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Comment: The budget was light on hard politics or grand statements but the pitch seemed spot on

Money jigsaw - Image credit: Holyrood

Comment: The budget was light on hard politics or grand statements but the pitch seemed spot on

This week’s draft budget by the Scottish Government was billed as the “most important since devolution”. 

Three big factors set the scene for the tough balancing act facing the Scottish Government this year: the ongoing public health emergency, the economic crisis and the upcoming Scottish election.

All of these have led to a great deal of uncertainty that the cabinet secretary had to wrestle with.

As a result, this is very much a ‘draft’ budget, both in terms of the overall spending envelope and some of the priorities within it.

It was interesting that the cabinet secretary’s approach to this year’s statement was different to what we have seen in recent years.

In particular, it was remarkably light on hard politics and there was little in the way of jargon or grand statements about policy objectives.

The tone was an attempt to convey focus and competence. This pitch seemed spot on.

Of course, alongside the budget statement, we received the latest updates from the Scottish Fiscal Commission (SFC).

This was their first set of forecasts in nearly a year, and their first since the start of the pandemic.

The key takeaway is that they expect the Scottish economy to still be over 12 per cent smaller in March than it was in the same time period last year – a full year on from the start of the pandemic.

It’s hard to put that into context. The peak to trough contraction in our economy at the height of the 2008-09 financial crisis was around four per cent.

At the UK level, the recession is expected to be the deepest in 300 years.

Hopefully, and with the rollout of vaccine in the coming months, the recovery will build momentum in the second half of 2021.

But even then, the SFC believes that it will early 2024 before our economy recovers in full.  

Unemployment is expected to peak at over 200,000 – around double the number of people unemployed before the pandemic.

These numbers give a sense of the picture at an aggregate level, but there will be huge variations across our economy by household, sector and geography.

There is a lot of good analysis in the Equality and Fairer Scotland budget statement, but some stakeholders will question whether there were sufficient policy measures announced to tackle these inequalities given the scale of challenge.

One interesting quirk with these forecasts, which the Scottish Government was able to exploit, was that because they were taking place two months after the Office for Budget Responsibility (OBR) undertook their forecasts for the UK, this unlocked additional flexibilities built into the fiscal framework to cope with an ‘asymmetric economic shock’.

One might have expected HM Treasury to push back on this, as this was a point of timing of publication rather than substance.

But credit where credit is due, they did not. It is often easy to criticise HM Treasury on fiscal devolution, but on this issue, and certain other instances this year such as the guaranteeing of Barnett consequentials, they have shown a willingness to be helpful.

On specific policy announcements, the strategy appeared to be ‘steady as they go’.

From income tax through to council tax, there was no attempt to raise money from households (with income tax thresholds increasing in line with inflation and councils being given £90m to freeze council tax bills in 2021-22).

On business rates, the government announced that the extension of the 100 per cent rates relief scheme for the tourism, retail and hospitality sector will continue for the first three months of the next financial year.

This is expensive and the government has held off making any further commitment until they see if funding will flow to Scotland from the similar scheme being extended in England.

The government did reduce the non-domestic rates ‘poundage’, enabling it to say that businesses in Scotland face lower NDR rates than counterparts in England.

As always with such claims, it is true but only by a whisker.

Of course, a tax cutting (or at least non-tax increasing budget) means that tough choices were required elsewhere.

On public sector pay, there will be at least a three per cent increase for those earning less than £25,000, but exceptionally modest cash increases for everyone else.

This policy has attracted criticism from trade unions, who have questioned the consistency of this decision with the sacrifices many workers in the public sector have made this year.

But the government too will have felt the need to balance any decision on public sector pay with the large job losses and hit to earnings forecast in the private sector.

On spending, priorities such as the NHS unsurprisingly got the bulk of the uplift in spending, both in terms of core services and suppressing COVID.

There was more money for local government, but also more commitments to be met in exchange.

Demand and cost pressures on local government haven’t gone away.

There was little in the way of new big announcements on what – just a year ago – were the major policy priorities for the government: child poverty and the transition to net zero (although they will no doubt argue that past investment plans remain in place).

Next up is the parliamentary scrutiny phase of this process, where the detail of the government’s draft plans will be debated.

Already we have opposition parties calling for changes. Whilst this is to be expected, any ask ‘for more’ needs to be backed up by credible plans about where any savings will be made to pay for such asks.

Unfortunately, it will only be as this process is coming to an end that we’ll have the final piece in the jigsaw for the Scottish budget – the UK Government’s plans for 2021-22 and likely next round of Barnett consequentials.

The cabinet secretary factored in an estimate of £500m of additional funding.

This seems very much on the downside, with the UK Government likely to announce more funding than this.

This might not be just a ‘prudent’ approach to take until March, but it is also one that ensures some wriggle room to meet any opposition demands for additional spending as part of any negotiation to secure support for the Scottish Government’s plans.

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