This blog sets out some initial analysis of the Scottish Government’s Resource Spending Review. A more detailed SPICe briefing to support Committees in their pre-Budget scrutiny will follow prior to summer recess.
Yesterday saw the publication of the first multi-year resource spending review in Scotland since 2011. It followed a Scottish Government consultation on spending priorities launched in December last year. At the time of the consultation launch, the Cabinet Secretary said the Resource Spending Review (RSR) would “outline resource spending plans to the end of this Parliament in 2026-27″ and would
“give our public bodies and delivery partners greater financial certainty to help them rebuild from the pandemic and refocus their resources on our long-term priorities.”
Alongside the RSR, the Scottish Fiscal Commission (SFC) presented its latest economic and fiscal forecasts. SFC forecasts give estimates of the revenues that will materialise from tax receipts over the next five years, and the levels of spending that will be required to fulfil social security policy commitments. They also set out important judgements on the likely trajectory for economic growth and inflation.
The Medium-term financial strategy (MTFS) was also published as well as an Equality and Fairer Scotland statement.
Taken together, these documents will help to inform parliamentary committees’ pre-budget scrutiny.
An uncertain context
As has become the norm in recent years, this latest fiscal event comes at a time of great economic uncertainty. The Russian invasion of Ukraine, steeply rising energy prices and supply chain disruptions in China, have all added to the difficult economic outlook.
Together these effects have contributed to rising inflation and slowing growth. The SFC states that after Scottish GDP growth of 2.1 per cent this year “we expect growth to slow to 1.1 per cent in 2023-24, slightly lower than we forecast in December 2021.”
Resource Spending Review – a tight financial outlook
After adjusting for the effects of inflation (so in “real terms”), the overall spending envelope presented by the Scottish Government in the RSR is expected to grow by 5% over the period 2022-23 to 2026-27, relatively slow growth by historic standards.
Spending is allocated by portfolio as follows
However it is important to bear in mind that, as ever, with Spending Reviews, the situation is likely to change. As the Cabinet Secretary herself said:
“today’s Resource Spending Review is not a Budget. Change to the fiscal position is inevitable over the next few year, one hopes for the better. Tax decisions will be taken in future budgets.”
So what did the RSR say and do?
Priorities for spending identified, but less detail than the previous spending review
The Scottish Government identifies the following key priorities for RSR:
- “reform to improve outcomes for children currently living in poverty
- reform to help achieve the just transition to a net zero and climate resilient society where we play our part in tackling the global climate crisis;
- reform in the way we experience our public services as we recover from the COVID-19 pandemic; and
- transformation of our economy to enable growth, opportunity and a sustainable outlook for our future.”
Spending choices are presented down to “level 2”, less detail than provided in the last Spending Review over a decade ago, which presented spending to the more detailed “level 3” budget lines.
Given what the Cabinet Secretary said when launching the RSR consultation in December about providing greater certainty to public bodies, this may disappoint public bodies who have not received details of their broad spending envelope. For example, it is not possible to look at the document and see the funding outlook for key public bodies which are presented in level 3 budget lines like Health boards, Skills Development Scotland and SEPA among others.
The Cabinet Secretary responded to this point about the detail provided in a tweet, saying:
“We’ve set out as much granular detail as possible to help with planning, but there are limits due to the extreme economic volatility – when the UKG published its figures (on which we base our budget) inflation was 3.1%. Now it’s at 9% and set to rise further.”
Health, Social Care and Social Security protected, meaning less for other parts of the budget
Looking at the Budget numbers presented, the clear priorities of the government in a budgetary sense are Health and Social Care and Social Security.
Spending on the health and social care portfolio is projected to increase to over £19 billion in 2026-27, an increase of 2.6% in real terms over the course of the RSR period.
Social Security assistance is forecast to increase by just under 50% over the period, reaching £6.5 billion in 2026-27. Indeed, the SFC point to an increasing gap between the amount the Scottish budget will receive in its block grant for Social Security and the amount the budget plans to allocate to social security benefits.
In the current year (2022-23) social security payments are forecast to be £462 million higher than the amount added to the Scottish Budget (the block grant adjustment, or BGA) for payments devolved from the UK Government. In 2026-27, spending above the funding received by the UK will increase to just under £1.3 billion. This extra spending has to be found from within the Scottish Government’s spending envelope.
Unprotected budgets face being squeezed
There is very little explicitly said about those budget lines that are not stated as priorities. This therefore must be inferred by looking at those budget lines that are not rising.
The SFC points out the implications of this in its forecast document which states:
“The Scottish Government plans to increase spending on health and social security…..Before adjusting for inflation, the remaining funding is lower for the first three years of the RSR than in 2022-23. Only in 2026-27 is funding for other areas expected to increase above the current level.
