The new Chancellor of the Exchequer, Sajid Javid, announced a UK Spending Review today. With everything else happening at the moment, the announcement was somewhat overshadowed.
These are not normal times, and this was not a normal Spending Review
Spending Reviews typically allocate departmental spending for multiple years, but this Treasury announcement set UK Departmental Spending limits for just a single budgetary year, 2020-21. Indeed, the document itself labelled the announcement a “Spending Round” as opposed to the previously trailed review, and stated that a multi-year “Spending Review” will follow next year.
Political opponents of the Government claimed it was a thinly veiled political bribe in advance of a possible election.
But what does the Spending Review mean for the Scottish budget?
As my regular blog readers will know, the Scottish Budget is now much more complicated than it used to be prior to the devolution of Scotland Act 2016 tax and welfare powers.
The size of the devolved Scottish spending envelope is now dependent on tax policies made by different Governments (Scottish and UK), forecasts made by different forecasting bodies (the SFC and OBR) and outturn reconciliations based on Scottish income tax receipts collected by HMRC and devolved taxes collected by Revenue Scotland. To complicate matters further, the policy announcements and forecasts happen at different points in the year and, in the case of income tax reconciliations, years after an initial budget is set.
The following infographic sets out the factors influencing the size of the Scottish budget. Note this simplified diagram only covers the taxation element, and doesn’t include the welfare element of the equation.
The Spending Review announcement told us what we can expect in terms of the ‘Barnett-determined block grant’. The announcement largely focused on increases to the Fiscal Resource budget (or day-to-day expenditure) as Capital (infrastructure) spending had already been announced for 2020-21.
So, what was announced?
Scotland will receive an additional £1.1 billion in day-to-day spending in 2020-21, a 2.1% real terms increase on the current year. This increase largely flows from above inflation additional monies for Health and Education which are all fully devolved to the Scottish parliament and result in Barnett consequentials for the Scottish Budget.
Although there may be political pressure to allocate these monies to the same or similar policy areas in Scotland, the Scottish Government does not need to allocate these Barnett consequentials to the same UK Government policy priorities from which they derive. The Scottish Government has, however, made a commitment to pass on any resource Health Barnett consequentials to the Scottish NHS.
With these additional resources, the Barnett determined Fiscal Resource spend for the Scottish budget will increase by a comparatively healthy amount next year (compared with recent years).
However, this is only part of the story
The actual size of the Scottish spending envelope will not be known in full until later this year when the Scottish Budget is presented to Parliament.
By then we will know the size of the Block Grant Adjustment to be made to the Scottish budget, which will be available when the UK Government presents its UK Budget 2019 sometime in the Autumn.
In December, when the Scottish Budget is presented, it will be underpinned by the taxation and welfare forecasts of the SFC.
Only then will we know the full extent of the spending power available for devolved public services.
Downward reconciliations to come which will offset these Barnett gains
In the depths of summer recess, HMRC published the outturn Scottish income tax receipts for 2017-18. This was the final element of the income tax ‘reconciliation process’, when outturn income tax receipts are reconciled with the Scottish tax and BGA forecasts made when the 2017-18 budget was set.
With the publication of that document, we now know that the Scottish budget will be reduced by £204 million in 2020-21, due to downward corrections to both the SFC and OBR forecasts that were made at the time the 2017-18 budget was set. This meant that the final income tax outturn figures were not as favourable to the Scottish budget as had been forecast.
With £204 million taken out of the Scottish budget for 2020-21, increases flowing from Barnett consequentials announced by the UK Spending Review will be partially offset.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit