Scotland's Budget Report 2023

Sousa, João and Spowage, Mairi and Congreve, Emma and Fox, Calum and Gillan, Brodie and Crummey, Ciara and Cooper, Benjamin and Williamson, Jack (2023) Scotland's Budget Report 2023. Fraser of Allander Institute, Glasgow. (https://fraserofallander.org/publications/scotland...)

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Abstract

When Deputy First Minister (DFM) and Finance Secretary Shona Robison rises next week to present her first Scottish Budget, she will do so against one of the most challenging fiscal backdrops in the history of Scottish devolution. The Scottish economy has not performed as badly as many had anticipated, with no recession this year, but growth has been essentially non-existent for the past two years. And with the Bank of England set to keep interest rates higher for longer than previously anticipated, the Scottish Fiscal Commission’s (SFC) forecasts are likely to follow the pattern presented by the Office for Budget Responsibility for the whole of the UK – slower growth and higher inflation than at their previous update. Between the Medium-Term Financial Strategy (MTFS) in May and the Autumn Budget Revision, spending pressures – mostly on pay – had increased by £930m. Since then, there have been £520m-worth of spending cuts announced; there is £380m in additional Barnett funding; and £260m in additional borrowing and use of the Scotland Reserve. This leaves the prospective position of the Scottish Government in 2023-24 at £232m, which might mean not all of the cuts announced by the DFM on the eve of the Autumn Statement are necessary. But the situation for 2024-25 is much more difficult. Part of it was already in the MTFS, with resource spending plans already outstripping funding by £1bn and capital plans £450m larger than projected funding. As the Scottish Government must balance funding sources with expenditures, this was clearly always unsustainable. More positive Income Tax net revenues in outturn and forecast are likely to add around £970m to funding available next year, and there are £310m of Barnett consequentials to add – plus an additional £180m additional funding to compensate for the devolution of winter fuel payments. In total, funding is £1,455m higher than expected in May. But spending pressures are also higher, with higher-than-budgeted-for pay awards creating ongoing difficulties. Assuming the higher scenario for pay this year and next from the MTFS – themselves probably too low for what actually happened – would add about £500m to spending. Adding in winter fuel payments expenditure brings spending plans to £646m above the MTFS – meaning a £780m improvement to the net funding position. This is before any of the additional spending commitments made by the Scottish Government, which have been numerous in recent months. First Minister Humza Yousaf said in October it would be ‘fully funded’ – which of course depends on what councils would have done in the absence of the freeze. If we assume they would have mirrored last year’s increases, we estimate compensation would run to £330m. The First Minister (FM) also announced so an additional £100m for NHS waiting list reduction. And at least £325m of the DFM’s ‘savings’ announced in Parliament on 21 November were actually reprofiling of spending into future years, when plans already exceeded projected funds using May’s forecasts. On the basis of announced policy and commitments, we estimate that the net funding gap is £1,465m for 2024-25: £799m on resource and £665m on capital. In the report, we also look at the outlook for spending and tax. We analyse how public sector employment has been evolving in Scotland relative to other areas of the UK; what capital borrowing plans using Scottish Government bonds might mean for capital spending; and how social security spending has been evolving. On the tax side, we have updated our analysis of how much proposed Income Tax policies would raise under our understanding of the SFC’s methodology; what reforms to smooth out marginal tax rates might look like; what the consequences of the council tax freeze are for the revenues and for households; the cost of matching reliefs on non-domestic rates; and the practical difficulties in introducing new taxes to combat short-term funding gaps.

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