The Budget for financial year 2018-19 passed its final parliamentary hurdles on Tuesday and Wednesday of this week. The ‘Rate Resolution’ debate and vote on Tuesday set the rates and bands for Scottish Income tax for 2018-19. Approval of the income tax rates and bands was required in order for the Stage 3 debate for the Budget Bill to proceed on Wednesday (as this is underpinned by income tax forecast receipts). It was passed by Parliament, with 70 voting for the Budget measures and 56 against.
As regular SPICe Spotlight blog readers will know, initial ‘draft’ budget proposals were published by the Scottish Government on 14 December 2017, kicking off the Committee scrutiny of the proposals.
Alongside that parliamentary process, there has been a political dialogue between the various political parties over where common ground may be achieved. The SNP needed the support of another party in order to pass the Budget Bill.
Just before the Stage 1 debate in the Chamber, the Cabinet Secretary announced that a deal had been agreed between the Scottish Government and the Scottish Green Party.
The deal led to Stage 2 amendments, which added £125m to Local Government (with an additional £34.5m allocated in 2017-18); £10.5m for inter-island ferries; £2m for fuel poverty; £200,000 for marine protected areas; and £70,000 for the Scottish Sports Association.
How will these amendments be funded?
These amendments will be funded from a combination of tax increases and funding from the Scotland Reserve. Explaining his amendments at Stage 2 of the Budget Bill the Cabinet Secretary for Finance and Constitution said “around £62m” would be funded by expected additional income tax revenues as forecast by the Scottish Fiscal Commission (SFC). The remaining £110m would be funded “from a combination of anticipated underspend in 2017-18 and drawdown from the Scotland reserve”.
The SFC forecast that an additional £55m in revenues will arise from the change to the higher-rate threshold, and an additional £7m will be generated from increasing the 3% pay policy threshold to £36,500.
Questioned on the additional £110m in amendments the Cabinet Secretary informed the Finance and Constitution Committee that “the final mix of underspend and reserve drawdown will be determined at the end of the financial year, once there is greater certainty on the year-end financial position.”
In subsequent questioning from the Committee, the Cabinet Secretary stated that the £110m would comprise around £40m in funding from the Reserves of tax surpluses from previous financial years, and approximately £70m from additional underspends beyond the £158m already built into the December draft budget.
Details will be clearer at the end of the financial year
However, there are still some unanswered questions.
We now know where the Scottish Government has opted to allocate additional resource in 2018-19. What is still not clear is what Budget lines are being underspent in the current year and to what extent their spending has been below what was authorised by Parliament 12 months ago.
It is also still not clear on the precise split of additional underspends and draw-down from the Reserve arising from tax surpluses from previous years.
The picture will become clearer in June when the Scottish Government presents their provisional outturn numbers for 2017-18 to Parliament. This will outline the extent to which the current financial year’s budget has been underspent in total and the portfolios where that underspend has arisen.
Higher than normal underspend
Underspends in the current year (2017-18) look like being around £230m (£158m identified in December’s Draft Budget + approximately £70m as identified at Stage 2). We do not yet have details as to how that is split between Resource, Capital and Financial Transactions, but it is likely to be a gross figure that is higher than previous years (see figure below).
This higher-than-normal level of underspend comes at a time when the Scottish Government regularly highlights the real terms reductions in its own revenue budget from the UK Government. It also means that the final outturn expenditure will be quite significantly lower than was actually authorised by Parliament 12 months ago when the Budget Bill for 2017-18 was passed (albeit this represents less than 1% of the total Budget).
Income tax revenue forecasts for 2017-18 will be “reconciled” in the Scottish budget 2020-21. If outturn revenues are lower than forecast, the Scottish Government will have a budget shortfall that it will need to fund by either raising tax, cutting spending, borrowing, or using resources from the Scotland Reserve. Conversely, if tax revenues are higher than forecast, the Scottish Government will have additional resources at its disposal.
As things stand, the Scottish Government plans to use around £40m of its current £74m tax surplus monies next year. Using tax surpluses sitting in the Scotland Reserve to fund 2018-19 spend means that the Scottish Government will have less of a fiscal cushion available in future should income tax revenues come in lower than forecast.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit