The (budgetary) times they are a changin’: 20 years of devolved budgets

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As part of the programme to mark 20 years since the creation of the Scottish Parliament, SPICe will publish twenty “20 year” blog posts on SPICe Spotlight over the course of 2019.  This is the third in the series. Our earlier post sets out more information on the programme and the series of blogs.

In 1999, £1 would buy you 10 packets of Space Raiders, Ricky Martin was living la vida loca and Harry Potter books were all the rage (they still are with my daughter).

But what about the Scottish Budget?  Much has changed in the size and composition of Scotland’s devolved finances.  A budget that in 1999 was overwhelmingly made up of a block grant transfer from Westminster, from next year will be around 50% made up of taxes raised in Scotland.

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There is ongoing debate about the extent to which Scotland Act powers have transferred ‘power’ from London to Edinburgh.

For example, income tax powers do not extend to all income, it is non-savings, non-dividend (NSND) income that is devolved – although that is the vast majority, 87% of total Scottish Income tax. The personal allowance has remained a reserved competence, which some argue has placed limitations on the Scottish Government’s ability to generate revenues from lower earners and potentially boost revenues. Some also argue that with other taxation and macro-economic ‘levers’ remaining reserved, there are limits on the extent to which the Scottish Government can grow the Scottish tax base.

On Value Added Tax (VAT) which is due to be 50% assigned to the Scottish budget, there are questions around the ability to influence revenue receipts from this tax in Scotland when the rates are set at Westminster.

However, there can be no doubt that tax devolution has meant that for the first time the size of the Scottish budget is directly influenced by economic performance in Scotland.

It has also resulted in taxes in Scotland and the rest of the UK diverging. The figure below shows income tax and property transaction tax rates in Scotland and the rest of the UK for this year.

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A game changer

The devolution of taxation powers has been a game changer for the parliamentary scrutiny process. It has shifted the range of issues that must now be considered when forecasting revenues (a job now undertaken by the Scottish Fiscal Commission (SFC)) and setting the parameters for available spending.

For the first time behavioural impacts must be considered by Scottish politicians when setting tax policy. For example:

  • Will income tax set too high (or low) for higher earners have implications for behaviours (migration between the nations of the UK, or declarations of income)?
  • Will differentiating landfill tax rates in Scotland relative to the rest of the UK provide economic incentives to move waste between the Scottish and English border (so called ‘waste tourism)?
  • Will Land and Building Transaction tax (Stamp duty as it was once known) set too steeply in the higher end of the market have knock on implications for sales and movements up and down the property ladder?

These are all questions now routinely asked in the Committees and Chamber of the Scottish Parliament.

Previously unheard of exchanges on the Laffer curve theory of economics have begun to emerge. Debates around the purpose of taxation as a vehicle for growing the economy and raising funds for public spending are directly relevant in a way that they weren’t in the early years of devolution.

This has allowed a full spectrum of left-right policy proposals to be aired, from raising more tax to spend on public services, to lowering tax in an effort to boost economic activity.

The electoral effects of these debates are yet to be fully felt. For example, will Scots show themselves to be supportive of higher income tax on earnings over £27,000 relative to the UK (as was voted for 2019-20)? Will Scots support or reject reducing taxation rates and revenues if it means less resources are available for public services?

These are all questions which will be keenly contested in future Scottish parliamentary elections.

The Fiscal Framework and Scottish Fiscal Commission

The key player in judging behavioural impacts and how they impact on the spending power of the Budget is the SFC. They produce forecasts for tax revenues which are then used to set the money available for the Scottish budget. These tax revenues offset the reductions in the block grant made by the UK Government to account for the revenue the UK exchequer has foregone from devolving taxation.  Depending on the decisions of the Scottish Government on tax policy, and the performance of the Scottish economy, Scottish tax revenues may or may not fully offset the block grant reduction made in respect of income tax.

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The SFC also produce forecasts for devolved Social Security/Welfare benefits. Further details on how this all works is contained in the SPICe briefing on the new budget process.