Once adjusted for inflation, funding for other areas falls more substantially for the first three years of the RSR and is 8 per cent below 2022-23 levels by 2025-26. In 2026-27 funding is expected to be 5 per cent below 2022-23 levels in real terms. This reduction in real funding for other areas has consequences for how the Scottish Government has allocated funding to different portfolios. “
By prioritising health and social security as it has, other parts of the Budget will be squeezed. For example, Local Government’s “core” resource budget is projected to be cut by 7% in real terms over the period. The £10,616 million local government figure used in the Spending Review is the combination of the General Resource Grant, guaranteed non-domestic rate income and specific revenue grant figures (as set out in the SG’s 2022-23 Budget) plus the additional £120 million announced at Stage 1. There has been no official reaction from COSLA yet, likely because, after the Local Government election, COSLA leadership is still to be determined.
In addition, the Enterprise, Tourism and Trade budget line will fall by 16% in real terms – this is something that parliamentary committees may wish to consider, given the impact of the pandemic on tourism and the economy.
Public service reform: reforming and resetting
Public service reform is clearly targeted as an area where the Government aims to achieve funding “efficiencies”. Indeed, the spending review sets an “expectation that public bodies will deliver annual efficiencies of at least 3 per cent” and that all public bodies are expected to “demonstrate that they remain fit for purpose against the present and future needs of Scotland’s people, places and communities”.
The Cabinet Secretary in her speech to the Chamber called for a focus on public service reform “to become more efficient, giving us space to realise our ambitions for better outcomes”. The RSR document provides some examples of how this reform might be achieved.
- Digitalisation – for example, providing common digital platforms that cut across organisational boundaries.
- Maximising revenue through public sector innovation – for example, expecting public bodies who charge for services to identify ways to recover more of their costs.
- Reform of the public sector estate – for example, have fewer public sector buildings and increasing co-location and the interoperability of offices.
- Reform of the public body landscape – for example, through further consideration of the potential for shared services.
- Improving public procurement – for example, aim to increase cross-sectoral consolidated procurement, and building on current sectorial centres of expertise to realise financial efficiencies.
It is not clear what scale of savings the Scottish Government envisages from these plans and over what time period, although the document states that:
“Over the coming months, the Scottish Government will engage pro-actively with public sector leaders to identify options that should be prioritised over the spending review period. Initial conclusions will be included in the 2023-24 Scottish Budget.”
Pay and public sector headcount
Another key plank of the Cabinet Secretary’s ambition to reset the public sector post pandemic relates to public sector pay costs.
The public sector pay bill totals over £21 billion per year and comprises a sizable proportion of the discretionary spending envelope. With consumer price inflation running at close to 10%, it is likely that demands on public sector pay are going to increase in the coming months. The RSR states that “the Scottish Government will always look to support the lowest paid” but that “we can only protect jobs and services if we can agree on settlements within what is available to the Scottish Budget.”
The Scottish Government states in the RSR that
“we propose an approach which aims to hold the total public sector pay bill (as opposed to pay levels) at around 2022-23 levels whilst returning the overall size of the public sector broadly to pre-COVID-19 levels. This will enable space and flexibility for fair and affordable pay increases that support the lowest paid in these challenging times.”
This implies a reduction in the headcount of the public sector with “the broad aim to return the total size of the devolved public sector workforce to around pre-COVID-19 levels by 2026-27.” Since the end of 2019, employment in the devolved public sector has increased by around 30,000 on a headcount basis.
A RSR for outcomes?
Much of the language in the RSR appears to be focused around “outcomes” – chapter 2 is headed “Delivering Strategic Outcomes for Scotland” and chapter 3 “Improving outcomes.” However, there are only a few mentions of the National Performance Framework and the National Outcomes. Some of the language of the high level national outcomes is used, for example “we will invest public funding to build a Scotland where communities are fairer, inclusive and empowered, and people grow up loved and respected, well-educated, and healthy.”
But, there does not appear to be any analysis of the impact of the spending plans in the RSR on the delivery of the different national outcomes and the outcomes in totality, or of how the data in the NPF has informed these spending plans. This may be an area committees wish to return to in their pre-budget scrutiny.
Conclusions
After over a decade of single year budgets that stood alone, it was fascinating to hear a more medium to long term set of spending priorities identified yesterday. These choices will have big implications for non-protected parts of the budget and the wider public sector.
While recognising that these are broadly indicative spending figures that will almost certainly change, the RSR nevertheless sets a strategic direction for the public sector in the years to come.
There will be much for Parliament and its Committees to scrutinise in budget cycles to come.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit, SPICe