After a topsy turvy Autumn of UK “fiscal events”, where UK Government policy shifted from proposing the biggest tax cuts in 50 years to proposing measures which aim to consolidate the public finances in the medium term, attention this week turns to the Scottish Government and its budget and tax proposals for next year.
On Thursday, the interim Cabinet Secretary for Finance, John Swinney MSP, will present the Scottish Government’s spending and tax plans for 2023-24. This will set out the Scottish Government’s ongoing response to the well-publicised challenges to have emerged over the course of 2022 following the Russian invasion of Ukraine in February. Dramatic increases in energy prices and general inflation have eaten into how far government (and individual and family) spending goes. The impact of this has already been seen in the Emergency Budget Review which set out plans to save over £1.2 billion this financial year (2022-23) for improved public sector worker pay deals and cost of living interventions.
Scottish Fiscal Commission forecasts key to the size of the Scottish Budget
The Scottish Budget will be accompanied by the all-important Scottish Fiscal Commission (SFC) forecasts, which will underpin the spending plans. Forecast judgements from the SFC are key to determining expected Scottish tax revenues and social security spending. Mr Swinney will be hoping that these judgements are not any more pessimistic than Office for Budget Responsibility (OBR) forecasts we saw last month. This is because of the way the SFC and OBR forecasts interact to produce the overall spending envelope in Scotland. When combined with SFC estimates of devolved tax revenues and social security costs, these forecasts determine the overall size of the Scottish budget.
As readers of previous SPICe 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 adjusted to account for the tax and social security powers that were devolved via Scotland Act 2016.
These block grant adjustments (BGAs) are based on 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 or not. If the tax forecasts by the SFC exceed the BGA, then the Scottish budget is better off than it would have been without devolved tax powers. If SFC tax forecasts are lower than the BGA, the budget is worse off than it would have been without devolved tax powers. If the social security spending forecasts are higher than the BGA added for social security, then money must be found from elsewhere to fill this gap.
Tax and Social Security policy will be important for public spending
Key to determining SFC forecasts will be Scottish Government policies on tax and social security.
On income tax, it will be interesting to see the extent to which the Scottish Government uses this policy lever to boost the public finances. For example, will the Scottish Government replicate the recent UK Government decision to lower the threshold for those paying the additional rate of tax?
What will the Scottish Government propose for taxation of people in different points of the earning distribution? There are already, for example, significant divergences for Scottish taxpayers earning over £40,000 relative to the rest of the UK. In the current year, Scottish taxpayers earning £50,000 pay around £1,500 more in income tax than equivalent earners in rUK. Will that divergence grow next year?
Similar dilemmas exist in the realm of social security policy. If the Scottish Government opts to provide more generous social security payments to Scottish residents than in the rest of the UK, then funding for that will need to be found from other parts of the Scottish Budget. The key thing to watch in this area is the extent to which the forecast spend in social security is higher than the BGA added to the budget for social security spend. As mentioned above, any spending over the BGA needs to be found from other parts of the budget.
What Budgets are the Scottish Government prioritising (and not prioritising)?
Thursday will tell us what areas of spending the Scottish Government is choosing to prioritise to get us through what looks like an economically challenging period.
In the devolution years, Health has always been protected from the effects of inflation. If Health is protected again (as was indicated in May’s Resource Spending Review), this will have implications (in a finite spending environment) for other parts of spend that are not protected.
What is the outlook for local government spending?
Local government has traditionally been a hotly contested element of parliamentary scrutiny and debate. This year will likely be no different.
There is often very little agreement on simple things like whether the budget has gone up or down given the range of policies local authorities deliver. With pay disputes ongoing, and according to COSLA staffing amounting to 70% of local government budget, the local government budget proposals will be another area to watch on Thursday.
Pay and public service reform
Given the widespread industrial action across the country at the moment, public sector pay policy will be watched with interest. With many pay deals still not struck for the current year (2022-23) setting policy and budgeting for next year will be trickier than normal.
At the time of the Resource Spending Review (RSR) in May of this year (which seems like an eternity ago), the Scottish Government had indicated it wished to keep the public sector pay bill flat in cash terms over the spending review period, and return “the overall size of the public sector broadly to pre-COVID levels”. With the high levels of inflation we’ve seen since and the additional resource that has had to be found this year for pay, this target looks even more challenging than it did in May. It will be interesting to see the latest plans.
What is the timetable for parliamentary scrutiny?
Thursday 15 December will kick-off an intensive period of parliamentary budget scrutiny, in both committee and the chamber.
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, but bilateral meetings between Party spokespeople and the Cabinet Secretary will likely still occur.
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 15 or 16 December
- top level infographics and detailed budget spreadsheets on 16 December
- a detailed briefing on the Budget on 19 December
- a detailed briefing on the local government settlement once allocations to individual local authorities are published.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit (FSU)