Model Scottish Budget:

June 2018
Tax and Revenue

INTRODUCTION
The Model Scottish Government has a number of income sources—a block grant provided
by the Model UK Government, a portion of the VAT revenues raised in Scotland, revenue
from devolved taxes, the ability to borrow up to £1.75 billion for use in balancing the budget,
and the ability to borrow up to £3 billion for capital expenditure.

The block grant is determined by the Model UK Government in its budget.

The assignment of VAT is agreed by the Model Scottish and UK Governments. The current
agreed rates are the first 10 percentage points of standard-rate revenues, and the first 2.5
percentage points of reduced-rate revenues, of VAT raised in Scotland.

At present, the devolved taxes are the Land and Buildings Transaction Tax (LBTT), Scottish
Landfill Tax (SLfT), Air Passenger Duty (APD), and the aggregates levy. Additionally, the
power to set the rates and bands for non-savings, non-dividend income tax is devolved. Of
these taxes, only LBTT, SLfT, and Scottish income tax are implemented.

The Model Scottish Government also controls funding for local authorities—which receive
income from council tax and non-domestic rates—and Quality Meat Scotland, which is
funded by the red meat levy. No income from these sources forms part of the Model Scottish
Government’s budget.

REVENUE SUMMARY
The total forecast revenues for May 2018 are £42.6 billion, broken down as follows.

Income source Revenue (£ million)

Block grant 26,860.0
VAT assignments 4,752.3
Scottish income tax 10,384.4
Land and Buildings Transaction Tax 442.0
Scottish Landfill Tax 157.8
Air Passenger Duty 1 0
Aggregates levy1 0
Total 42,596.5

The following sections provide analysis for each income source.

1
Not yet implemented.
BLOCK GRANT
The block grant was set in the Model UK Government budget to £26,860 million. 2

VAT ASSIGNMENTS
The total VAT assignment to Scotland is forecast to be £4,752.3 million.

Meta: HMRC does not (currently) provide VAT revenue breakdowns by region.

This forecast was made by taking Scottish GDP (of £159.4 billion) 3 as a proportion of the
total UK GDP (of £2,102 billion) 4 and assuming that the proportion of VAT revenue raised
in Scotland was the same.

HM Revenue and Customs reported total VAT receipts of £125,337 million.5 It is estimated
that reduced-rate VAT receipts were £2,145 million,6 giving a standard rate receipts total
of £123,192 million. Applying the proportion estimated above, VAT raised in Scotland can
be estimated at £9,342 million at the standard rate and £162.7 million at the reduced rate.

The standard rate of VAT is 20%, and the reduced rate is 5%. With the assignment of the
first 10 percentage points of the standard rate, and the first 2.5 points of the reduced rate,
the VAT assigned to Scotland is half of the VAT raised in Scotland—£4,671 million for the
standard rate, and £81.3 million for the reduced rate, giving £4,752.3 million total.

2
Meta: The Model UK Government budget is currently exactly the same, in terms of numbers, as the
real UK Government budget. This figure is the Fiscal Resource Budget Limit from the 2018/19 Draft
Scottish Budget published by the real-world Scottish Government.
3
According to the Office for National Statistics (August 2017):
http://www.gov.scot/Topics/Statistics/Browse/Economy/QNA2017Q1
4
According to the Autumn Budget 2017 (see footnote 2), Table 1.6. Total Managed Expenditure is listed
as £809.3 billion for 2018/19, with that being 38.5% of GDP.
5
In its March 2018 VAT bulletin.
6
The Institute for Fiscal Studies estimated (in Briefing Note BN09, 2016) that the cost of reduced-rating
goods was £5,925 million for 2015/16. HMRC (in its March 2018 VAT bulletin) reported that total VAT
receipts increased by 8.6% between 2015/16 and 2018/19, and so it can be estimated that the cost of
reduced-rating would have increased by the same amount, giving £6,435 million as a cost. At a reduced
rate of 5% from 20%, the loss can be taken as three times the receipts, and so reduced -rate receipts can
be taken as £2,145 million.
SCOTTISH INCOME TAX
The Model Scottish Government proposes to have eight bands and rates for Scottish income
tax (including the Scottish personal allowance of £29,300, which is higher than the UK-wide
personal allowance of £11,850). 7

