Unfunded commitments in 'Scotland's Future'
Published 18 December 2013
© Crown copyright 2013
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1. Summary
‘Scotland’s Future’ includes an initial set of spending commitments, which the current Scottish government proposes to fund primarily through immediate cuts to defence expenditure. Taking these funding proposals at face value, these commitments are not considered in this note.
‘Scotland’s Future’ also makes a range of long-term spending commitments, for example on the State Pension in an independent Scotland. As these proposals would largely hit an independent Scotland’s fiscal position over the long term horizon (after 10 years and beyond), they are not considered in this note.
Instead, this note focuses on the additional policy proposals the current Scottish government sets out in ‘Scotland’s Future’ as early priorities for the government of an independent Scotland, but does not provide costs nor explain how they would be funded.
Based on the information provided in ‘Scotland’s Future’, costs have been estimated for three of these proposals:
- provision of 1,140 hours per year of childcare to all children from one year old to school age (phased in during the first two Parliaments of an independent Scotland)
- cut Air Passenger Duty (APD) by 50%
- cut corporation tax by up to three percentage points
To fund just these three policies, the future government of an independent Scotland would need to find in the region of £1 billion (in 2011 to 2012 prices) of additional annual tax revenue or spending cuts by the end of the first Parliament.
By the end of the second Parliament, which would start in the early 2020s, the annual cost of these policies (again in 2011 to 2012 prices) would increase to around £1.6 billion. To put this into context, this is similar to the amount currently spent annually on Scotland’s entire police and fire services, or total annual expenditure by Scotland’s Further and Higher Education Funding Council.
This is a cautious estimate of the early priority commitments made within ‘Scotland’s Future’ as there are additional commitments that are not immediately possible to cost. In particular, it is not clear exactly what rates or mechanism the Scottish government proposes for “an increase in the National Insurance Employment Allowance” or to “return the Royal Mail in Scotland to public ownership”. These costs would be on top of this £1.6 billion funding gap.
A summary of the costings is set out in the table below, and an explanation of each follows.
| First Parliament policy costed | Annual cost (+ve) or saving (-ve) in £ million (2011-2012 prices) |
|---|---|
| Provide 1,140 hours of childcare to all 3 and 4 year-olds, and to vulnerable 2 year-olds | 570 |
| Cut APD by 50% | 130 |
| Cut corporation tax by 3 percentage points | 300 |
| Increase the National Insurance Employment Allowance | Insufficient detail to cost this – it would depend on the size of the increase |
| Return Royal Mail in Scotland to public ownership | Insufficient detail to cost this – it would depend on how much of the company the Scottish government would want to purchase, the value at the time, and how it would translate this investment in a UK company into a separate Scottish postal service |
| TOTAL | 1,000 |
| Second parliament policy costed | Annual cost (+ve) or saving (-ve) in £ million (2011-2012 prices) |
|---|---|
| Ensure that all children from one to school age will be entitled to 1,140 hours of childcare per year | 1,210 |
| Cost of this policy in addition to first Parliament childcare commitment | 640 |
| CULMULATIVE TOTAL | 1,640 (1,000 + 640) |
2. Costing detail
2.1 Childcare
The policy commitment is:
- end of first Parliament – provide 1,140 hours of childcare to all 3 and 4 year-olds, and to vulnerable 2 year-olds
- end of second Parliament – ensure that all children from one to school age will be entitled to 1,140 hours of childcare per year
The annual cost of this policy is estimated by the Scottish Parliament Information Centre to be £570 million by the end of first Parliament and £1,210 million by the end of the second Parliament (both in 2011 to 2012 prices).
2.2 Air Passenger Duty (APD)
The commitment is to “cut Air Passenger Duty by 50%, with a view to eventually abolishing it”.
The annual cost of a 50% cut in 2016 to 2017 is estimated at £130 million in 2011 to 2012 prices, while the annual cost of abolishing APD is estimated at £275 million (also in 2011 to 2012 prices).
The latest OBR forecast (as at December 2013) for UK-wide APD revenues in 2016 to 2017 is £3.7 billion. It is assumed that the Scottish proportion will remain at 8.1%, which is the most recent (2012 to 2013) proportion published by HMRC. Scottish revenue in 2016 to 2017 is therefore estimated to be £300 million under current rates.
It is further assumed that all APD bands would be cut by 50%. This would reduce Scottish revenue from the same passengers to around £150 million in 2016-17.
However, it is estimated that the number of passengers departing from Scottish airports would be 3% higher as a result of the 50% cut to APD. This is informed by Department for Transport modelling of this scenario (prices reduced by 50% of APD in Scotland) for the HMRC Research Report 188: Modelling the Effects of Price Differentials at UK Airports.
Under this scenario, Scottish APD revenue in 2016 to 2017 is therefore estimated to be £155 million.
The cost to the Scottish government of abolishing APD in 2016 to 2017 is estimated at £300 million while the cost of a 50% cut is estimated at £145 million (£300 million minus £155 million). These annual costs are £275 million and £130 million respectively in 2011 to 2012 prices.
2.3 Corporation tax
The commitment is “a pre-announced reduction in corporation tax of up to three percentage points”.
The annual cost of a three percentage point cut in 2016 to 2017 is estimated at £300 million in 2011 to 2012 prices.
The HMRC ready reckoner published alongside Autumn Statement 2013 estimates the UK-wide impact of certain changes in tax rates and thresholds. A one percentage point increase in corporation tax in 2016 to 2017 is estimated to generate £1,445 million. This is a costing of the direct effects of the policy, which is consistent with the approach – certified by the OBR – taken to cost the UK government’s ongoing cuts to corporation tax. It is assumed that the impact of a one percentage point cut would be of the same magnitude.
The Scottish share of this impact is estimated at 7.7%, using the most recent (2012 to 2013) proportion published by HMRC. The Scottish share is therefore estimated at £110 million.
Hence the estimated cost for a three percentage point cut in Scotland in 2016 to 2017 is £330 million. This is equivalent to £300 million in 2011 to 2012 prices.