A fraught fiscal outlook

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The Scottish Fiscal Commission (SFC) published a Fiscal Update today. It highlights the continuing uncertainty surrounding the Scottish Budget.

The COVID-19 global pandemic has resulted in Governments around the world taking unprecedented fiscal measures. UK Government borrowing in the first four months of the financial year reached £150.5 billion and at the end of July 2020 debt had increased by 20.4 percentage points compared to the year before, reaching 100.5 per cent of GDP. UK spending decisions mean  additional resources have flowed to the Scottish budget via Barnett consequentials.  These will add £6.5bn to the Budget for 2020-21 passed by the Scottish Parliament in February this year. This really does seem like an eternity ago.

The Summer Budget Revision (SuBR) allocated some of these resources and further in-year Autumn and Spring Budget Revisions will allocate remaining consequentials. It is likely that the 2020-21 Budget will remain fluid, with further in-year changes possible from UK Government announcements, and if as expected there is a UK Budget in the Autumn.

Other in-year changes to the Scottish budget may flow from reduced fully devolved tax receipts and increased social security spending. The net impact of this however will depend on how these changes compare to changes in the rest of the UK via the Block Grant Adjustments (BGAs). The SFC report points out that “at this stage it is too early to know how these relative changes will turn out.” It is worth noting that any negative impact to income tax receipts will not affect this year’s budget (see below).

What is the outlook beyond this year?

There is major uncertainty about the outlook for the public finances beyond this year. The extent to which COVID-19 related financial interventions continue will obviously depend on how the pandemic plays out. Given the economic fallout, it is very likely that government action and spending stimulus will be required for some time yet. The UK Government is currently able to borrow cheaply and seems willing to take on high levels of deficit and debt in the short term at least. However, at some point there will be a requirement on Governments to address the debts that have soared to deal with pandemic.

One fact we do know will feed in to next year’s Scottish Budget (2021-22) will be the “reconciliation” of non-savings non-dividend (NSND) income tax receipts with outturn for financial year 2018-19. This reconciliation is expected to be sizeable, with current forecasts pointing to a reduction of £555 million in 2021-22, well over the £300 million the Fiscal Framework allows the Scottish Government to borrow for smoothing of forecast errors. HMRC is expected to publish Scottish income tax outturn data for 2018-19 on 23 September 2020. At that point we will know the negative adjustment required to Scotland’s 2021-22 budget.

Scottish Fiscal Commission (SFC) and Office for Budget Responsibility (OBR) forecasts underpin the Scottish Budget. These will be determined by judgements on some of the sectoral impacts of the pandemic and how they impact Scotland disproportionately more or less than the rest of the UK. For example, to what extent are Scottish income tax receipts hit more than those in rUK from declines in the tourism and oil and gas sectors? To what extent do Scottish tax receipts hold up better than rUK as a result of Scotland having a higher proportion of public sector workers?

The Fiscal Framework

Finally, the pandemic has raised issues around the suitability of the Fiscal Framework agreed back in 2016 between the UK and Scottish Governments to govern the Scottish budget process, especially during a time of crisis. Already due for review in 2021, the Scottish Government has been pushing HM Treasury for greater immediate flexibilities to respond to the pandemic. For example, increased borrowing powers and flexibilities to allow money to be moved from Capital (where infrastructure programmes have been in lockdown) to Resource (where many pressures exist).

These have not been agreed to by the UK Treasury, who point to the guaranteed additional £6.5 billion consequentials for 2020-21 as providing sufficient flexibility for a Scottish Government COVID-19 response. In a letter to the Finance and Constitution Committee on 2 September, the Chief Secretary to the Treasury stated that the Fiscal Framework:

“carefully balanced Scottish Government flexibilities and the UK Government’s ability to manage the overall fiscal position. As I am sure you will understand, I am therefore reluctant to move away from the agreed arrangements in advance of the review. However, as demonstrated by the above guarantee [of £6.5 billion consequentials], I am willing to consider the evidence and am keen to have an ongoing dialogue with the Cabinet Secretary for Finance. Alongside this my officials are working with their counterparts in the Scottish Government to establish the next steps on the review. “

Ross Burnside, Senior Researcher, Financial Scrutiny Unit