Spring (Budget Revision) has sprung, but further adjustments required to meet financial commitments for next year

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Yesterday, the Finance and Public Administration Committee considered the “Spring Budget Revision (SBR)” in an evidence session with the Minister for Finance, Planning and Community Wealth, Tom Arthur MSP. Background papers and an official report for the session are available on the Parliament’s website.

The SBR was also accompanied by a very helpful “Brief Guide to the SBR” produced by Scottish Government officials. Unfortunately, this document is not published on the Scottish Government website, but can be found via the Finance and Public Administration Committee papers available on the Committee homepage.

For readers who don’t know, Budget Revisions provide the opportunity for the Scottish Government to make in-year amendments to their spending plans.

For example, during the course of the financial year, it may become apparent that a particular spending line may have slipped, and the Scottish Government wishes to allocate that resource to another priority. There can be a variety of reasons for money being redirected to other priorities. For example, demand for support funding may be lower than expected, or infrastructure projects might be delayed into a subsequent financial year due to weather delays.

Revisions to spending may also arise from the Scottish Government receiving additional in-year Barnett consequentials (for example, in recent times there have been significant additions to the spending envelope arising from the pandemic response). 

There are normally two budget revisions per year, one in the autumn (usually September/October) and one in (very) early spring (usually published in January/February).

Although receiving less coverage and interest than the Government’s Budget proposals, Budget Revisions are nevertheless important as they show what movements have taken place in year, which, as already mentioned, can happen for a number of reasons.

So what is in the Spring Budget Revision considered by the Finance and Public Administration Committee yesterday?

The proposed changes detailed in the SBR are by no means insignificant. The one considered in Committee yesterday resulted in a net increase in the approved budget of £1,202.2 million from £56,495.2 million to £57,697.4 million, an increase of over 2%.

The Brief Guide produced by Government officials to support yesterday’s Committee deliberations also contained an update around the recent cost of living-related funding announcements. These came after the SBR was published on 3 February, and the implications of these for the Scotland Reserve are set out later in this blog.

Large funding changes again to support the pandemic response and other priorities

By scale, the “funding changes” in the SBR are by far the most significant. They add resource across a variety of budget lines and Government activity, but also return money to the centre to be redeployed elsewhere.

The majority of these changes relate to the COVID-19 response, which has been unprecedented in scale. Since the onset of the pandemic in March 2020, the Scottish Budget has received a total of £14,564 million in additional resource from the UK Government. The Scottish Government states that it has allocated £14,855 million to its COVID response, which is £291 million more than has been received via UK Government transfers.

SPICe will shortly publish a blog looking at these COVID allocations in more detail.

COVID funding changes made in the Budget Revision include:

  • a net addition to the Health and Social Care portfolio of £682 million for COVID pressures
  • £295 million in Business Support for distribution by local authorities
  • £131 million allocated for Self Isolation Support payments
  • £24 million of Capital Grants for businesses to provide ventilation
  • £10 million for Visit Scotland (part of the Cultural Support package of £64 million).

Non-COVID related funding changes included support for the Scottish Government’s 100 Day Commitments pledge made during last year’s election. For example:

  • £50 million additional funding to increase teacher numbers by 1,000 and classroom assistants by 500 to assist with education recovery in Local Government.
  • £25 million additional funding to 3,000 SMEs to invest in digital capability to increase competitiveness, productivity and growth in the Finance & Economy portfolio.

“Whitehall Transfers”

The SBR also includes a summary of the transfers to the Scottish budget from the UK Government that are outwith the normal Barnett formula process. These, are known in the documentation as “Whitehall transfers” and increase the Scottish budget by over £130 million.  

This includes a couple of additions that catch the eye. The largest relates to a “further instalment of the migrant health surcharge of £62.4 million”, which is pooled centrally by the UK Government and distributed on the basis of the Barnett formula (albeit it is not based on additional departmental allocations by Treasury so not formally classed as a Barnett consequential). This surcharge is paid as part of immigration applications if individuals are applying for a UK visa.

Another eye-catching Whitehall transfer is of £65 million of COP26 transfers across a number of budget lines. This includes £51.5 million for increased policing and staff costs.

The Scotland Reserve position

This financial year has seen very high levels of late-in-the-year announcements around the omicron variant and also in preparation for impending cost of living increases.

This is reflected in a very fast-moving Scotland Reserve position compared with the position when the SBR was published in early February.

The Scotland Reserve allows for a Fiscal Framework subscribed carry over of funding across financial years. The Scotland Reserve is capped at £700 million with annual drawdowns from the Reserve normally set at £250 million for Resource and £100 million for Capital and Financial Transactions combined. As Scotland is currently within a defined period of “Scotland Specific Economic Shock” (as set out in the Fiscal Framework) the annual drawdown limits are waived but the cap of £700 million remains.

Movements of money in and out of the Scotland Reserve can arise for a variety of reasons. For example, carry overs between years can be planned for a specific purpose (for example the £120 million being carried over from this year for Local Government funding in 2022-23).  As mentioned above, they may emerge during the financial year for a variety of reasons (for example, weather related delays in infrastructure projects). They may also arise from changes to funding via devolved taxes or expenditure formalised in the provisional and final outturn process after the end of the financial year.

The Brief Guide states that

“The Scotland Reserve position evolves continually across the financial year with the emerging outturn position for a particular year influencing the funding available to support future year funding.”

There have been a number of developments in the Reserve position since it was published on 3 February.

The Scottish Government states that at the time the SBR was published on 3 February, the UK Treasury had provided an updated funding position on 26 January which included a clear indication that the position was close to final, with:

“… any subsequent movement likely to be in the region of plus or minus £20 million. This is the position that is reflected in the SBR document and that underpins the decision taken to use the Scotland Reserve to carry forward the £120 million of additional funding allocated to Local Government as part of the 2022-23 Budget process.”

The implied balance in the Scotland Reserve contained within the SBR is £283 million.

There were then UK Government announcements of a package of Cost of Living measures with an associated consequential impact for Scottish Government of around £290 million.

On 10 February the Cabinet Secretary for Finance and the Economy set out the Scottish Government Cost of Living measures equating to £290 million – the Scottish equivalent of what was being allocated via the UK equivalent announcements.

The Scottish Government is now claiming that the UK Supplementary Estimates (which were published in late February) confirmed that the Scottish budget was to receive less than the Scottish Government was expecting. This is because the UK Government has decided to fund various commitments by re-prioritising its own budgets, rather than via “new money” triggering Barnett consequentials.

This, and other movements in the Reserve which is constantly evolving, means that the latest implied net position in the Scotland Reserve is -£42 million, not the +£283 million as presented in the SBR Supporting document.

As a result of this changed position, the Scottish Government will now require to find another £42 million to place in the Scotland Reserve between now and the end of this financial year to meet commitments made for 2022-23. On the Resource (day-to-day spending) side the Scottish Government must find £98 million by 31 March to meet commitments for the next budget year starting on 1 April.

In terms of how the Scottish Government plans to manage this, the Brief Guide states that “active management of the financial position” will allow them to deliver the “necessary levels of underspend” to support commitments made for the next financial year when the cost of living crisis will really start to bite.

Between now and the end of the financial year later this month, the Scottish Government states that “spending against the Spring Budget Revision limits in some areas will be actively constrained – notably in Health where the final consequential position was far less than previously anticipated.”

Ross Burnside, Senior Researcher, Financial Scrutiny Unit, SPICe