TIGHT DEAL POSES DIFFICULT QUESTION FOR SCOTTISH GOVERNMENT

HEADLINES

• Extra funding over the next 3 years of £1.2/2.3/3.7bn on top of baseline figure for 2007/08 of £26.1bn. Thus in 2010/11 this will be an extra £3.7bn available (or £1.5bn in real terms)
• Equivalent to an annual 1.8% real increase, in comparison to the overall Westminster increase of 2.1%
• Less than half the annual increase seen since 2000
• If Scotland were to match (£ for £) the increases seen in England for Education and Health there would be very little left for other services. If Scotland were to match the % increase seen in these two areas there would be even less available

PRE BUDGET REPORT

Main Points:

• As expected, UK growth for 2008 revised down from 2.5-3% to 2-2.5%.
• Due to slower growth and thus lower revenues than expected, public spending as a share of GDP will rise slightly next financial year rather than the small fall predicted in the Budget Report
• Main tax and allowance changes are:

o the inheritance tax threshold for couples will rise to £600,000 from today and £700,000 by 2010.
o The main rate of corporation tax will be cut by 2p in the pound to 28% by next year.
o the capital gains tax system to be reformed, ensuring those working in private equity pay a "fairer share". There will be a single rate of 18%.
o The amount of child maintenance a family can receive without it affecting their benefits will double from £20 a week to £40 a week by 2010.
o Pension credits will rise £5 a week from next April for single people and £7.65 for couples

• North Sea Oil Revenues are revised down by £0.6bn in 2007/08 and £0.3bn in 2008/09. This is due to lower than expected output as well as the continued decline of the dollar against sterling. Beyond 2008/09, North Sea Oil revenues are expected to remain at 0.6% of UK GDP (i.e. £9bn in 2007/08).

COMPREHENSIVE SPENDING REVIEW

Main Points:

• Overall UK settlement equivalent to 1.7% annual real increase on Resource (current) Budget and 4.6% increase on Capital Budget. The best settlements were for Health (4% per annum) and Education (2.8% per annum), while a number of Departments received either practically no real terms increase (Defence) or a real terms cut (Work and Pensions, HMT etc)
• Scottish settlement equivalent to overall 1.8% annual real increase in Budget (Department Expenditure Limit)
• Scottish baseline revised down from £26.6bn to £26.1bn, due to updated projections for 2007-08.
• Extra funding over the next 3 years of £1.2/2.3/3.7bn on top of baseline figure for 2007/08 of £26.1bn. Thus in 2010/11 this will be an extra £3.7bn available (or £1.5bn in real terms). In the next 3 years this amounts to a cumulative increase of £7.2bn.
• This figure is based on the normal operation of the Barnett Formula. That is, it allocates the same increase, £ for £ per head of population, to Scotland as has been received in comparable English public services
• As the two areas to receive the best settlements, education and health, have fully comparable Scottish departments then the Scottish increase, in percentage terms, is higher than would have been the case had spending increases been spread evenly across all Westminster departments (if the latter had happened the annual real increase would be lower for Scotland – perhaps as low as 1.25% for Scotland)

Implications for Scottish spending:

• If the Scottish government were to match the Westminster settlement in terms of £ for £ increases per head of population for education and health, this would require £0.85bn of the extra £1.2bn in year one (£1.85bn of £2.3bn in 2009/10 and £3bn of £3.7bn in 2010/11), leaving very little over for other spending areas like Crime, Transport and the Environment
• If the Scottish government were to match the Westminster settlement for education & health in terms of  the same % increases, this would require £1bn of the extra £1.2bn in year one, leaving even less for other spending areas like Crime, Transport and the Environment.
• In order to match English increases in education and health, and at the same time find extra funding for other Scottish priorities, the Scottish government might need to apply real terms cuts to some spending areas (as is the case in Westminster). Alternatively, maintaining outputs could be achieved through continuation of significant efficiency savings.
• The tightness of the Scottish settlement will be heavily dependent on the public sector wage deals that are struck. These deals tend to settle above inflation and staff costs account for almost 50% of the annual Scottish budget

Further information:
Jo Armstrong:  07740440766
Richard Harris: 07969697224

First published: 10 October 2007

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