Decorative - picture of the budget document

Transparency and the Scottish Budget

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The Scottish Budget for 2023-24 is set to be formally passed by MSPs tomorrow.

With Brexit aftershocks, the pandemic, the war in Ukraine, and inflation now impacting on all aspects of economic life, it seems that every budget year in recent times has been “exceptional”, “unusual” or even “unprecedented”.

2022-23 perhaps took the biscuit. This was due to the fact that the budget, set in February 2022, was subject to increased in-year pressures across a number of areas, without compensating additional resource to fund them.  This is in contrast to the case during the height of the pandemic in 2020-21, when the Budget was supplemented to the tune of billions of pounds.

This meant that, in 2022-23, various budget lines have been subject to in-year reductions to fund improved public sector pay offers, increased social security costs and other cost of living interventions to mitigate inflation impacts. The 2022-23 volatility will now feed through to 2023-24, with next year’s budget facing uncertainties on a number of fronts, from infrastructure projects, to pay, and public service delivery.

The Deputy First Minister acknowledged this at Finance Committee on 7 February 2023 when he said:

“I have to accept that there is a significant amount of risk [in the budget], because we are living in volatile times in relation to inflation, the implications of inflation on employment costs, energy prices and the cost of procuring materials, although the latter is getting better now. Earlier this year, that was at its most acute, sharp and difficult, but it is getting better now that some supply chains—or their alternatives, due to disruption related to Ukraine— are beginning to settle down. However, we still face significant risks, and, of course, it could all change dramatically.”

This blog is a little longer than normal, and so we’ve added a contents popout below:

Does the Budget presentation enable or limit scrutiny?

In two recent blogs, SPICe has been exploring the Scottish Budget 2023-24 from a human rights perspective. We first looked at how the budget documents measured up broadly against the three principles of human rights budgeting – transparency, participation and accountability – and then at the common themes in committees’ budget scrutiny under the same three principles.

This blog builds on this work, and considers this year’s budget scrutiny process from the point of view of the transparency of the budgetary information provided by the Scottish Government to support parliamentary scrutiny.

In football, there is a term often used that “you can only play what’s in front of you”, and when it comes to considering a Budget, it can also be said that the Parliament can only scrutinise what’s in front of it.

So, was the information provided by the Scottish Government an effective enabler of scrutiny? To what extent did it allow MSPs to see a clear picture of Government plans?

As is often the case, the picture is mixed.  

Scottish Fiscal Commission aids transparency

One of the benefits of having an independent forecaster in the Scottish Fiscal Commission (SFC) is that it allows for an independent presentation of the revenues that might reasonably be expected to be raised from Scottish Government tax policies. This is invaluable to the budget process. Before the creation in 2010 of the UK’s first independent forecasting body, the Office for Budget Responsibility (OBR), the UK Treasury was often accused of being overly optimistic around revenue forecasts from tax policy. Having an independent forecaster reduces that possibility (although some also argue that independent forecasters are prone to pessimism bias).

Having the SFC produce forecasts which underpin the Scottish Budget does not remove the likelihood for forecast errors, but it does provide useful independence and transparency – helpful to both the Government and Parliament.

The SFC also produces forecasts for likely demands for social security spending deriving from Scottish Government social security policies. Again, this is helpful in setting out independent expectations of the implications of policies for the public finances. It also allows for scrutiny of impacts on other parts of the Budget – where social security spend is higher than the block grant provided to the Scottish budget for that purpose, then monies must be found from other parts of the budget.

Having the SFC perform such a central role in the Scottish budget therefore is a very helpful addition to the Scottish budget process, and an important check on Government.

Other transparency gains

Another useful part of the 2023-24 budget was the inclusion of greater material around equalities. As shown in our recent SPICe blogs on human rights budgeting, improvements within the Equality and Fairer Budget Scotland Statement and an increased focus on linking portfolio priorities to human rights was a welcome improvement for committees. Witnesses giving evidence to the Equalities, Human Rights and Civil Justice Committee on 24 January also praised improvements to accessibility, and the Scottish Government’s progress towards linking the budget to national outcomes.

The 2023-24 Budget also included the Climate Change Assessment of the Budget”. This complements the existing taxonomy assessment of the capital budget and the carbon assessment of the budget with a narrative section highlighting spending across portfolios which will contribute to the Scottish Government’s aims for achieving a just transition to net zero. This addition has been informed by the Scottish Government and Parliament’s Joint Budget Review, which aims to improve the transparency and scrutiny of spending decisions from climate perspective.

Following a request from the Scottish Fiscal Commission, the Scottish Government has also now presented Budgetary information on a Classification of Functions of Government (COFOG) basis.  This allows three years (2021-2024) of comparative budgetary information to be viewed via a consistent classification of government spending activity (for example “Economic affairs”, “Education”, “Housing and Community amenities”, and Health among many others). The transparency benefit of COFOG is that it allows direct comparison of budgets on a consistent categorisation, and not via portfolios which frequently change.

Still room for improvement

However, there were a number of omissions in this year’s Scottish budget which presented a barrier to Parliamentary and public understanding of the Budget. Some of these have been explored in the cross-party Finance and Public Administration Committee report into Budget 2023-24.

Lack of public service reform and public sector pay plans

When the Scottish Government published its Resource Spending Review and Medium Term Financial Strategy in May 2022, it committed to publishing details around planning for public service reform, including direction of travel for public sector employment. However, these expected plans have been a notable omission, and barrier to parliamentary scrutiny. Responding to this omission, the Finance and Public Administration Committee said:

“The Committee is disappointed that the Scottish Government’s initial outcomes and plans for its public service reform programme have not been published. This is particularly so given the comments by the Auditor General for Scotland that public service reform is “now urgent” and the evidence we heard that “there has never been a more important time to consider prioritisation in public services and productivity-enhancing reforms in the public sector.” If the Scottish Government has decided to no longer publish its plans and initial outcomes, we would have expected it to have announced and explained this decision, to enable transparency and scrutiny. We are further concerned that there may be no overarching framework and strategy in place with overall aims, costs and savings anticipated from reform.”

Similarly, the Scottish Government also opted to not publish a public sector pay policy. Given that public sector pay accounts for around £22 billion of the budget, not having a steer on pay parameters leaves some sizeable unanswered questions. Whilst acknowledging “difficulties arising from soaring inflation” and “knock-on implications for public sector pay”, the Finance and Public Administration Committee

“was disappointed there was no detail in the budget on whether or not the Resource Spending Review targets around public sector pay and headcount remain, and, if so, how these might be achieved.”

In responding to questions around the lack of published public service reform plans, Mr Swinney said:

“I understand that the committee feels that there is a big report waiting to be published. The way that I would characterise it is that the Government is committed to the Christie commission principles; we have been taking those forward on an on-going basis since the commission reported.”

The Scottish Government did subsequently provide additional detail and information to the Finance and Public Administration Committee in its response to the Committee’s budget report, but this still does not include specific information on public sector reform and public sector pay. This will form the basis of ongoing scrutiny work by the Finance and Public Administration Committee, and other parliamentary committees will likely return to these issues in their year-round scrutiny of the next Budget. 

Other policy and budget transparency gaps

Another gap in the Scottish Government budget publication, picked up by both Committees and external commentators like the Fraser of Allander Institute, related to the lack of detail around flagship policy areas like the National Care Service and delivery of ambitious climate-related targets. Again, this is an area that committees will likely return to.

While the new “Climate Change Assessment of the Budget” provides an additional narrative setting out how spending decisions in the Budget are expected to support the transition to net zero, the information currently presented here and in the capital taxonomy and the carbon assessment does not allow for hugely effective scrutiny from a climate perspective. We do not know how much individual policies are expected to contribute to emissions, whether decisions being taken in this Budget will set Scotland on a course to meet the Scottish Government’s net zero target, or the volume of emissions ‘locked in’ to future years through existing policy and behaviours.