The creation of the SFC, tasked with producing independent tax and social security forecasts, followed the publication of a Fiscal Framework agreement between the Scottish and UK Governments. This document governs the operation of the new Scotland Act 2016 powers and arose out of the considerable complexity added to the Scottish budget following the devolution of tax and social security powers. A review of the early operation of the Fiscal Framework will follow in 2021.

The size of the spending envelope

However, despite these changes, the size and distribution of the budget and particular spending lines remains a key element of the parliamentary debate. Additional resource for public services is what motivates many of the changes made to tax proposals and the budget bill itself.

The early years of devolution coincided with strong growth in public spending across the UK. Public spending was growing at such a rate (more than five per cent in real terms per annum) that the Scottish Labour/Liberal Democrat coalition governments of the time were accruing underspends that accumulated to around £1.5 billion by the time the SNP minority administration took office in 2007.

But the days of boom and bust were not over, and the ensuing global financial crash of 2008 fed through to the Scottish budget and a period of real terms reductions.

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Health and Local Government

The spending areas that have been most keenly debated since devolution have undoubtedly been Health and Local Government, probably because these are the areas of public policy which most directly impact on the lives of Scots.

Health has been a spending priority of the devolution years, with spending per head growing by 75% in real terms. In 1998-99, Scottish health spending as a percentage of GDP stood at 6%, compared to 8% today. In recent years, when public spending has fallen in real terms, Health has continued to grow at rate that has outstripped inflation. Whether that has led to health outcomes (the subject of another SPICe blog) commensurate with spend is open to debate.

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The Local Government budget has always been a source of political interest, but in recent years with tighter budgets there have been attempts to mitigate ‘challenging’ settlements with additional resources flowing to local authorities from amendments made during the parliamentary budget process.

Over the years, Local Government has faced changes to its functions and powers. The most important from a budgetary point of view were the rolling up into the general settlement of previously ring-fenced monies after the 2007 election, and the removal of police and fire functions and funding from the settlement from 2013-14. This means that long-term, reliable like-for-like comparisons must come with caveats attached.  The changing role of Local Government also means that there are a variety of ways in which the settlement can be presented, and different claims made around the year-to-year change.

SPICe publishes an annual briefing looking at Local Government long term trends.

The Parliament’s Budget process

The way in which Parliament scrutinises the Budget has undergone change since 1999. New tax powers contributed to a review of the Budget process report, which was published in 2017. Recommendations from this report were subsequently agreed by the Parliament and a new budget process implemented last year.

Further information on the budget process is contained in the SPICe briefing on the new process. Central to it, however, is a more year round and mainstreamed budget scrutiny by committees designed to result in greater parliamentary influence on the budget.

The new process also seeks to allow more space for consideration of medium to long term fiscal challenges through the publication annually of a Medium Term Financial Strategy (MTFS). This is to address a tendency of budget scrutiny throughout much of the devolution period to focus on annual ups and downs in budgets, rather than more fundamental, longer term policy challenges.

What will the future bring?

Further change in the composition of the Scottish budget is happening and will continue in the coming years.

Social Security powers contained within Scotland Act 2016 have been partially devolved already, and will be rolled out further in the coming years, increasing the scale of spending decisions taken by Holyrood.

The Scottish budget and the mechanisms through which Parliament scrutinises public spending will continue to evolve.

A more influencing Parliament?

It is early days in the new budget process, a process designed to make Parliament more influential in budgetary terms than it has been in the past.

During periods of minority Government in Scotland’s devolution story, the Parliament, in theory, becomes more influential and significant as the Government of the day works with other parties to gain sufficient parliamentary support.

However, rather than leading to increased Committee and parliamentary power to influence budget amendments, changes made to the budget in minority government contexts have arisen from closed door negotiations between political parties, as opposed to deliberative consideration and evidence from Committee scrutiny.

Whether this will or even should change, or is simply an inevitable political reality, is open to debate.

Ross Burnside, Senior Researcher, Financial Scrutiny Unit