Fiscal sustainability: long term thinking required!

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The Scottish Fiscal Commission (SFC) yesterday published its first fiscal sustainability report, looking at a long term (50 year) trajectory for Scotland’s population and finances.  

This report follows recommendations by the OECD in its evaluation of the SFC in 2019, and also the previous Parliament’s Finance Committee. It sees the SFC follow other independent fiscal institutions (IFIs) in publishing these kind of longer term looks at fiscal sustainability. The SFC’s intention is to publish a fiscal sustainability report at least once per five-year Parliamentary session, so this is going to be a key document which Parliament and committees refer to over the remainder of this Session.  

This blog provides a high level summary and some initial analysis of the report. It also highlights some of the implications for the public policy debate in Scotland.  

First, the caveat… 

The first thing to note on these projections is that they are just that: projections. They are not going to be, or even intended to be, precise. Population projections never are. I’ve been around long enough to remember former First Minister Jack McConnell discussing population projections suggesting that Scotland’s population would fall below the “psychologically significant” 5 million mark by 2009. That didn’t happen because circumstances and policy changed. Population projections are not destiny.  

The SFC report acknowledges this up-front:  

“The main aim of the long-term projections is to highlight how broad trends will affect the public finances over time, rather than provide a specific point estimate. Therefore, we use the term ‘projection’ rather than ‘forecast’ throughout this long‑term analysis. 

We use the analysis to provide an insight to the scale of changes that may be required in terms of overall spending and tax decisions. Although there is uncertainty about the scale of the challenges, those shown by the fiscal sustainability analysis are real and these are what our report focusses on.” 

Nevertheless, based on the trajectory of current policies, powers of the Scottish Parliament and rules set out in the Fiscal Framework, the SFC assesses 

“that the Scottish Government will face significant challenges in funding the future provision of devolved public services in Scotland.” 

So, what is the SFC projecting? 

Falling and ageing population 

Using National Records of Scotland projections, the report notes in its central scenario that the population of Scotland falls by around 400,000 over the next 50 years, largely as a consequence of a low birth rate.  

A low birth rate results in an ageing population. As the figure below shows, on current trajectories we will see over 65s as a share of the overall population increase to 31 per cent by 2072-73. The traditional “working age” 16-64 year old population will fall, as will the under 16 population. The average age in Scotland will rise from 42 this year to 49 in 2072-73.  

From the 2030s onwards the SFC forecasts a falling labour supply, which will have a negative impact on economic growth. Indeed assumed GDP growth over the 50 year period is a modest 1.2 per cent per annum.  

Changing demands on devolved public spending 

Population ageing (having more older and fewer younger people) feeds through to projections for public spending, as shown in the figure below. Based on projections for spending under current Scottish Government policies, Health comprises 50% of all Scottish spending by the end of the 50 year period, compared to 35% in 2027-28. Education falls as share of spending from 18% in 2027-28 to 11% in 2072-73.  

In terms of the overall size of the spending envelope available for devolved services, the SFC project this to rise from £54 billion in 2027-28 to £117 billion in 2072-73 in real terms. The block grant will remain the most significant element of Scottish Government funding, driven by increases in health spending in England feeding through to the Scottish budget.  

Fiscal sustainability 

In its section on fiscal sustainability, the SFC note that if public services in Scotland continue to be delivered as they are today, Scottish Government spending over the next 50 years will exceed estimated funding available by an average of 1.7 per cent per annum.  

However, they also note that this gap between spending and available resource could be even higher. Pointing to OBR forecasts for what might be required to make UK public finances sustainable, the SFC has:  

“modelled a scenario where the fiscal tightening is applied evenly across all areas of UK Government spending and taxation. This would lead to a reduction in funding for the Scottish Government budget through a reduction in the Block Grant and higher BGAs for tax. The end result is a considerably higher fiscal gap in the Scottish Government budget, with an average over the next 50 years of 10.1 per cent of total spending each year.” 

This fiscal sustainability gap is presented in the figure below.  

Effect of population variants on annual budget gap 

The report also points out (see figure below) that under the terms of the current Fiscal Framework between the Scottish and UK Government, the annual budget gap (ABG) is reduced in the low population scenario and increases in the high population scenario. This is arguably an unintended consequence of the current system and might be something that the two governments wish to consider when the Fiscal Framework is finally reviewed.  

Population variant effects on Scottish Government funding 

Block Grant  
Tax net position 
Total effect 
Low population 
Slightly lower, as Scotland has a smaller population share in the Barnett formula 
Substantially higher, as Scotland has smaller BGAs which offset reduced tax revenues 
Substantially lower, as the lower population reduces spending on health and education 
Increased funding and reduced spending leads to reduced ABG 
High population 
Slightly higher, as Scotland has a higher population share in the Barnett formula 
Substantially lower, as Scotland has larger BGAs which offset increased tax revenues 
Substantially higher, as the higher population increases spending on health and education 
Reduced funding and increased spending leads to increased ABG 

Source: Scottish Fiscal Commission 

Although, the SFC does also state this is purely a budgetary impact and doesn’t take account of the wider economic effects of a low population scenario:  

“Although our analysis shows the effects of the population change on Scottish Government finances, we recognise this is a narrow lens through which to view the effects of a falling population, for which there are broader societal implications.” 

What are the implications of this for public services and policy?  

These findings raise fascinating questions for the Scottish Parliament and wider civic Scotland.  

As said at the start of this blog, the report is based on current trajectories and policies.  

However, it raises questions around what policies might need to be adapted to accommodate the trajectory Scotland is on. For example, what is the combination of spending cuts and/or tax increases that might be required to fill the annual budget gap identified?  

The report also points to challenges for the Scottish Government and Parliament around the allocations made in budgets. For example, if we have an older population, will we inevitably need to redirect additional resource to health and social care, and less on interventions aimed at younger members of society? What steps can be taken to elongate healthy and active years? Do we need to be redirecting resources now into more preventative interventions to save resources in the longer term?  

Perhaps more fundamentally, the report also raises questions for policy makers around the requirement to be more pro-active in reversing these trends.  

For example, what steps can be taken to boost the working age population? What can be done to boost the productive capacity of the economy, and increase the modest growth trajectory assumed by the SFC of 1.2 per cent a year between 2027-28 and 2072-72? How might the Scottish and UK government collaborate to increase working age migration into Scotland?  

This report is likely to form the basis of these kinds of debate over the coming years. In the short term the Finance and Public Administration Committee’s inquiry into public service reform will be important, but these challenges require fundamental thinking around how productive we are, and what type of economy and society we want in Scotland.  

Ross Burnside, Senior Researcher, Financial Scrutiny Unit