Scottish income tax band Rate Taxpayers8

£0 to £29,300 0% 1,807,821
£29,300 to £35,000 20% 189,702
£35,000 to £50,000 30% 189,042
£50,000 to £75,000 40% 142,697
£75,000 to £100,000 50% 96,333
£100,000 to £150,000 60% 76,829
£150,000 to £250,000 65% 11,170
£250,000+ 70% 7,985

This arrangement is forecast to bring £10,384.4 million in revenue. The following table sets
out the forecast revenue by tax band.

Scottish income tax band Rate Revenue (£ million)9

Scottish lower rate 20% 107.8
Scottish basic rate 30% 640.8
Scottish additional rate 40% 1,518.2
Scottish higher additional rate 50% 2,108.7
Scottish reduced intermediate rate 60% 3,314.4
Scottish intermediate rate 65% 1,012.5
Scottish upper rate 70% 1,682.0

7
The UK-wide personal allowance was set at £11,850 for tax year 2018/19 by the Autumn Budget 2017
(see footnote 2). The Scottish Parliament can set zero-rate bands additional to the personal allowance,
but cannot reduce the Scottish personal allowance below the UK-wide allowance.
8
Based on the number of income taxpayers by country and band reported by HMRC (in Table 2.2 of its
Survey of Personal Incomes 1999/00 to 2017/18) and on Scottish Fiscal Commission modelling (in
Table 4 of its Updated Income Tax Forecasts for February 2018). The number of taxpayers by band was
fed into a regression tool, which produced a number of curves. A particular regression which appeared
to fit best was selected, which was N(x) = 2619e−2.117/(x−10.94) . The lower bound for each band was fed into
this function, with the difference between that and the previous result used as the relative proportion of
the total number of Scottish taxpayers (forecast at 2.525 million by the Scottish Fiscal Commission) to
enforce a fixed upper bound. For the open-ended tax bracket, a calculation was made as if a further
band with a lower bound of £500,000 was present. Compared with the real -world predictions, these give
more taxpayers in the lowest-rate and highest-rate bands, with fewer in intermediate-rate bands. This
was adjusted by redistributing 20% of calculated Scottish personal allowance -rate taxpayers among the
bands with thresholds below £150,000 in decreasing proportion —7/25 to the 20% rate, 6/25 to 30%,
5/25 to 40%, 4/25 to 50%, and 3/25 to 60%. Additionally, 30% of taxpayers in bands above £150,000
were redistributed among bands below £150,000 (except the personal allowance band) to bring numbers
more in line with real-world numbers—7/25 to the 60% band, 6/25 to 50%, 5/25 to 40%, and so on.
9
Income tax revenue was estimated by taking the number of taxpayers for each band and assuming that
income increased linearly by taxpayer from the lower to the upper bound of the band and adding this to
the tax paid at that rate by higher-rate taxpayers. Tax paid by higher-rate taxpayers was taken as the
difference between bounds, multiplied by the rate and the number of taxpayers paying at a higher rate.
Considering that the real-world tax arrangement brings in around £12.1 billion and that the majority of
taxpayers actually pay no tax, this seems accurate enough for these purposes.
LAND AND BUILDINGS TRANSACTION TAX
The Land and Buildings Transaction Tax (LBTT) is a tax on purchases of land, buildings, and
commercial leases. There are three rate categories—residential purchase, non-residential
purchase, and non-residential rent. LBTT revenues are forecast at £442.0 million.

The Model Scottish Government proposes to use the following arrangement of tax bands.

