Yesterday the Chancellor of the Exchequer, Rishi Sunak MP, unveiled his second Budget of the calendar year and the UK Government’s first multi-year Spending Review since 2015. The Spending Review provides departmental settlements to individual UK departments and the devolved administrations for the next three financial years, 2022-23 to 2024-25. Alongside the Budget and Spending Review, the Office for Budget Responsibility published its latest fiscal and economic outlook.
This all came on the back of an unprecedented couple of years with the UK’s formal exit from the EU being quickly followed by the COVID-19 pandemic. The pandemic has resulted in high levels of fiscal support to the UK economy and borrowing levels not seen since World War Two.
Borrowing reached £319.9 billion (15.2% of GDP) in 2020-21, and the OBR expect borrowing of £183.0 billion (7.9% of GDP) in 2021-22. Public Sector Net Debt has reached the highest level since the early 1960s, with public sector net debt excluding the Bank of England expected to rise by nearly 10 percentage points of GDP from 75.9% of GDP in 2019-20 to a peak of 85.7% of GDP by the end of 2023-24.
An improved economic outlook…but inflation rising
The Office for Budget Responsibility (OBR), charged with producing forecasts on the UK economic outlook, point to a much-improved economic picture. They forecast that the UK economy will return to pre-pandemic levels at the start of 2022, earlier than previously anticipated. They forecast growth of 6.5% this year, followed by growth of 6% in 2022, 2.1% in 2023, 1.3% in 2024 and 1.6% in 2025. Unemployment is now expected to peak across the UK at 5.2% this year, lower than previously forecast. In the longer term, they also now forecast that the pandemic will have a less damaging ‘scarring’ effect on the size of the UK economy.
Overall, the OBR forecast a more optimistic economic outlook than the last one presented at the UK Budget of just seven months ago.
Having said that, there are still significant downside economic risks on the horizon. Chief amongst them is the rising spectre of consumer price inflation, which is expected to increase to 4% next year. Combined with the supply disruptions we have seen in the economy recently, it is clear there are economic challenges and risks ahead.
Rising inflation also means that an interest rate rise cannot be ruled out. If this were to happen, it could feed into public spending via the resulting increase to the costs to the UK government of their extensive borrowing mentioned above. Higher interest on borrowing means that less is available for public spending by the UK government, with knock on effects for Scotland.
Big spending continues
Despite these high levels of borrowing and debt, public spending is still set to grow in real terms (ie after adjusting for inflation) in the coming years, with the Chancellor announcing that each UK department is projected to receive a real-terms increase over the spending review period as a whole (although the increases are not spread evenly over the period).
The combination of stronger growth, higher inflation, plus tax rises introduced in the last two UK Budgets has allowed the Chancellor to spend a bit more than might have been expected in this Budget. The OBR state that as a result of the Budget announcements, spending will rise to its highest sustained level as a share of GDP since the late 1970s.
What does all of this mean for Scotland’s public finances?
The Budget documentation states that Scotland will receive “an additional £4.6 billion per year on average through the Barnett formula over the SR21 period, on top of its annual baseline funding of £36.7 billion.”
What this means in practice is that the total unadjusted Scottish block grant will increase from £36.7 billion (excluding COVID funding) in the current year (2021-22) to £41.8 billion by the final year of the Spending Review period (2024-25).
This equates to a 2.4% real terms increase over the Spending Review period. However, as the table below shows, this is quite front loaded with big real terms increases next year (+7.7%), followed by two years of the Scottish Budget standing still in real terms.
Table 1: Scotland Block Grant from Treasury 2021-2025
Cash, £ billion
Cash % change
Real (2021-22 prices) £ billion
Real % change
SPICe hopes to receive a full list of Barnett consequentials shortly and will publish them when they become available.
The levelling up fund
There has been much recent coverage of the proposed “levelling up fund”, which the UK Government is planning to give direct to projects across the UK. The documents confirms that Scotland will receive 10.1% of the first bidding round of the Fund, equivalent to £172 million, which the Budget document says will go to the following eight projects in Scotland:
- Redevelopment of Inverness Castle.
- A new marketplace in Aberdeen City Centre.
- A direct route between Glasgow and the three towns in North Ayrshire.
- Transforming Pollok Stables and Sawmill in Glasgow into a net-zero heritage living centre.
- Redeveloping Granton Waterfront Northwest of Edinburgh.
- Upgrading Westfield Roundabout in Falkirk.
- Remodelling the Artizan Shopping Centre in West Dunbartonshire.
- Connecting the Advanced Manufacturing Innovation District to Paisley, Renfrew and Inchinnan.
There were many announcements made in the Budget. A few of note…
Just days before the COP26 summit in Glasgow, the Chancellor, perhaps surprisingly, made announcements on Air Passenger Duties (APD) and fuel duties which will make it cheaper to fly within the UK and cheaper to drive.
On APD, the Budget introduced a 50% cut in domestic APD, which will apply to all flights between airports in England, Scotland, Wales and Northern Ireland (excluding private jets). The Treasury claim this will result in 9 million passengers paying less. It will be interesting to see what impact this has on behaviour and the balance of train/plane travel within Britain.
APD is to go up for the longest haul flight (over 5,500 miles) which the document states “will align APD more closely with environmental objectives by ensuring that those who fly furthest incur the greatest level of duty.”
Given that APD (or Air Departure tax as it will be known in Scotland) is due to be devolved to the Scottish Parliament (the precise timeframe is still not known), it will be interesting to see whether the Scottish Government opts to follow similar policies.
On fuel duties, the UK Government decided to freeze fuel duty for the 12th year in a row. Some, for example, Paul Johnson of the IFS question whether this is “consistent with climate change objectives”.
The UK Government announced a number of changes to non-domestic rates in England (“business rates”). The most significant were:
- a freezing of the poundage rate that is used to calculate the business rates bill for a property.
- a 50% reduction in the business rates bill for the majority of retail, hospitality and leisure properties in England in 2022-23.
These measures will only apply in England, so it will be for the Scottish Government to decide whether they want to replicate these policies and retain what it has claimed is the “most generous non-domestic rate regime in the UK”.
The budget also introduces two changes to Universal Credit (UC). The main change is a reduction in the ‘taper rate’ from 63% to 55%. This means that the rate at which benefits are withdrawn when a recipient starts working will be slower and so the individual sees a bigger gain in net income from work. The work allowance (the amount households with children or individuals with limited capacity to work can earn before their UC is withdrawn) is increasing by £500 per year. These changes are to be introduced from 1 December. According to the IFS, the changes to UC could mean an additional £1,000 per year for someone working full-time at minimum wage rates (although the exact amount will depend on family circumstances). These changes will cost £2.2 billion for the UK as a whole in 2022-23, but will only benefit UC recipients that are in work.
What happens next?
With the UK Government having now set out its stall, the ball moves to the Scottish Government’s side of the court.
The Scottish Government is due to publish its Budget for 2022-23 on 9 December. Alongside this, there will also be publication of the Medium Term Financial Strategy (MTFS) and a consultative Framework document on the upcoming Scottish Resource Spending Review.
On the same day as the Scottish Budget, we will see Scottish Fiscal Commission (SFC) forecasts for the Scottish economy, and their estimates for how much revenue will be raised from Scottish tax policies. The Scottish Budget will also incorporate the Block Grant Adjustments derived from these latest OBR forecasts.
For Scottish budget fans, it will be as if Christmas has come early. As ever, SPICe blogs will keep you right up to date.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit