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Scotland's Economic and Fiscal Forecasts

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Scotland's Economic and Fiscal Forecasts Scotland’s Economic and Fiscal Forecasts January 2021 fiscalcommission.scot © Crown copyright 2021 This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit: http://www.nationalarchives.gov.uk/doc/open-government- licence/version/3/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected] Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. This publication is available at www.fiscalcommission.scot Any enquiries regarding this publication should be sent to us at: Scottish Fiscal Commission, Governor’s House, Regent Road, Edinburgh EH1 3DE or [email protected] ISBN: 978-1-911637-26-4 Published by the Scottish Fiscal Commission, January 2021 Laying Number: SFC/2021/1 Foreword The Scottish Fiscal Commission is the independent fiscal institution for Scotland. Our statutory duty is to provide independent and official forecasts of Scottish GDP, devolved tax revenues and devolved social security spending to inform the Scottish Budget. This report is our fourth set of Scottish Budget forecasts. These forecasts are our first since the COVID-19 pandemic began in Scotland and they cover the years 2021-22 to 2025-26. They demonstrate the profound effects COVID-19 has had on the economy and the Scottish Budget. There is huge uncertainty about how the pandemic will develop, and in turn what future associated public health restrictions and fiscal support measures might be put in place. This in turn means our forecasts are subject to greater uncertainty than in a typical year. Throughout this report we discuss the assumptions and judgements we have made, and the associated risks. Our forecasts represent the collective view of the four Commissioners of the Scottish Fiscal Commission who take full responsibility for the judgements that underpin them. While the staff of the Scottish Fiscal Commission have as always greatly supported us in producing these forecasts, we take this opportunity to acknowledge the exceptional level of dedication and hard work they have shown in doing so while working remotely. Our forecasts rely on data from a range of providers and we are grateful for their support. We would also like to thank officials from the Scottish Government, Revenue Scotland, Social Security Scotland, DWP, HM Treasury, HMRC and the OBR for their constructive challenge of our judgments and for ensuring that we considered all the available evidence. Dame Susan Rice DBE Professor Francis Breedon Professor Alasdair Smith Professor David Ulph 28 January 2021 1 Fiscal Overview COVID-19 funding increased successively over the course of 2020-21, from £3.5 billion in April to the latest estimate of £8.6 billion. The 2021-22 Scottish Budget is set based on £1.8 billion COVID-19 funding. Treasury confirmed £1.3 billion and £500 million is assumed by the Scottish Government Income tax reconciliations adjust for differences between outturn and forecasts in previous years. We are expecting two positive reconciliations, related to tax collected in 2019-20 and 2020-21. Estimates of future reconciliations are highly uncertain and will be finalised when outturn data are released. Economy We expect the latest lockdown to reduce economic activity by 5 per cent in the first quarter of 2021. We forecast that GDP grows by 2 per cent over 2021, 7 per cent in 2022, and recovers to its pre COVID level in 2024. By 2025, GDP is 4 per cent lower than we forecast in February. Differences between our and OBR’s forecasts trigger a Scotland-specific economic shock in Q3 2021. This is mainly because we could account for the early-2021 restrictions. This shock increases annual limits on resource borrowing by £300 million, and removes annual limits on the withdrawal of funds from the Scotland Reserve. 2 Tax Our income tax forecast for 2021-22 has fallen by £634 million compared to our previous forecast, primarily because of falls in employment. The forecast now uses the HMRC RTI data for 2019-20 and 2020-21, giving us more timely information on the effects of the furlough schemes. The lockdown’s effect on the housing market has been primarily via transactions which bounced back in 2021-22. We expect the effect on average house prices to be more muted as incomes continue to be supported by the various job support schemes. Social Security COVID-19 has increased the number of people eligible for social security support as unemployment has increased and incomes have reduced. There are also other COVID-19 related factors that reduce spending such as the lower inflation forecast and lower pension-age population. In 2021-22, most social security spending, over £3 billion, will be based on UK Government policy and administered by DWP. Personal Independence Payment is the most significant payment with an expected spend of £1.7 billion. 3 Scotland’s Economic and Fiscal Forecasts January 2021 Fiscal Overview 2020-21 2021-22 £ million Non-COVID-19 related Resource funding funding increases by £2.6 44,579 40,431 (latest position) billion and COVID-19 funding decreases by £6.8 billion Economy 2020 2021 2022 2025 % growth GDP growth, shocked in -10.7 1.8 7.5 1.7 2020 by restrictions on GDP economic activity, rebounds in 2022 before stabilising. Trend productivity is subdued Trend Productivity 0.0 0.2 0.4 1.6 in the short term and then gradually rises. Average nominal earnings 2.5 2.6 2.4 3.3 growth is supported by the Nominal Earnings furlough scheme in 2020 and then increases gradually. Growth revised down in 2020 -2.4 -1.5 1.2 0.2 and 2021 to account for the Employment effects of COVID-19 on the labour market. Tax 2020-21 2021-22 2022-23 2025-26 £ million Income tax revenues grow Income Tax 11,850 12,263 12,907 14,718 slowly because of increased unemployment. Forecast includes policy 1,848 2,680 2,930 3,216 announcements for the retail, Non-Domestic Rates hospitality & leisure sectors and poundage set at 49p. Housing market seeing 517 586 629 740 recovery following lockdown LBTT during 2020. Limited effect on average prices. Downward revision in line Scottish Landfill Tax 95 88 86 61 with weaker outlook for the economy. Policy announcements Poundage set at 49p in 2021-22 with extended relief -251 -67 -71 Non Domestic Rates for the retail hospitality & leisure sectors. Social Security 2020-21 2021-22 2022-23 2025-26 £ million Spending will increase over the next five years as more All devolved social people receive social security 3,495 3,614 3,810 4,249 support each year and most security assistance payment amounts increase with inflation. 4 Contents Foreword ................................................................................................................................................ 1 Summary ................................................................................................................................................ 6 Chapter 1 Introduction .......................................................................................................................... 17 Chapter 2 Fiscal overview .................................................................................................................... 24 Chapter 3 Economy .............................................................................................................................. 40 Chapter 4 Tax ....................................................................................................................................... 55 Chapter 5 Social security ...................................................................................................................... 79 Annex A Policy costings ..................................................................................................................... 102 Annex B Policy recostings .................................................................................................................. 110 Annex C Materiality ............................................................................................................................ 113 Annex D Monte Carlo simulations of income tax reconciliations ......................................................... 116 Additional Information ......................................................................................................................... 119 5 Summary Introduction 1 This report contains our official economic, tax and social security forecasts along with policy costings for the changes in tax and social security proposed in the Scottish Budget. Our forecasts are just one component of the Budget; we also discuss how the Scottish Budget is set and provide our assessment of the reasonableness of the Government’s borrowing plans. 2 The 2021-22 Scottish Budget is being set at a time of great uncertainty about how the COVID-19 pandemic will evolve. Despite the development and roll-out of vaccines we expect both the Scottish and UK Governments to keep public health measures in place for much of 2021. 3 These public health measures have economic costs. Both Governments have introduced policies to reduce the economic effects of the public health measures on individuals, households and businesses. The most significant fiscal support from the UK Government has been the furlough schemes, allowing businesses to continue to pay employees even if they are unable to work because of public health restrictions. As part
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