The Chancellor of the Exchequer, Rishi Sunak, delivered his Spending Review today, presenting it as a response to the “economic emergency” currently faced by the UK. The overall figures were grim, with UK GDP forecast by the OBR to fall by 11.3% this year, borrowing in this year alone likely to be £394 billion, and unemployment UK-wide forecast to rise to 2.6 million by the middle of next year.
Although spending will increase substantially next year as the health emergency continues, the Chancellor did highlight challenges that will need to be dealt with in the future, stating, for example, that a pay freeze for non-NHS, non-low paid public sector workers will apply from next year.
Public sector pay is devolved, so the Scottish Government may opt for a different approach. However, given the importance of public sector pay as a share of the Budget, pay freezes at a UK level will affect the Scottish Budget, as Barnett consequentials might be lower than they would otherwise have been if budgets had increased to fund pay increases. Therefore, if it wishes to, the Scottish Government’s room for manoeuvre to take a completely different approach in this area is somewhat limited.
What are Spending Reviews?
Spending Reviews are typically designed to set out broadly fixed spending plans for three or four years ahead, with the Chancellor setting out Departmental spending plans split into Resource (day-to-day spending) and Capital (infrastructure) spending. These were originally designed as a mechanism for giving departments and public sector bodies a degree of certainty about their funding outlook for the medium to longer term.
In the past decade however, there have been occasions when Spending Reviews have only covered one-year worth of spending plans, for example in 2013 and 2019.
In 2020, when looking beyond the next week has been challenging, it is perhaps not surprising that the latest UK Spending Review was again more limited in time horizon, setting Resource and Capital plans for just one year ahead.
What does it mean for the Scottish Budget?
The document sets out the Treasury Spending limits for the Scottish budget for 2021-22:
- Resource spending is set to increase by over £1 billion from £30.4 billion in 2020-21 (the final spending limit prior to the additional COVID-related funding in-year) to £31.7 billion in 2021-22.
- Capital spending is set to fall from £5.5 billion in 2020-21 (again, this is the final spending limit prior to the additional COVID-related funding in-year) to £5.2 billion in 2021-22.
- COVID-19 related funding is set at £1.3 billion in 2021-22, compared with the guaranteed minimum amount of £8.2 billion in 2020-21.
The Treasury spending limit figure presented in the documentation is not the final Scottish spending envelope for next year. As regular readers know, the Scottish Budget is much more complicated that it used to be since the devolution of new Tax and Social security spending powers in 2016.
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 Scottish Fiscal Commission (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’. But the actual size of the Scottish budget will not be known until Kate Forbes MSP, Cabinet Secretary for Finance, delivers the Budget to Parliament next year.
The 2021-22 Scottish Budget and process
We now know that the Scottish Budget for 2021-22 will be published on 28 January, resulting, for a second year in a row, in a much-truncated period for parliamentary scrutiny.
With ongoing COVID-19 challenges, a vaccine roll-out, and the transition to a post-EU trading arrangement, not to mention a pending Scottish Parliamentary election, Budget debates are sure to be highly charged.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit