This paper sets out the methodology and assumptions relating to the devolved tax forecasts which underpin the 2017-18 Scottish Budget. A medium-term assessment of devolved tax revenues is also provided with forecasts over a 5-year period to 2021-22. The overall aim of the paper is to show how each of the forecasts have been arrived at to provide greater transparency on how devolved tax forecasts influence the Scottish Budget for 2017-18. This is particularly important as it comes at a time of significantly increased tax revenues being devolved to Scotland.
Forecasting future tax revenues or wider economic variables are, by their nature, subject to margins of error. Assumptions that are built into forecasts - based on the best available information at the time - often prove to be too optimistic or pessimistic as new economic events continuously unfold. Such uncertainty is particularly high in the current economic climate. The outcome of the EU referendum, coupled with the lack of clarity on the UK Government's timetable for leaving the EU, or the new relationship they wish to secure, inevitably increases the economic uncertainty faced in Scotland and in turn the future path of tax revenues.
The forecasts for the devolved taxes and their underlying methodology and assumptions, and the forecasts of the economic determinants of NDRi have been scrutinised by the Scottish Fiscal Commission (the Commission) over the course of the year in a series of 12 'challenge' meetings. Their conclusions on our forecasts are outlined in their Report on Draft Budget 2017-18.  Since the publication of the Draft Budget 2016-17, the Scottish Government has taken steps to improve the approach taken to existing forecasts in response to the Commission's scrutiny. These include incorporating newly published data into the forecasts; further assessing the appropriateness of all data used; and adjusting and updating the forecast methodologies as required. This is the final year of the Commission's scrutiny of the Scottish Government devolved tax forecasts. From 1 April 2017, Commission itself will take on responsibility for the forecasts that will appear in Draft Budgets for 2018-19 onwards.
Outturn for 2015-16 and 2016-17
Chapter 2 reports that, for 2015-16, the fully devolved taxes, Land and Buildings Transaction Tax ( LBTT) and Scottish Landfill Tax ( SLfT) raised a total £572 million. LBTT raised £425 million of this total which was £44 million above forecast. SLfT raised the remaining £147 million which was £30 million above forecast. The revenue surplus has enabled Scottish Ministers to place £74 million into the Cash Reserve at the end of 2015-16.
For 2016-17, we have seven months of LBTT data and one quarter of SLfT revenue data. Total revenues received to end October 2016 are £269 million. LBTT residential revenues in particular (excluding the Additional Dwelling Supplement) have slowed in 2016-17 in response to a lower than expected growth in residential transactions and house prices. Non-residential LBTT revenues have shown some volatility and it is too soon to draw conclusions on the likely final outturn for 2016-17 especially given wider economic uncertainties. SLfT revenues are currently on track though data is only published for the first quarter of 2016-17. Tax revenues over the remainder of the year will ultimately depend on the performance of both the residential and non-residential property markets and trends in landfill volumes between now and 31 March 2017.
In terms of the economic determinants of non-domestic rates income ( NDRi), the Draft Budget 2015-16 used March 2014 OBR forecasts of September 2014 RPI of 2.5%. The actual outturn was slightly lower at 2.3%. After the publication of the Draft Budget 2015-16, the uplift in poundage was capped at 2.0% rather than increasing in line with September RPI. An error of 0.2 percentage points would typically result in an error in the poundage assumption of 0.1 pence - which is equivalent to around £5 - 6 million in NDRi terms. Outturn buoyancy in 2015-16 was 1.3%, marginally above the forecast for that year of 1.25%. The impact on 2015-16 NDRi of this forecast error was around £1 million. Draft Budget 2016-17 was presented in December 2015 and used the September 2015 RPI of 0.8% that was known at the time the forecast was made. Scottish Assessors have the full year to make adjustments to the Valuation Roll. We cannot therefore provide a comprehensive update on buoyancy part way through the current year.
Scottish Non-savings, Non-dividend ( NSND) Income Tax Liabilities
Chapter 3 presents, the economic forecasts which underlie the NSND forecasts.
Chapter 4 sets out our 5-year revenue forecasts for the newly devolved powers over Scottish NSND Income Tax which Scottish Government will take on following the passing of the Scotland Act 2016 and which take effect from 1 April 2017. These income tax powers are expected to raise £11,829 million in 2017-18 thus changing the entire scale of devolved taxation revenue in Scotland from what has existed previously. Looking ahead, revenue from Scottish Income Tax is forecast to rise to £14,559 million by 2021-22. These tax forecasts, outlined in Table 1, have been assessed as reasonable by the Commission in their Final Report on the Draft Budget 2017-18. 
Table 1: Forecast of Scottish NSND Income Tax Liabilities, 2017-18 to 2021-22, £ million
|Scottish Income Tax ( NSND Liabilities)||11,829||12,290||12,912||13,647||14,559|
Land and Buildings Transaction Tax ( LBTT) and Scottish Landfill Tax ( SLfT)
Chapters 5 and 6 set out our 5-year revenue forecasts for the two existing fully devolved tax revenue forecasts presented in the 2017-18 Draft Budget - LBTT and SLfT. These tax powers were devolved in the Scotland Act 2012 which took effect from 1 April 2015. The two taxes are expected to raise £656 million in 2017-18 with this figure rising to £730 million by 2021-22. The LBTT forecasts, which are broken down into their component parts in Table 2, have been assessed as reasonable by the Commission in their Final Report on the Draft Budget 2017-18.
Table 2: Forecasts for Land and Buildings Transaction Tax, 2017-18 to 2021-22, £ million
|Land and Buildings Transaction Tax||507||543||571||597||624|
|Residential transactions (excl. ADS)||211||235||251||265||280|
|Additional Dwelling Supplement ( ADS)||72||75||78||80||82|
The SLfT forecast, as laid out in Table 3, has also been assessed as reasonable by the Commission in their Final Report on the Draft Budget 2017-18.
Table 3: Forecast for Scottish Landfill Tax, 2017-18 to 2021-22, £ million
|Scottish Landfill Tax||149||118||109||112||106|
The two fully devolved taxes are together forecast to raise the following revenues:
Table 4: Forecast for fully devolved taxes, 2017-18 to 2021-22, £ million
|Fully devolved taxes||656||661||680||709||730|
1. Land and Buildings Transaction Tax and Scottish Landfill Tax.
Non-domestic rates Income ( NDRi)
NDRi is an important component of the Scottish Budget - the latest published income figures are for 2014015 - when NDR accounted for £2.5 billion. Chapter 7 sets out the forecasts for inflation and buoyancy which are the economic determinants underpinning this figure. There are many other factors listed in the NDRi methodology detailed in the Chapter which also underpin NDRI. The forecast for buoyancy (broadly thought of as the growth in the tax base, corrected for revaluation appeals) in 2017-18 is 1.7% with the 5-year forecast laid out in Table 28. The estimate for September 2016 RPI inflation is 2.0% based on outturn data from the ONS. It should be noted however, that the implications of the upcoming revaluation of Non Domestic Properties will also affect the poundage rate applied in 2017-18. The methodology underlying the economic determinants of NDRi was assessed as reasonable by the Commission in their Final report on Draft Budget 2017-18.
Air Passenger Duty and the Aggregates Levy
This analysis excludes the forecast revenues and methodologies of two reserved taxes which Scottish and UK Governments have already agreed will be devolved in future years. These are Air Passenger Duty ( APD) from 2018-19 and the Aggregates Levy (date to be determined). For completeness, these taxes are estimated to have raised £275 million and £53 million respectively in Scotland in 2015-16.