

5

10

15

20

25

30

35Pr

opor

tion

of A

dult

s Bo

rn O

utsi

de U

K

Source: Understanding Society Waves a-d

Scotland the White?

rUK Scotland0

10

20

30

40

50

60

70

80

90

100

White BritishAsianOther

Prop

porti

on o

f Adu

lts

Source: Understanding Society

Slightly older population

0.0

05

.01

.01

5.0

2kd

ensi

ty d

vag

e

20 40 60 80 100Age

Scotland rUK

Source: Understanding Society

Implications for fiscal sustainability?

Satisfaction with health may be relative?

96 97 98 99Percentile

0

1

2

3

4

5

6

7

8

ScotlandrUK

Mea

n an

nual

day

s in

hosp

ital

Source: Understanding Society

Significant health inequalities

Higher public spending per head

National Statistics

2009-10outturn

2010-11outturn

2011-12outturn

2012-13outturn

2013-14outturn

England 97 97 97 97 97

Scotland 113 113 115 117 115

Wales 109 110 112 111 111

Northern Ireland 121 121 124 124 123

UK identifiable expenditure

100 100 100100

100

Source: HMT: Public Expenditure Statistical Analysis (July 2015)

How is Scotland’s Funding Determined?

• Welfare – demand driven – paid by UK Government

• DEL – base and increment – known as the “block grant” – determined by the “Barnett Formula”

• Scotland receives its population share of any grant increase agreed for “comparable” English departments such as health and education

1 1 0 01 1Sc rUK rUK rUK Sc ScE p E p g T g T

Scotland: The Policy Environment

• Scottish Government: areas of responsibility (spending)– Health– Social care– Education– Local government– Justice– Transport

• Opportunities for policy analysis?• Distinctive Scottish policies

– Long-term care– University tuition fees– Prescription charges

Policy environment – “The Commission on the Future Delivery of Public Services”• Priorities

– Concentrating the efforts of all services on delivering integrated services that deliver results

– Prioritising preventative measures to reduce demand and lessen inequalities

– Identifying and targeting the underlying causes of inter-generational deprivation and low aspiration”

– Implications for longitudinal studies?

Public Bodies (Joint Working) (Scotland) Act

• Granted royal assent on April 1, 2014. It will put in place:

– Nationally agreed outcomes, which will apply across health and social care, and for which NHS Boards and Local Authorities will be held jointly accountable

– A requirement on NHS Boards and Local Authorities to integrate health and social care budgets

– A requirement on Partnerships to strengthen the role of clinicians and care professionals, along with the third and independent sectors, in the planning and delivery of services

– Exogenous(?) policy variation on (similar/same?) populations – opportunities for Understanding Society?

The Changing Fiscal Environment

Scotland’s increasing tax powers

Full fiscal autonomy with different oil prices

Scottish Rate of Income Tax (SRIT)

Income

Income TaxRate

£10k £42k £100k

20p

40p

50p

10p

Scottish Government

HM Government

= £4.7bn

Vertical tax competition within shared tax base?

Horizontal tax competition over mobile tax base?

15p

£52k

Support for moving fiscal responsibility to Holyrood

State

pensio

nVAT

Corporati

on tax

Income ta

x

Unemploym

ent ben

efits

Disabilit

y ben

efits

Taxe

s on N

orth Se

a oil a

nd gas

Housing b

enefit

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Don't knowRemain at WestminsterPartially devolved to ScotlandFully devolved to Scotland

Source: Centre on Constitutional Change Survey

Preferences for taxes and benefits among those who wish powers moved to Holyrood

State pensio

n

Disabilit

y benefits

Unemployment b

enefits

Housing benefit

Taxes o

n North

Sea oil a

nd gas

Income ta

x

Corpora

tion tax

VAT0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Higher rate than in the UK currentlyDon't knowSame rate as in the UK currentlyLower rate than in the UK currently

Source: Centre on Constitutional Change Survey

Principles? Logic?

• Who bears what risks?

• Accountability?

• Who controls macroeconomic policy

• Efficiency

• How important is size asymmetry?

Decentralisation ratios in OECD countries

0 10 20 30 40 50 60 700

10

20

30

40

50

60

4.75

9.92

49.52

26.52

22.81

13.23

29.81

1.09

26.67

3.10

16.63

3.59

12.58

7.12

41.92

36.62

39.76

Scotland pre 2012

Scotland Act 2012

Scotland 2015

Expenditure share %

Reve

nue

shar

e %

The Block Grant Adjustment – How will it work?

Year 1

<£30bn?

A

CScottish

Income Tax Revenue

Reduced Block Grant:size of reduction

determined by growth in UK tax base

Year 2

A*

C£30bn

Shortfall if Scottish incometax not growing as fast as

UK income tax

The Indexed Deduction Method

B B*D*

Determining the Scottish (Welsh?) future budget

0 0 1 0 01 1 1 1 1Sc Sc Sc rUK Sc rUK rUK Sc ScE g T g T p g T g T

Change in Scottish Government Budget

Growth in Scottishtax base

Scottish populationshare

UK tax revenuein period 0

Share of Scottish taxesin period 0 going to UKgovernment

Share of Scottishtax revenues retainedby Scottish Parliament

Scottish taxes in period 0

Growth in rUKtax base

Barnett Formula

Block Grant Adjustment

The Budgetary Effect of Slower Scottish Tax Base Growth

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

-2.0%

-1.8%

-1.6%

-1.4%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

Scotland ActScotland Act Pop Adj SmithSmith Pop Adj

YearCh

ange

Rel

ative

to

Barn

ett O

utco

me

(as

perc

ent

of G

DP)

Modelling the tax and welfare provisions – CCC Research

UnderstandingSociety

Scottish sample

MicrosimulationSoftware

Differences in tax rates

Differences in welfare benefits

Differences in growth rates

Differences in demography

Effects on block grant

Distributional effects

Effects on net household income

1p increase in SRIT

How stable is the income tax band distribution?

2012Non-

TPBasic rate

Upper rate

Additional rate

Total

2009

Non-TP 52.77 43.82 3.23 0.19 100

Basic rate 12.58 82.25 4.99 0.17 100

Upper rate 6.68 23.95 65.61 3.76 100

Total 24.94 66.5 8.16 0.4 100

2012

Non-TP

Basic rate

Upper rate

Additional rate Total

2009

Non-TP

54.04 43.23 2.5 0.23100

Basic rate

10.38 84.95 4.53 0.13100

Upper rate

4.96 29.91 61.7 3.43100

Total 22.29 70.03 7.33 0.35 100

rUK Scotland

New powers over welfare coming to Scotland

• Benefits for carers, disabled people and those who are ill• Benefits covered by the Regulated Social Fund• Discretionary housing payments

• End of any consensus on UK-wide social insurance?

• Administrative nightmare

• How to adjust Scottish budget to cover welfare payments?

• Interaction between welfare powers and Scottish policy initiatives (eg free personal care)

Welfare powers being transferred

Attendance Allowance Share

Disability Living Allowance

Conclusions

• Profound effects on the (unwritten) UK constitution are in train

• Chaotic fiscal decentralisation

• Existing funding structures have no principled rationale – proposed alternatives have even less – fiscally unsustainable

• Leading to break-up of the UK in the (near/distant?) future?

• But – great opportunities for social science – particularly longitudinal studies such as Understanding Society