The new Chancellor of the Exchequer, Rishi Sunak MP, announced his first budget yesterday.
It was noticeable for a substantial fiscal loosening by the UK Government, reversing the period of public spending reductions introduced after the 2010 election. The OBR described the package as the
“the largest planned sustained giveaway since Norman Lamont’s pre-election Budget in 1992 and modestly greater than Gordon Brown’s 2000 Budget.”
This build-up and announcement was dominated by the UK Government’s response to the coronavirus/covid-19, and a number of short-term fiscal responses were made around support to individuals, businesses and the health service.
Responding to the Budget on behalf of the Scottish Government, the Cabinet Secretary for Finance said that she had still to receive clarity on what the covid-19 funding measures mean for Scotland, stating
“we need urgent confirmation of consequentials that will arise to ensure Scottish businesses are not at a disadvantage.”
At the time of writing, it is still not clear how the covid-19 support to the NHS is going to work in practice. For example, whether this will be a UK wide scheme, accessed as and when required by NHS boards and Trusts across the UK, or whether it will feed through to the Scottish budget via Barnett consequentials.
Do the Scottish numbers add up?
From a Scottish perspective, there were a number of areas of interest in the UK budget related to the budget passed by the Scottish Parliament for 2020-21 just last week.
Do the Barnett consequentials cover the monies baked into the Scottish Budget?
Uniquely, and due to the timing of Scotland’s Budget before the UK Budget, the Scottish Government had based its 2020-21 budget on anticipated Barnett consequentials arising from its reading of the Conservative election manifesto from December 2019. There was £468 million in the initial Scottish budget document, supplemented by an additional £55 million in anticipated Barnett consequentials to fund the amendments agreed with the Green Party.
The Cabinet Secretary for Finance acknowledged there were risks inherent in this approach. If the Barnett consequentials were not delivered by the UK Government, it would leave a hole in the Budget that the Scottish Parliament had just authorised.
In the event, the Barnett additions to the Scottish Budget amounted to £640 million: £226 million in Resource spending (for day-to-day expenditure), £409 million for Capital spending and £5 million for Financial Transaction funding, which can be loaned out to the private sector.
This additional resource provides over £100 million more in Barnett consequentials than is baked into the Budget Act 2020-21. The Scottish Government will allocate this additional money for 2020-21 via the in-year budget revisions.
The block grant adjustment
The Scottish budget passed last week was underpinned by a provisional block grant adjustment (BGA) for devolved taxes and social security. This was due to the unusual circumstances surrounding this year’s Scottish budget, and meant that these provisional BGAs were derived from Office for Budget Responsibility (OBR) forecasts from March 2019.
As regular readers of this blog will know, BGAs remove funding where the Scottish Government is now raising its own tax revenue and add funding where the Scottish Government is responsible for social security payments.
These provisional BGAs amounted to a block grant reduction of £12,963 million for taxation in 2020-21, and a block grant addition for Social Security in 2020-21 of £3,203 million.
However, the Scottish Government agreed with Treasury that the BGA based on the latest OBR forecasts could be used instead of the provisional BGA applied to the Budget if it was favourable to the Scottish spending envelope.
At the time of writing, we still do not have the updated BGAs. So, it is still not clear whether the provisional BGA or the latest BGA will apply to the 2020-21 Scottish budget. It is likely the Scottish Government will write to the Finance and Constitution Committee on this matter in due course.
Any tax changes?
There were no changes announced to UK income tax that might have led to a Scottish Government response. The personal allowance will remain at £12,500 and the rate at which earners move into the 40p tax bracket will remain at £50,000. Further detail on Scottish rates of income tax are presented in a recent SPICe blog.
The Chancellor did announce the abolition of non-domestic rates for England’s retail, leisure and hospitality companies with a rateable value of less than £51,000 in 2020-21.
It remains to be seen whether the Scottish Government opts to replicate or respond to these policies in Scotland.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit