This is an initial blog analysis of the 2021-22 Budget. More detailed SPICe briefings and additional blogs will follow in due course.
On 28 January 2021, the Cabinet Secretary for Finance presented the Scottish Government’s proposed spending and tax plans for next year.
As discussed in a previous SPICe blog, the Scottish Budget is being published later than normal and in advance of the UK Government’s Budget, which is scheduled for 3 March. The later than normal publication lessens the time available for parliamentary scrutiny of the Scottish Government’s proposals.
Preceding the UK Government’s Budget also means that the total Scottish spending envelope for 2021-22 is still uncertain. Budget risks though are largely on the upside, as it is more likely than not that the UK March Budget will only increase the size of Scotland’s spending envelope via COVID-related Barnett consequentials.
Unsurprisingly, the statement to the Chamber was dominated by the Government’s response to the pandemic.
A Scotland-specific shock, but is it really?
The Cabinet Secretary’s statement summarised the Scottish Fiscal Commission’s (SFC) bleak assessment for Scottish economic growth. The SFC forecast the Scottish economy to fall by 10.7% in 2020, before increasing by 1.8% in 2021, 7.5% in 2022, 1.6% in 2023 and 1.6% in 2024.
This economic outlook is in part driven by assessments of the impact of Brexit. But the pandemic has clearly wreaked havoc on the Scottish economy, and the SFC estimate that Scotland won’t return to pre-pandemic levels of economic output until 2024.
The UK Office for Budget Responsibility (OBR) and the SFC have both stated that the COVID-related Scottish and UK economic impacts are broadly in line with each other. However, the timing of the OBR forecasts in November (prior to the new COVID-19 variant and subsequent lockdown) means that OBR forecasts were more optimistic then than the SFC’s are now. It is likely that the OBR forecasts that will be published alongside the UK Budget on 3 March will be more pessimistic.
Meanwhile, the forecast divergence in Scottish and UK growth means that the Fiscal Framework conditions for the triggering of a Scotland-specific economic shock are met for the first time, namely:
- Annual GDP growth in Scotland, on a four-quarters-on-four-quarters basis is below 1%.
- Four-quarters-on-four-quarters growth in Scotland is 1.0 percentage point or more below the UK.
This forecast timing difference – and the resulting triggering of a “Scotland-specific shock” – has the effect of increasing the fiscal flexibilities available to the Scottish budget. Specifically, the resource borrowing limit increases from £300 million to £600 million for the next three financial years. However, this can only be used to address forecast errors. In addition, the annual drawdown limits from the Scotland Reserve are removed for the same three-year period. This means that rather than an annual limit of £250 million resource and £100 million capital, the Scottish Government can draw down up to the Reserve’s maximum limit of £700 million.
Even if revised forecasts or outturn data show that the conditions for a Scotland-specific shock were not met, the fiscal flexibilities will not be revoked. So, these flexibilities will be in place until 2023-24.
It is somewhat ironic that the Cabinet Secretary has been calling on the UK Treasury to increase flexibilities for some time. This disconnect in the timing of the OBR and SFC forecasts is likely not how either government intended additional flexibilities to be delivered, but is yet another consequence of the “unprecedented times” that we live in.
It also raises interesting questions which the Fiscal Framework review may wish to ponder, around the timing of UK and Scottish forecasts and how that can have a material impact on the size of the Scottish budget.
So what spending choices is the Cabinet Secretary making to respond to and mitigate this health and economic crisis?
The overall spending outlook for 2021-22
A note on “real terms” figures
Before examining the spending outlook, it is worth referring back to our blog of last week, which examined some of the challenging comparability issues caused by the impact of the pandemic on the “GDP deflator”, used to calculate figures in “real terms”. Because of these issues, SPICe’s view is that the best comparison in this budget is to use the actual cash terms figures, and we (in the main) will refer to these in briefings and blogs on the Budget.
The Cabinet Secretary has made some macro-level decisions to increase the spending power available. As well as the UK block grant and Scottish tax policy choices set out, the Scottish Government is proposing to boost its spending power through an additional combination of:
- Reserve monies (£431 million)
- Resource borrowing (£319 million)
- Capital Borrowing (£450 million).
Additionally, on top of the £1.3 billion in COVID consequentials already earmarked for next year, the Cabinet Secretary opted to assume an additional £500 million COVID consequentials as “baked into” her plans. Given there is a £21 billion COVID contingency sitting at the UK Treasury, this appears to be a prudent step.
In terms of what is actually being allocated overall in the Budget (presented in the Annex of the document), the Resource budget (or day-to-day spend) is projected to increase by 11.2% next year, and total just under £38 billion.
Spend on Capital, however, is expected to decrease by 0.7% in 2021-22.
So how is this increased spending power being allocated?
Health remains the most significant budgetary priority of the Scottish Government. Even before taking account of additional COVID-19 spending, the health budget is increasing by 5%. On top of this, the Scottish Government currently plans to allocate a further £869 million to the health budget for COVID-19 funding in 2021-22. With these increases, the health budget will account for 43% of all day-to-day spend next year.
In recent years, the allocation to local government has been one of the main issues of controversy during parliamentary consideration of the budget. Here we set out some of the headline numbers in the Budget. Much more detail will follow in both our main budget briefing and a dedicated local government briefing.
The Scottish Government guarantees the combined General Resource Grant (GRG) and distributable Non-Domestic Rates Income (NDRI) figure, approved by Parliament, to each local authority. If NDRI is lower than forecast, this is compensated for by an increase in GRG and vice versa.
This combined GRG and NDRI figure (i.e. the amount of money to deliver services over which local authorities have control) increases by 1.9% in cash terms, or £186 million.
Once specific, ring fenced resource grants are included, then the combined figure for the resource budget increases by 2.5% in cash terms, or by £252 million.
The total capital budget sees a decrease in cash terms this year, of -20.7% or by £161 million. This is mostly driven by a decrease in specific capital grants, with support for capital remaining relatively static with an increase of 2.2%.
With the devolution of Social Security by Scotland Act 2016 came over £3 billion of spending power via an upward Block Grant Adjustment (BGA) to the Scottish Budget. However, it also brought with it increased budgetary risks, as any spending over and above the BGA must be found from other resources.
In 2021-22 the BGA addition to the Scottish Budget for Social Security is £3,310 million. However, the Social Security spend in the next year is forecast by the SFC as being over £300 million higher, at £3,614 million. This is partly due to introduction of new benefits specific to Scotland, such as the Scottish Child Payment.
Income tax reconciliations – things are looking up
We already knew before today that the 2021-22 Budget would be reduced by around £300 million to reconcile the income tax and other devolved powers’ outturn figures with original forecasts.
To manage this reduction, the Scottish Government is planning to borrow the full amount (£319 million) which will need to be repaid in subsequent years.
There was better news regarding future income tax reconciliations, however, with the SFC providing indicative figures for future income tax reconciliations. For the first time since non-savings non-dividend (NSND) income tax was devolved, reconciliations are forecast to be positive over the next few Budgets – totalling £74 million for 2019-20 (to be applied to the 2022-23 Budget) and £127 million for 2020-21 (to be applied to the 2023-24 Budget).
Taxation policy and forecasts
The Scottish Government proposes to retain the same five-band income tax structure that has been in place since 2018-19. With the exception of the top rate threshold, which remains at £150,000, all other thresholds are increased in line with inflation in the Scottish Government’s proposals.
The impacts of these policy changes on individual earning levels are presented in the following charts.
The proposed income tax policy for 2021-22 means that all taxpayers will be paying less income tax than in 2020-21. However, the differences are very small – only around £14 over the year for those on incomes below £25,000, rising to just over £60 per year for those earning more than £44,000. Much of this change comes from the UK Government’s plans to increase the personal allowance to £12,570, rather than the Scottish Government’s proposed changes.
The SNP manifesto for the 2016 election included a commitment to make changes that would have had the same effect as increasing the personal allowance to £12,750. However, the Budget states that the Scottish Government has decided not to do this due to the “unprecedented circumstances”. Given the circumstances, it is perhaps not surprising that this policy was not delivered today. As the Fraser of Allander have said “the policy would cost around £80m, and would not be particularly well targeted at low earners.”
Assuming no further changes to UK income tax at the UK budget, Scottish taxpayers earning less than around £27,000 will pay just under £21 less income tax in the year than they would in the rest of the UK. This accounts for 54% of all Scottish taxpayers. However, those earning more than £50,000 will be paying at least £1,500 more income tax per year than they would in the rest of the UK.
Non-Domestic Rates (NDR) reliefs have been a key feature of COVID-19 business support. Early in the pandemic, the Scottish Government announced 100% rates relief for the industries most significantly affected, along with a series of business grants tied to the Non-Domestic Rates system.
This 100% rates relief for retail, hospitality and leisure businesses was due to be in place until 31 March 2021. As part of the Budget statement, the Cabinet Secretary announced (noting that the UK Government had not yet announced an extension) that this would be extended for a further three months, and potentially further should the UK Government take similar action.
In addition to this relief extension, the Cabinet Secretary announced that the poundage rate for Non-Domestic Rates would be reduced by 0.8p to 49p, making it the lowest poundage rate in the UK.
The Budget allocates £90 million to local authorities to allow them to freeze Council Tax, which the Government states is equivalent to around a 3% increase. COSLA had previously called for local authorities to have the freedom to set their own rates, but it is likely that local authorities, especially in the tough current economic climate, will take up this deal rather than impose Council Tax increases larger than 3%.
Will these proposals change?
As has happened in previous years of minority government, the Scottish Government will now attempt to strike a Budget “deal” with another political party, or parties, in the Parliament.
In previous years, deals have been struck around additional allocations to local government, or tweaks to income tax bands to generate additional resource for public spending.
With the economic carnage caused by the pandemic, there will likely be no shortage of proposals landing on the Cabinet Secretary’s desk in the coming weeks.
SPICe have published a detailed briefing looking at this years budget.
Ross Burnside, Nicola Hudson and Ailsa Burn-Murdoch, Financial Scrutiny Unit