Residential rates and bands Rate Transactions10 Revenue (£ million)11

£0 to £145,000 0% 52,053 0
£145,000 to £250,000 2% 33,018 34.7
£250,000 to £325,000 5% 12,898 51.3
£325,000 to £500,000 10% 4,141 60.5
£500,000 to £750,000 12% 1,350 51.8
£750,000+ 15% 581 63.7

Non-residential rates and bands 12 Rate Transactions Revenue (£ million)

£0 to £150,000 0.0% 3,380 0.0
£150,000 to £350,000 3.0% 1,500 4.0
£350,000+ 4.5% 2,160 150.4

Commercial rent rates and bands 12 Rate Transactions13 Revenue (£ million)

£0 to £150,000 0% 0 0.0
£150,000+ 2% 5,520 25.6

10
The residential transactions number is based on data from the Registers of Scotland (in RoS’s Calendar
Year Market Review 2017, from March 2018). A regression tool was fed the number of transactions by
band reported by RoS (in Table 4 of its 2017 Review) to produce a function taking the upper bound as a
parameter and producing the number of sales below that threshold as its output. The function produced
was T RES (x) = 1/(8076.840x −2.742 + 9.547×10−3). The outputs of this function were used as the relative
proportion of the total 104,042 residential sales reported by RoS to fix an upper limit. This l argely lines
up with the 105,630 LBTT returns Revenue Scotland received January through December 2017 (per the
LBTT Monthly Statistics up to March 2018), but provides a finer price breakdown. Additionally, this
method forecasts more transactions in the higher bands (>£500,000). To adjust, 40% of transactions in
those bands were redistributed to the £325,000–£500,000 band.
11
Residential LBTT revenue was estimated similarly to Scottish income tax revenue. The number of
transactions per band was taken and it was assumed that the value of each transaction increased linearly
with each transaction from the lower to the upper bound of the band. The result from this was added to
the tax paid on higher-value transactions, taken as the difference between bounds multiplied by the rate
and by the number of transactions of a higher value, giving revenues of £261.9 million. Compared with
the real-world revenue of £253.8 million, and considering that Model LBTT includes an additional band
between £325,000 and £750,000, this revenue increase of around 3.2% seems reasonable.
12
These bands are identical to the real-world bands, and so data from Revenue Scotland (in Tables 4
and 5 of its LBTT Monthly Statistics up to March 2018) is used here rather than a model. Producing a
model for this income appears less straightforward—assuming a linear distribution (as with Scottish
income tax and residential LBTT) produces results wildly different from real -world figures, likely as a
result of real-world transactions being heavily skewed towards the higher-value end of the band. It may
be the case that some form of 1/(x−n), ln(x), e x, or Gaussian assumed distribution would better suit. The
real-world numbers used here are not an exact fit as some revenue comes from the Additional Dwelling
Supplement (ADS), which is not implemented in Model Scotland. These figures also differ from others in
this document in that the revenue from a single transaction charged at multiple rates is not spread
across the revenue figure for those multiple rates, and is instead placed wholly in the highest-rate figure.
13
Non-residential lease transactions are not broken down by band in Revenue Scotland data and so the
distribution of transactions between tax bands cannot be known.
SCOTTISH LANDFILL TAX
Scottish Landfill Tax (SLfT) is a tax on disposing waste at landfill. SLfT has a standard rate,
for highly-polluting material, and a lower rate, for so-called “inert” material. Additionally,
some material is exempt from SLfT, and so does not contribute to revenue.

The Model Scottish Government proposes a standard-rate charge of £93 per tonne, bringing
in revenues of £162.6 million, and a lower-rate charge of £5.50 per tonne, giving revenues
of £4.6 million. With forecast payments into the Scottish Landfill Communities Fund of £9.4
million, total SLfT revenues are forecast at £157.8 million.14

14
Both standard- and lower-rate revenues were calculated by taking the proposed per-tonne rates and
multiplying by the tonnage reported for that rate by Revenue Scotland (in its quarterly Scottish Landfill
Tax Statistics up to October–December 2017), and then by subtracting payments into the Scottish
Landfill Communities Fund (SLCF). SLCF payments were taken as those reported by Revenue Scotland
multiplied by the ratio of the Model SLfT standard rate to the real-world standard rate. The real-world
standard rate was taken as £86.10 which, with SLCF payments of £8.7 million and a Model SLfT
standard rate of £93.00, gives SLCF payments of £9.4 million. This is not a wholly accurate calculation
as there is a limit on the SLCF payment tax credit, but this is not thought to be of great impact.
 Expenditure and Reserves

OVERVIEW
This part sets out the Model Scottish Government’s plans for spending.

