This blog is part of a series of publications supporting scrutiny of the Scottish Budget 2024-25.
Next Tuesday, the Scottish Government will publish, for parliamentary scrutiny, their initial spending and tax proposals for next year (2024-25). They have also promised to publish some indicative spending plans for years beyond 2024-25, alongside an updated set of capital spending plans.
This Budget is a little closer to Christmas than normal. The Written Agreement between the Scottish Government and the Finance and Public Administration Committee states that the Budget should follow “no more than three working weeks” after the UK Autumn Statement. However, the Scottish Government and Scottish Fiscal Commission have required a little more time this year to work up the Budget plans. Indeed, there has been little signalling of Christmas cheer in the build up to what is expected to be a challenging Budget for the Deputy First Minister and Cabinet Secretary for Finance.
So what are some of the key areas to keep an eye on?
Inflation falling but still it looms large
The spectre of inflation that escalated following the illegal Russian invasion of Ukraine in February 2022 continues to dominate budget deliberations.
Higher inflation has resulted in previously unbudgeted paydeals having to be funded in-year to maintain public services, with knock on implications across all other “non-pay” parts of the budget, and, indeed, for future budgets. The result of inflation is that the Budget now goes less far than it would previously have done. In addition to a higher paybill, the Budget must accommodate higher baseline heating bills for public buildings and higher construction costs for infrastructure projects. Recent projections from the Bank of England and the Office for Budget Responsibility (OBR) expect inflation to remain higher for longer. In its November forecast the OBR noted that:
“Inflation is expected to be more persistent and domestically fuelled than we previously thought, falling below 5 per cent by the end of this year but not returning to its 2 per cent target until the first half of 2025”
What might have been considered affordable earlier in this parliamentary session, looks less so now. This is why, for example, the Scottish Government is revisiting capital spending plans.
Affordability and the much discussed billion pound “black hole”
Since publication of the Scottish Government’s medium term financial strategy in May of this year, there has been much discussion of what the Scottish Government identified to be a potential £1 billion pound funding gap in 2024-25 rising to £1.9 billion by 2027-28.
The 2024-25 funding gap has since been filled somewhat as it was predicated on the income tax reconciliation for 2021-22 being over £700 million – a figure which turned out to be just over £300 million. There were also some Barnett consequentials added to the Scottish budget in the recent UK Autumn Statement.
Nevertheless, the budgetary position is still very constrained with no end of demands being added to the public finances.
The issue of affordability was a key theme in the pre-budget scrutiny of parliamentary committees. For example, the Finance and Public Administration Committee made the point that they were “concerned that affordability does not appear to be a key factor in Scottish Government decision-making” – the notion that the Scottish Government is continuing to add to rather than reduce budgetary commitments – for example in the area of child payments or the proposed council tax freeze. The Finance Committee concluded:
“We recommend that the Scottish Government explicitly sets out in the Scottish Budget 2024-25 if there are any areas of spending it has assessed as not meeting its three missions [equality, opportunity and community] test and where funding will, as a result, be reduced or ceased entirely.”
It will be interesting to see what the Scottish Government considers is and isn’t affordable next week. Budgets are choices, and we will see in the allocations what the Scottish Government has chosen to prioritise and just as importantly, not prioritise.
Public service and workforce reform
One vehicle for governments in tackling budget gaps is to look at how public services are delivered and consider ways in which these might be reformed to save resources. This was a key area of focus in committees’ pre-Budget scrutiny with discussion on the role of central government in driving reforms; shifting spending to more preventative interventions; using digitalisation to improve efficiency, looking across the public body landscape for ways to reduce overlap and duplication; sharing services and utilising the public sector estate better post-pandemic.
In its pre-Budget report, the Finance and Public Administration Committee (FPAC) noted concern
“that the focus of the Scottish Government’s public service reform programme has, since 2022, changed multiple times, as have the timescales for publishing further detail on what the programme will entail. Given the financial challenges facing the Scottish Budget, this represents a missed opportunity to be further along the path to delivering more effective and sustainable public services.”
The Auditor General recently said, “public services don’t work without people”, and there was a need to act quickly to deliver service differently. In a recent interview, the DFM stated that “the size of the workforce will have to reduce” so it will be interesting to see what the Scottish Budget has to say on, not just how public services operate, but the number of people and jobs required to deliver public services in Scotland.
What will the Budget propose on tax?
Another way in which budget gaps can be filled is to increase taxes to generate additional revenue for public spending. However, budget gaps can also increase via the tax system if the Government choses to cut tax and put money into people’s pockets, thereby reducing revenues. For example, previous budgets have used tax cuts to incentivise behaviours for example in the housing market with tax cuts for first time home-buyers, or income tax cuts for lower earners.
The DFM has had no shortage of advice in this area in recent times from a wide range of perspectives.
Council tax freeze?
One tax proposal that few saw coming was the First Minister’s announcement at the SNP conference that there would be a council tax freeze in 2024-25, bringing back a policy the SNP introduced during their first and second terms in office.
If this policy is included in next week’s Budget, the key thing to look out for will be how much the Scottish Government is transferring to Local Government to compensate them for any reduced revenues from such a freeze. When the policy was in place previously, the Scottish government, broadly assumed a 3% increase in revenue compensation to local authorities. However, with inflation having been and continuing to run high, the Scottish Government may be forced to pay more than it had perhaps bargained for. If that’s the case then, again, other budget areas may face an additional squeeze.
What will the Scottish Government do on income tax?
If the Scottish government is looking to get more money into people’s pockets, arguably a more progressive approach to a council tax freeze would be to use the income tax system.
There has been heavy speculation for some time now that the Scottish Government may use income tax as a vehicle for generating additional resource for public services.
Policy in this area will very much depend on the judgements made by the Scottish Fiscal Commission (SFC) and the extent to which taxpayer behaviours might change in response to tax increases.
Proposed policy in this area will definitely be one to look out for next week.
What’s the timetable for parliamentary scrutiny?
Tuesday 19 December will fire the starting gun on an intensive period of parliamentary budget scrutiny before and after Christmas, in both committees 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 early February, 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 19 or 20 December
- top level infographics and detailed budget spreadsheets on 20 December
- a detailed briefing on the Budget early in the new year
- potential blogs with further analysis, such as a repeat of our human rights analysis of the 2023-24 budget
- a detailed briefing on the local government settlement once allocations to individual local authorities are published.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit (FSU)