Budgets are always complex. But so far, as the perspective from and for Scotland is concerned, the complexity has increased with the extent of fiscal devolution.

Looking at the 2018 UK Budget requires a focus on three key aspects.

First we still have to analyse what UK-wide Budget measures mean for Scotland. Will they help stimulate investment, productivity and employment? Will they favour particular sectors or income groups across the UK?

Second, we need to work through the implications for public spending in Scotland. Which changes will affect Scotland directly and which will work their way through the system via the block grant?

Third, we must consider implications for those tax powers, in particular income tax, which are largely devolved. At the least there can be effects on the base line from which adjustments for Scotland can be developed.

The Herald: Jeremy Peat

What did the chancellor tell us?

As ever these days the new forecasts from the Office for Budget Responsibility (OBR) were critical - as will be the case in December’s Scottish Budget with the independent forecasts from the Scottish Fiscal Commission (SFC).

There was little change in the GDP growth forecast – tiny increases for next year and the year after but from then on as we were. The key point to emphasise is that UK growth is set to remain muted, 1.6% per annum maximum rather than the 2% or 2.5% we should be seeking.

But the good news from the OBR was that they expect stronger employment and sustained growth in real wages in each of the next five years. After such an extended period of decline in real wages this, if achieved, will be really positive for households across Scotland.

In advance of the Budget there were estimates that, thanks to strong tax revenues, the fiscal deficit for 2018/19 was likely to come in some billions of pounds below prior expectations – giving scope for expenditure increases. The stronger than expected performance in tax revenue is now expected to continue. However, Mr Hammond appears to have flexed up and to be prepared to live with a deficit each year of around £20 billion, close on 1% of GDP. Nevertheless the level of UK debt will fall below forecast. He claims he will meet his fiscal rules while at the same time he also claiming that ‘the era of austerity is finally coming to an end’.

Most of the public expenditure changes announced do not relate to Scotland directly, but will feed through via upward adjustments in the block grant. The Chancellor tells us that the feed through will mean an uplift for Scotland of £950 million in 2020/21 and ‘much larger’ increases in years to come.

That will be good news for Derek Mackay and team. But they must make their own judgements on how to allocate these funds – taking note perhaps of what is proposed in England but following their own priorities.
The changes in income tax allowances announced in the Budget will cause pause for thought. The increases in personal rate allowance and the higher rate threshold have been brought forward to April 2019.

How will the Scottish Government react?

Increasing differentials between Scottish income tax rates and those in the rest of the UK would have fiscal and – potentially – economic incentive implications.

Mr Hammond did stress his desire to unleash business investment and announced measures which he hopes will stimulate activity, and which will apply in Scotland. There is an increase in the annual business investment allowance; more support for UK exporters; and more funds for the British Business Bank. Not massive but helpful.

We must now await whatever emerges in the Scottish Budget on 12th December. But, as Mr Hammond himself has made clear, a ‘no deal Brexit’ would mean that all Budget bets are off. It will be back to the drawing board to construct a much cheaper model for the next few years. Do not relax yet.

Jeremy Peat is Visiting Professor University of Strathclyde