The first section provides a summary of expenditure broken down by subject area.

The second section explains the legal position, and the impact on spending, of the decision
by the Model Scottish Government to not prepare a Budget Bill for this term.

The third section provides an update on the status of the National Wealth Fund.

The fourth section details the Government’s spending obligations under the National Health
Service (Salaries) (Scotland) Act 2018, 15 which was passed at the start of this 2nd Parliament.

The fifth section discusses the cost of the Welfare Devolution Referendum, including costs
which were met in the previous term and new costs.

The sixth section provides spending estimates for other policies.

EXPENDITURE SUMMARY
The Model Scottish Government plans to spend money in the following areas.

Area of expenditure Spend (£ million)

Education and Skills 3,559.0
Finance and the Economy 327.0
Health, Sport, and Social Security 15,893.6
Environment, Climate Change, and Land Reform 356.3
External Affairs, Tourism, and the Constitution 232.1
Culture, the Gàidhealtachd, and Rural Scotland 2,945.6
Communities, Justice, and Equalities 11,446.5
National Records of Scotland 29.8
Crown Office and Procurator Fiscal Service 113.0
Scottish Courts and Tribunals Service 108.6
Office of the Scottish Charity Regulator 3.1
Scottish Housing Regulator 4.0
Revenue Scotland 5.6
Pensions for teachers and national health staff 4,568.5
Operational and administrative costs 192.8
Total 39,785.5

The shortfall, caused by a limit on expenditure resulting from not passing a Budget Bill, is
estimated to be £934.7 million. To mitigate the effect of this shortfall, the Government will
make use of the full contingency resource authorisation of £197.8 million.

15
http://legislation.mhoc.uk/id/asp/2018/1
THE BUDGET BILL
The Model Scottish Government has elected not to submit a Budget Bill for this term. Such
a Bill is not strictly necessary—the emergency arrangements put in place by section 2 of the
Public Finance and Accountability (Scotland) Act 2000 16 mean that the Government can use
the same resources as were authorised the previous year.

Meta: Due to the vote to base modelled budgets on their real-world counterparts, this means
that the figures from the real-world Budget Act 201717 are in use.

Under these emergency arrangements, the Model Scottish Government has authorisation to
spend £39.6 billion, and no more than £3.30 billion in any one month. The spending must
also be allocated as it was in the previous year.

To cover overspend, the contingency authorised by section 3 of the PFA Act 2000 will be
used where possible. This section authorises the use of an additional 0.5% over the total
authorisation where it is necessary and where it is impractical for the reason of urgency to
pass a Budget Bill to authorise the use. This 0.5% equates to £197.8 million.

The Scottish Government considers that it is impractical to pass a Budget Bill by reason of
the impending elections to the Scottish Parliament.

THE NATIONAL WEALTH FUND

The Model Scottish Government of the previous term introduced a National Wealth Fund,
and deposited £15 billion into this fund. In response to the Lakigígar volcanic eruptions, the
Government spent £1 billion of the National Wealth Fund. However, revenues are predicted
to be in the region of £42.6 billion in this financial year, and so the £39.6 billion spend (with
money for the £197.8 million contingency coming from a loan) will leave a £3 billion surplus
above the spending authorisation.

This surplus will be placed in the National Wealth Fund, bringing its balance to £17 billion.

16
http://www.legislation.gov.uk/asp/2000/1/part/1
17
http://www.legislation.gov.uk/asp/2017/1/contents
NATIONAL HEALTH SERVICE (SALARIES) (SCOTLAND) ACT 2018
The National Health Service (Salaries) (Scotland) Act 2018 was the first Act passed in this
2nd Parliament, and requires the Model Scottish Government to increase the resources paid
to NHS employers to enable an increase in salaries by the greater of 2% or RPI inflation.

