It’s the most wonderful time of the year…

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After a couple of years with later and truncated Budget scrutiny processes, 2021 will see the first pre-Christmas Budget introduction since 2018.

9 December is the date for your diary, a day that will trigger a busy period of parliamentary budget scrutiny either side of Christmas.

The Cabinet Secretary for Finance and the Economy, Kate Forbes MSP, comes to Parliament bearing gifts this year. Not only will she introduce the Government’s spending and tax plans for next year (2022-23), she will also publish a Spending Review Framework document, a Medium-Term Financial Strategy (MTFS) as well as the normal other policy documents on public sector pay, equalities and a climate assessment of the budget.

To top off the excitement, the Scottish Fiscal Commission (SFC) will publish its Economic and Fiscal Forecasts, setting out forecasts for devolved tax revenues, social security spend and economic growth.

What to look out for in the Budget…

The size of the overall spending envelope

The October UK Autumn Budget and Spending Review set out the unadjusted Scottish block grant from Treasury through to 2024-25. This showed that the Scottish budget is expected to grow quite significantly next year (by nearly 8% after adjusting for inflation) before flattening off in subsequent years. This front-loading of spending over the course of the spending review period is perhaps understandable as we emerge from the shock of the pandemic.

However, as readers of previous blogs will know, the Treasury block grant only tells part of the story as to the size of the Scottish budget. This is because the block grant from Treasury is now adjusted to account for the devolution of tax and social security powers via Scotland Act 2016.

These block grant adjustments (BGAs) are based on Office for Budget Responsibility (OBR) forecasts. BGAs deduct resource from the Scottish budget for devolved tax revenues foregone by the UK Government.  Scottish Fiscal Commission (SFC) devolved tax forecasts are then added back in to the Budget.  BGAs also add resource to the Scottish Budget for social security spend foregone by the UK Government (see figure 1 below).

Figure 1: How is the Scottish Budget determined?

The key thing to look out for this week, in terms of the size of the Scottish Budget, will be the extent to which the SFC forecasts exceed the BGAs. If the tax forecasts by the SFC exceed the BGA, then the Scottish budget is better off than it would have been without the newly devolved powers.

Given that Scottish taxpayers overall pay more income tax than south of the border, it seems likely that the SFC forecasts will exceed the BGA.   However, the Scottish Government has also introduced changes to social security benefits that will affect the net position.

Economic outlook

It is likely that the SFC forecasts will be much more upbeat than when the last Scottish Budget was set, largely due to the opening up of the economy and the successful roll-out of the vaccination programme. As such, expect the economic outlook and tax receipt forecasts to be more buoyant than before.

However, there are significant economic risks on the horizon, chief amongst them the new COVID ‘omicron’ variant. But, the SFC will have ‘closed’ their forecast prior to the detection of this new variant, which has been dominating the news in this past week. This means that the economic outlook will not contain SFC judgements as to any possible economic impact from the new variant taking hold in the UK.

Another risk to the economy comes from rising inflation, which was noted as a risk by the OBR. The OBR forecast expected inflation to increase to 4.4% next year, a position that has worsened since those forecasts were published, and which many, including the Bank of England, think will go as high as 5% next year.

It will be interesting to see what assumptions the SFC make for inflation. Budgetary impacts from rising inflation are complicated and mixed. For example, increased wage inflation feeds through to higher tax receipts, but also higher costs for delivering public services, paying social security benefits, and building public infrastructure.

Rising inflation also means that an interest rate rise cannot be ruled out. Athough the Bank of England voted 7 to 2 for no change at its most recent meeting, markets still expect a rate rise is in the offing. If this were to happen, it could feed into public spending via the resulting increased costs to the UK government of their extensive borrowing taken on to tackle the pandemic. Higher interest rate payments on UK government borrowing means that less is available for public spending by the UK government, with potential knock on effects for Scotland’s Budget, depending on how the UK government reacts to any increased borrowing costs.

Budget policy decisions

As often happens with Budgets, some policy decisions are heavily trailed or pre-announced. For example, we already know that the Budget will propose that the Scottish Child Payment will double to £20 in April, at an estimated additional cost of around £90 million in 2022-23, over and above the previous planned spending on the policy.

It will also be interesting to see whether the Scottish Government opts to replicate policies announced in the UK Budget. For example, the Chancellor 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, up to a cash limit of £110,000.

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”.

Local government funding

The local government budget is always a hotly debated element of parliamentary scrutiny, and this year promises to be no different.

One of the key issues of contention in recent times has been around the lack of any multi-year funding certainty for local authorities, with knock on implications, for example, for third sector organisations.

The Scottish Government has cited the UK government’s lack of multi-year spending reviews as being the key barrier in place to delivering settlements beyond the next financial year. With the UK government publishing a 3-year spending review in October, including Scottish Treasury spending limits through to 2024-25, this barrier has been removed.

Speaking at the Local Government, Housing and Planning Committee in August of this year, the Cabinet Secretary for Finance and the Economy, Kate Forbes, stated:

“We desperately want to provide that long-term security and we desperately want that long-term security ourselves so that we can make long-term plans, which we have been unable to do because of year-to-year budgets. My sincere hope is that we will get the spending review this autumn, which will allow us to embark on our spending review and provide multiyear certainty to local government.

Until we have that security, it would not be prudent for us to provide it, because there are too many risks attached to our ability to deliver on the funding amount that we might confirm. We want to give that security because I know that local government wants to give security, for example, to some of the third sector organisations that it supports, which often appeal to local government for a multiyear settlement. It is a domino effect, but my hope is that that might change this autumn.”

The Scottish Government has stated that there will be no Scottish Spending Review at this stage, but a framework document for consultation. Does that mean that local authorities’ wait for multi-year settlements will continue?

The Green Party called for greater financial certainty for local government during budget debates of recent years. With two Green ministers now in place, it will be interesting to see whether the Budget documentation provides any at least indicative multi-year allocations to local authorities.

What is the timetable for parliamentary scrutiny?

Thursday 9 December will kick-off an intensive period of parliamentary budget scrutiny, in both committee and plenary discussions.

With the agreement between the Scottish Government and the Green Party providing a majority in the Parliament, the Budget is pretty much guaranteed to pass. It is not clear whether the usual bilateral meetings between the Cabinet Secretary and the various Party Finance spokespeople will take place.

Timings for the various budget plenary debates and income tax rate resolution vote have yet to be formally agreed. It is likely that a debate on the committees’ pre-budget reports will take place in late January, followed quickly by the Stage 1 debate on the Budget Bill, when MSPs and committees have the opportunity to submit alternative revenue and spending proposals through reasoned amendments to the motion on the general principles of the Bill.

In terms of SPICe work on the Budget, we broadly will aim to publish:

  • a blog covering key issues in the Budget on 9 or 10 December
  • top level infographics and detailed budget spreadsheets on 10 December
  • a detailed briefing on the Budget on 13 December
  • a detailed briefing on the local government settlement once allocations to individual local authorities are published.

Watch this space…

Ross Burnside, Senior Researcher, Financial Scrutiny Unit