There was also the announcement last week that the Scottish Government had found an additional £300 million to fund teacher and other council workers’ pay this year and next. This was despite clear statements from the Government that there was no additional money for pay. It is not clear whether this has been found from additional emerging underspends and savings, or another source. This highlights the challenge for Parliament, which has arisen in previous years, of understanding what the total size of the spending envelope is, where flexibilities might be, or what is contained within budget lines, as explored in the case study below.

Case Study: do non-government MSPs and committees have the information to make alternative budget proposals? 

During the Stage 1 debate, there was an alternative Budget proposal made to fund increased social care pay. It was proposed that this be funded from a number of Budget lines, including from the “miscellaneous” health budget of just under £150m.

There was then a debate about what the loss of that miscellaneous funding might entail, despite there being a lack of clarity around what was actually covered by that budget line. The point arising from this exchange is that any budget called “miscellaneous” is not describing what that budget does.  

When opposition members or committees are told they must identify what should be reduced to fund a policy proposal, then logically, they need to have a clear picture as to what is in the Budget and what the available budget is. This issue has also arisen in previous years’ budget processes.

Non-government members and committees don’t have, and never will have, access to the same information and resource as the government, so it is important for parliamentary scrutiny they are provided as much information as possible.

Systemic challenges to the Budgetary rules and frameworks 

2022-23 has also highlighted challenges around the rules and frameworks in place for the composition of the Scottish Budget.

As late into the year as we are, the Deputy First Minister is still not sure whether the 2022-23 budget can be, in his words, “balanced”, in other words, not overspent. Key to this is what comes out of the UK Supplementary Estimates for 2022-23, which we are not expecting until late February. This means that the Scottish Government is not clear as to the overall size of its spending envelope until very late in the year – only serving to increase the uncertainty.

With the second (and last) in-year Budget revision published in early February, this means that these are not reflective of the final budget position for this year. The content of them is also not particularly transparent. For example, it is not easy to track where money is going. Many lines are reduced and directed to “other Scottish Government priorities” although which priorities is not clear.  

Questions around the ability or not of the Scottish Government to “balance” the budget stem in part from a lack of flexibility within the current fiscal framework arrangements between the Scottish and UK governments. The Fiscal Framework was due to be reviewed in 2022, but the Deputy First Minister acknowledged the lack of progress between the two governments in this area at the Finance and Public Administration Committee on 7 February 2023.

One issue with the current arrangements comes from the lack of flexibility in the borrowing powers of the Scottish Government and the fact that they have remained the same since 2016 (not being increased by inflation, for example). They are also probably not sufficient to meet the volatility in forecast errors we are likely to see in income tax “reconciliations”, when outturn income tax receipts are adjusted with the forecasts made when budgets are set. The latest SFC forecast “reconciliation” for Scottish income tax sits at -£732 million, well over double the £300 million borrowing the fiscal framework allows for forecast error.  

A challenging budget to manage, but scope for improved transparency

This year has been particularly challenging for the Scottish Government in preparing its budget and for the Parliament in scrutinising it, and that must be recognised. With block grant funding, block grant adjustments, reconciliations, in-year revisions, the Scotland Reserve and borrowing, the Scottish Budget is extremely complex, with lots of moving parts. And that’s before we even consider the pressures and demands arising from high inflation.

However, it is clear from the scrutiny of Finance and Public Administration and other parliamentary committees that more can be done to improve transparency in the presentation of Scottish Budget information.

It is to be hoped that the Scottish Government’s commitment to fiscal openness and transparency results in ongoing improvements to the presentation of budgetary information.

Ross Burnside, Financial Scrutiny Unit, SPICe