The percentage change in RPI between March 2017 and April 2018 was 3.4%, 18 and so this
must be the increase in resources paid to NHS employers (as set out below).

NHS employer 19 Staff costs, 17/18 Staff costs, 18/19

Health Boards
NHS Ayrshire and Arran £399.9 million £413.5 million
NHS Borders £121.6 million £125.7 million
NHS Dumfries and Galloway £168.3 million £174.0 million
NHS Fife £324.4 million £335.5 million
NHS Forth Valley £250.1 million £258.6 million
NHS Grampian £587.9 million £607.9 million
NHS Greater Glasgow and Clyde £1,678.7 million £1,735.8 million
NHS Highland £375.2 million £388.0 million
NHS Lanarkshire £506.6 million £523.8 million
NHS Lothian £950.9 million £983.2 million
NHS Orkney £26.6 million £27.5 million
NHS Shetland £29.5 million £30.5 million
NHS Tayside £531.4 million £549.5 million
NHS Western Isles £39.3 million £40.6 million
Special Health Boards
NHS Education for Scotland £68.6 million £71.0 million
NHS Health Scotland £12.0 million £12.4 million
Golden Jubilee Foundation £80.3 million £82.9 million
NHS24 £44.6 million £46.1 million
Scottish Ambulance Service £180.2 million £186.3 million
State Hospitals Board for Scotland £29.2 million £30.2 million
Others
The Common Services Agency £147.6 million £152.6 million
Healthcare Improvement Scotland £19.5 million £20.1 million

In total, this increase of 3.4% equates to £223.3 million, giving a total staff cost of around
£6.8 billion. The Model Scottish Government cannot meet this cost using its contingency,
and so will instead distribute £93.9 million among the NHS employers.

18
According to the Office for National Statistics (Consumer price inflation tables, 23 May 2018, Table
37): https://www.ons.gov.uk/economy/inflationandpriceindices/datasets/consumerpriceinflation
19
Staff costs were taken from Note 2 of the Other Notes to the Annual Report and Accounts for
2016/17 for each Board. These were increased by 1% to account for pay increases up to 2017/18.
WELFARE DEVOLUTION REFERENDUM
The Model Scottish Government of the 1st Parliament called a referendum on the devolution
of welfare powers to the Model Scottish Parliament. 20 The poll at this referendum was held
on the 31st of May 2018, and so the cost must be met by this Government.

The full cost cannot be known until the results—due to be announced on the 2nd or 3rd of
June—are known. However, the Government estimates a cost in the region of £14.7 million,
rising to a maximum of £18 million depending on turnout. 21 The 2017/18 Scottish budget
allocated £8 million for the referendum, and so the remaining cost of £6.7 million to £10
million will be met from the contingency under the PFA Act 2000.

OTHER POLICIES

School lunches
During the 1st Parliament, the Model Scottish Government expanded the provision of free
school lunches to pupils in Primary 1 through 4 and to any other pupils (whether in primary
or secondary education) who are part of a household with income of £6,000 or less. 22 This
is in addition to those already provided with school meals by reason of their receipt of certain
benefits or tax credits.

It is estimated that 229,756 pupils are in Primary 1 through 4,23 and that 9,184 are eligible
by reason of being in a low-income household.24 The additional cost from providing 5 meals
per week for 38 weeks for 238,940 students is forecast at £104.9 million.25

The additional cost of expanding free school lunch provision would normally be met by the
Government through increases to a local authority’s block grant. However, the Government
is unable to meet the full cost as a result of the limits of its contingency funding. Instead, up
to £93.9 million will be met by the Model Scottish Government, with the remainder met by
local authorities from their own budgets.

