In shadow of Brexit, this could only have been a fiscal update

The fact that Phillip Hammond downgraded the old Spring Budget to a simple Spring Statement seemed particularly prescient yesterday. Post the rejection of Theresa May’s Brexit deal by another whopping majority, what was the point of setting out new finance plans? Very little, so it was, yet again, the Office for Budget Responsibility’s (OBR) economic and fiscal forecasts that dominated the event.

What the OBR said confirmed what had been expected. GDP growth in 2019 revised downbuttaxrevenuesrevised up, thereby improving the fiscal balance position. How to square this apparent anomaly? It seems that what economicgrowthexistsisskewed towards the wealthy, who in turn pay more tax than on average. While this is useful to the government in terms of the public finances, it may hold a sting in the tail politically if “hard working” households fail to see much in the way of improving living standards.

There is also a particular Scottish drawback on this front. As Scotland has relativelyfewer“high-end”incometax payers then its tax take does not improve as quickly as in the rest of the UK, which leads to a shortfall in funds available under the new, post Scotland Act 2016, fiscal arrangements. This has already been a problem, with much of the extra funding resulting from Scottish Government inspired tax changes being offset by weaker income growth.

In a separate report, the OBR analyse this issue in relation to 2016-17 and acknowledge the role played by the lack of growth of income at the top end. The OBR analysis suggests that the problem may related to the disproportionate impact of the fortunes of the North Sea on high end Scottish taxpayers and the impact of highend taxpayers moving their main residence from Scotland to elsewhere in the UK, in anticipation of future tax increases once powers over rate setting had been devolved. Looking past 2016-17, any North Sea impact may have abated, although concerns over whether any “higher Scottish taxes” migratory effect is a one-off or potentially an on-going one will be a worry for the Scottish Government.

Elsewhere, the OBR have not had time to incorporate the almost 10 per cent rise in North Sea oil output seen in 2018, although they do comment that the impact of this on tax receipts would be “more muted than might be expected”. There has been a significant downwards revision in the oil price, reflecting market shifts, which means that, overall, oil and gas revenues have been revised down by around £0.5 billion a year, to a level between £1 and £2bn over the forecast period. Still a pale shadow of their former glory. l John Mclaren is a political economist with Scottish Trends