The Fraser of Allander Institute has published a report; Scotland’s Budget 2016, which analyses the outlook for Scotland’s public finances.
Around 50% of the Scottish budget will now be funded directly by the revenues raised in Scotland, rather than simply relying on a block grant from Westminster. This requires new arrangements for managing economic risks that might impact the annual budget. Fiscal devolution on this scale is largely unprecedented internationally and certainly within the UK. Therefore independent analysis of this sort is very welcome.
As more revenues are raised in Scotland we need to take a closer look at the economy. The report highlights fragile economic growth that has lagged behind that in the UK as a whole over the past year with growth of just 0.6%, compared to UK growth of 1.7%.
The outlook for the Scottish budget to 2020-21 is not encouraging. The Scottish budget has faced unprecedented cuts since 2010. This year, Scotland’s resource budget is around 5% lower in real terms than it was in 2010-11. Capital spending has been hit particularly hard, down 12% in real terms since 2010-11. While we need to await the UK Autumn Statement to see what a ‘reset’ for UK fiscal policy actually means – it is unlikely to mean an end to austerity. The report suggest that the Scottish budget could be cut by between 3% – 4% in real terms by 2020-21 and up to 6% – around £1.6 billion – under a worst case scenario. The Scottish Government has decided to make only a modest use of its new powers, totalling less than 1% of the overall budget.
Despite this difficult financial position, the Scottish Government has announced plans to increase health spending by £500m more than inflation by the end of the parliament. It has also committed to maintain real terms spending on policing and has a flagship policy of doubling the provision of free childcare with a £500m price tag. The report says that delivering these commitments will require difficult decisions and a serious re-prioritisation of existing spending. This means that other ‘unprotected’ public services could face an average reduction of 10% to 17% (2.6% to 4.5% annually) in real terms by 2020-21.
Local government is likely to yet again face the brunt of the cuts. As an area of ‘unprotected spend’, the report suggests that the grant to local government could be reduced by around £1 billion on a like-for-like basis by 2020-21 – with increases in business rate and council tax income only partially offsetting these cuts.
As the report concludes, the scale of the challenges facing the public finances means that bold and radical solutions will be needed. Business-as-usual is not an option.