20
In the Welfare Devolution Referendum (Scotland) Act 2017:
http://legislation.mhoc.uk/id/asp/2017/13
21
According to the BBC (http://www.bbc.co.uk/news/uk-scotland-scotland-politics-34157264), the
Scottish Independence Referendum in 2014 was forecast in the region of £13.7 million. CPI inflation
since 2015 of 7.51% gives an initial figure of around £14.7 million. The higher final cost of £15.8
million was reportedly as a result of higher turnout, and so accounting for inflation, this would be the
equivalent of £17 million today for 84.5% turnout. The higher end of £18 milli on predicted here would
be the cost in the event of turnout above 90%.
22
In the Education (School Lunches) (Scotland) Regulations 2017:
http://legislation.mhoc.uk/id/ssi/2017/2
23
By the Scottish Government in Table 2.3 of its Pupil Census 2017.
24
It was considered that the method of approximating taxpayers described in footnote 8 was not
accurate enough at low thresholds to provide a useful forecast. Instead, it was assumed that 2% of the
688,959 students in primary and secondary education (as reported by the Scottish Government in
Table 1.1 of its Pupils Census 2017) had incomes equivalent to ~£115/wk (that is, £6,000 spread over
the 52 weeks of the year), based on a graph provided in a BBC article: http://www.bbc.co.uk/news/uk-
scotland-37940847. Approximately a third of these students were then removed to account for the
number who would already be included by virtue of being in Primary 1 to 4. No account was made of
pupils eligible (e.g. by reason of receiving benefits), and so this figure is likely to be greater than it would
be in reality. This gave an estimate of 9,184 pupils in such families, which does not appear unreasonable
when it is considered the estimate for children in households earning less than £291/wk is 100,000.
25
A Scottish Parliament consultation document stated that, in 2004, the prices for school meals ranged
between £1.15/day to £1.93/day. Adjusting for CPI inflation (×1.50) and averaging these two prices, the
cost of a school lunch is 2018 is taken as £2.31/day.
Early learning and childcare
The Model Scottish Government this term expanded childcare provision to 1820 hours per
year for children between the ages of 2 and 4.26 The cost to Scotland’s local authorities in
providing this service is forecast at £596.5 million each year. 27

The Model Scottish Government would normally increase the block grant to local authorities
appropriately to cover this additional cost, but is unable to do so using only the contingency
under the PFA Act 2000. As such, local authorities will be required to meet this shortfall
from their own budgets and reserves.

26
In the Provision of Early Learning and Childcare (Specified Children and Mandatory Amount)
(Scotland) Order 2018: http://legislation.mhoc.uk/id/ssi/2018/3
27
The real-world Scottish Government reported in its Financial Review of early learning and childcare in
Scotland: the current landscape (2016) that 97,262 children were registered for early learning and
childcare funding, comprising 5,544 aged 2 or under and 91,718 aged 3–5. In its update report, the
Expansion of Early Learning and Childcare: Evaluation Report 2017, the Scottish Government reported
that this total fell by 1.4% to 95,893, but that the number of registered 2 year olds had increased from
7% of the 2 year old population to 10%, and that the proportion of registered 3 a nd 4 year olds had
increased to 99% of the population. As precise numbers did not appear available, the number of children
was predicted by taking the 2016 report’s figures, multiplying them by the percentage increase in uptake
(e.g. 7% to 10% being a ~43% increase), and then using the resultant figures as proportions of the
reported total of 95,893. This gave the number of children aged 2 or below as 7,480 and the number of
children aged 3 or 4 as 88,413. In the 2016 report, costs were anticipated at £6.91 /hr for 3 and 4 year
olds and £7.34/hr for 2 year olds. Using the previously-determined numbers of children, this results in a
total cost (assuming use of the full entitlement of 1,820 hours) of £1,211.82 million per year. However,
the 2017 report (on p. 57) indicated that the number of early learning and childcare hours taken (with
any private or informal hours included) varied wildly. Using the figures in the 2017 report (p. 57) —and
assuming that all those in the 40+ hours and 30–39 hours categories used the full entitlement, and that
in all other categories an equal number used one number as another (i.e. as many used 8 hours, as used
9 hours, as used 10 hours in the 8–15 hours category)—the final cost is estimated at £596.5 million.