Medium term financial strategy – decisions pushed back

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The Scottish Government published its Medium-Term Financial Strategy (MTFS) on Thursday 25 May 2023. This is a five-year look ahead at the trajectory for Scotland’s public spending and government spending priorities. The MTFS was the first opportunity for the new Cabinet Secretary for Finance (and Deputy First Minister), Shona Robison MSP, to set out a strategic direction for the public finances. This direction was underpinned, like the Scottish Government’s Budget, by forecasts produced by Scotland’s independent forecasting body, the Scottish Fiscal Commission (SFC).

The MTFS is intended to be a key document underpinning the Scottish Budget process. It is designed to serve as the hook upon which Parliamentary committees undertake scrutiny in advance of the Government publishing its Budget later this year – the so called “pre-Budget Scrutiny” phase of the Scottish parliamentary budget process.

It contains lots of detail as to the scale of the challenges facing the public finances in the coming years, and a general approach to setting budget priorities, but specific details of how the Scottish Government intends to take on these challenges were missing.

However, more specific plans for the medium term were pencilled in for later in the year when the Scottish budget 2024-25 is brought to Parliament, alongside updates to the Resource spending and Capital investment plans for subsequent years to 2026-27.

Scottish Fiscal Commission forecasts broadly similar to six months ago

The SFC forecasts were largely unchanged from those set out in December 2022 and used to underpin the 2023-24 Scottish Budget.

Energy prices have fallen more quickly than previously expected resulting in slightly lower expectations for inflation.

This has fed through to a slightly improved economic outlook than the previous forecast, which predicted a shallow recession this year. The SFC is now predicting relatively modest growth of 0.3% in 2023-24, followed by growth of 1.0% in 2024-25 and 1.3% in 2025-26.

Living standards, however, are forecast to continue to fall this year because overall inflation continues to outpace growth in nominal household disposable incomes. This has been driven by a broader range of price rises than just energy, for example continuing high food prices.  

The outlook for the public finances remains broadly unchanged relative to the previous forecast, with 2024-25 likely to be tight. This is due in part to an anticipated negative income tax reconciliation of £712 million for 2021-22 income tax receipts which will be taken from the 2024-25 Budget. The final “reconciliation” figure will be known this summer when HMRC publishes the 2021-22 income tax outturn figures.

Overall, the SFC view is that the Scottish Government faces a challenging public finance outlook, driven by rising demand and cost pressures .

MTFS points to significant budget gaps

The MTFS sets out projections for overall resource and capital spending, setting out the potential for significant gaps between available resource and demand. These projections draw on SFC forecasts and the Government’s own assessment of the Scottish Government spending demands for areas like health and education, as well as social security.

Based on these projections, resource spending will grow by more than projected available funding. The Government estimates in its central spending scenario that this could exceed £1 billion (2% of resource spending) in 2024-25, rising to £1.9 billion (4%) in 2027-28.

On the Capital side (the funding of infrastructure like roads and hospitals), the Scottish Government projects a similar gap between the central funding outlook compared to central spending plans. The MTFS puts this gap in the region of £900 million by 2025-26.

Given these shortfalls, the Deputy First Minister told Parliament that certain areas of spend would be “deprioritised” and that details of this would be published later in the year.

“In order to prioritise the programmes that will have the greatest impact on delivery of our three missions, such as early learning and childcare, we will need to deprioritise programmes that make a less meaningful contribution to our central missions. Today, I commit to refreshing both our resource and capital multiyear spending envelopes as part of the 2024-25 budget, through which I will set out the Government’s plans to put our public finances on a more sustainable path.

Our policy choices and priorities will be clearly set out for all to see. If others disagree with them, they can, of course, bring forward alternative spending plans as part of the budget process.”

Strategic approach to tax

Spending reductions are not the only means by which the Scottish Government can “balance the budget”. Tax revenues may also play a part and the DFM signalled that she would establish and chair an “external tax stakeholder group” this summer:

“This group will build on the Government’s inclusive approach to tax policymaking and will consider how best to engage with the public and other stakeholders on the future direction of tax policy, including whether a “national conversation” on tax is required. The outcomes of this engagement will feed into the Budget 2024-25 and the development of the Government’s longer-term tax strategy. The Scottish Government will publish updates of these alongside the MTFS in 2024.”

It will be interesting to see who is invited to join this group, what its remit will be and how it will inform tax decision making. As the Fraser of Allander points out in its blog on the MTFS, there have been many conversations and round tables on tax over the years, including in the area of local taxation where change has been minimal.

“engagement is only meaningful if feedback and suggestions are taken on board.”

What was missing from the MTFS?

Whilst the MTFS set out revisions to public service reform plans (for example it seems to have dropped the previous plan to reduce the public sector headcount to pre-covid levels) and the extent to which there is a potential “budget gap” between spending available and existing commitments, it did not really set out anything concrete on how the gap might be filled.

This detail has been pencilled in for later in the year when the Scottish budget for 2024-25 will be accompanied by refreshed “Resource Spending Review” and Capital plans.

There was also no additional detail on some of the high-profile policy areas that have been of interest to various committees of the Parliament. For example, there is nothing on the National Care Service Bill, or plans to tackle the “climate emergency”.

The implications of the large inflationary increase to the public sector pay baseline in 2022-23 for subsequent years is covered with a presentation of three “hypothetical” pay awards scenarios and how much additional resource these will cost.

However, aside from highlighting the size of shortfalls, it is clear that specific decisions on how to address them have yet to be taken.

What next for parliamentary scrutiny?

As mentioned earlier, the Parliament now moves to the pre-budget scrutiny phase of the Budget process. The MTFS, whilst not giving too much away on the spending choices the Scottish Government intends to take, raises plenty of questions for committees to be raising with stakeholders and Ministers in advance of the next Budget.

The Finance and Public Administration Committee has begun an inquiry into public service reform, and that will be a key focus of pre-budget work in the coming months as it asks public bodies and others how it is approaching reform and views of Scottish Government leadership in this area.

There are plenty other areas for Parliament to explore, as it feeds views into the upcoming 2024-25 Budget and beyond. For example:

What is the best way of raising additional revenue from taxation?

What will protecting priorities like Health, Social Security and public sector pay mean for other parts of the Budget?

What areas of spending should be “deprioritised” and what areas protected?

Are policy outcomes improving? If not, are spending changes required?

What does this spending environment mean for key policy priorities like the National Care Service, tackling the climate emergency, reducing poverty and inequality?  

SPICe will continue to publish content across these areas in the coming months.

Ross Burnside, Senior Researcher, Financial Scrutiny Unit