Testing times: the delay to the UK budget has a severe knock-on effect in Scotland

*This article was written before the Scottish Government announced the draft Scottish budget would be published on 6 February, which lessens the impact on councils. It is nevertheless unlikely that the Scottish budget can be fully finalised until after the UK figures are published on 11 March, leaving a significant degree of uncertainty until very close to the start of the next financial year*

“If you think I’ve said something interesting, you will have misunderstood,” joked Andy King from the Office of Budget Responsibility (OBR) at a Scottish budget briefing event hosted by the Fraser of Allander Institute in November 2019 to examine the state of play for the budget and the Scottish economy in general.

It was a demonstration of the strange political times we are in that because of the UK Government’s decision to delay the UK budget, there was no UK budget to discuss, no forthcoming Scottish budget and due to election purdah, the man from the OBR could not even talk about what he knew unless it was some neutral information that was already in the public domain.

The UK budget was due to be held on 6 November but was delayed by the UK Government in protest over MPs opposing Boris Johnson’s attempt to push through his Brexit deal in a matter of days, after which Johnson opted instead for a December general election.

Last week, Chancellor Sajid Javid announced the UK budget will not now be held until 11 March.

Whether or not this delay is a deliberate attempt to undermine Scottish devolved power, it has a severe knock-on effect on both national and local government finance in Scotland.

Public finance minister Kate Forbes described it as “reckless, careless and ignorant”.

The situation for councils is unprecedented. Local authorities get the vast majority of their funding in the form of a grant from the Scottish Government, so it is difficult for them to set their own budgets before the Scottish Government sets out its funding plans, which in turn it would struggle to do without a UK budget and growth projections from the OBR.

Even a December Scottish budget is quite late for councils needing to plan their own spending, and March makes it virtually impossible.

Ahead of the budget date announcement, COSLA resources spokesperson Councillor Gail Macgregor told Holyrood: “Councils are responsible for delivering a vast range of essential services to communities across Scotland and we cannot take key spending decisions without knowing what money will be available.

“The delay to a UK and in turn Scottish budget has serious implications for local authorities’ ability to plan and prioritise these essential services, especially in light of the decreasing levels of funding councils have seen in recent years.”

Councils must not only set a balanced budget by 11 March, but also set the council tax rate for the following year with enough time to send out letters to residents informing them what they will need to pay before the financial year starts.

In practice, this means most councils must set their budget by the last week in February at the latest.

The implications of not informing people of their council tax liability in time would mean councils couldn’t collect council tax in April and could lose more than 10 per cent of that revenue, given that many people pay council tax over 10 months rather than 12, with a bumper payment in April.

The situation is further complicated by councils’ differing interpretations regarding what it means to set a balanced budget.

Some councils understand council tax as purely a top-up or balancing factor to fill any gap in Scottish Government funding, and councils that have taken that legal interpretation are unable to set council tax without a Scottish budget.

Other councils, often those with higher reserves, may make a different interpretation of the law and separate the setting of council tax from the amount they get from the Scottish Government.

They may fix council tax based on an estimate, knowing they have the potential to top up any shortfall from reserves if necessary.

If the Scottish Government sets a budget, even a provisional one, in February, councils will be able to set their budgets, but if the Scottish budget is pushed back until after the UK budget in March, some will risk setting a budget without information about what they will receive from the Scottish Government, while others who take the view that doing that would leave them open to legal challenge for overcharging or a potential shortfall they could not cover, may feel they are not able to set one at all. The consequences of the latter scenario are unknown.

Normally, the funding allocation to local authorities is a key focus of negotiations between the draft budget being presented by the Scottish Government before Christmas to the final budget getting passed in February.

It is more or less expected that the draft budget is not the final offer to councils, with haggling leading to more money being ‘found’ during the process of negotiation between the SNP, opposition parties and COSLA before the final budget bill is voted on – for example, the £90m extra allocated to councils as part of the deal with the Scottish Greens last year.

However, the likelihood of a very short turnaround this year and an expedited process to push the budget through in time means that there will be less chance for councils to negotiate for more money, so it could leave them at a disadvantage should the Scottish Government choose to take advantage of the need to get a budget through quickly.

All this is in the context of already strained local government budgets, with a recent Accounts Commission report revealing that Scottish councils have already used £45m of their reserves to help make up for the 7.6 per cent reduction in local government revenue funding since 2013-14.

Add to this the increasing ringfencing of funding and councils will find it challenging to cover any shortfall.

COSLA president Councillor Alison Evison warned last week that councils’ budgets are at breaking point and called for a “fair settlement” in this year’s budget.

She said: “Without adequate investment in Scotland’s councils the cracks are starting to show. In every indicator whether it is economic growth, tackling climate change, wellbeing or child poverty, cuts to council budgets will mean targets are missed.”

Business rates are set to be devolved to councils, but this year’s troubles will fuel further calls from local government for multi-year budgets, more autonomy over council tax, as well as reform of local government funding and the power to set additional discretionary taxation.

At the time of writing, the Scottish Government had yet to announce the revised date of the Scottish budget.

It must get its income tax plans passed by parliament before April or the Scottish rate of income tax will cease to apply, but it must choose whether it will wait until after the UK budget to publish its plans or produce something provisional before that to allow councils to move forward with their processes.

The Welsh Government set a budget on 16 December based on the UK Government’s spending commitments in the Queen’s speech, but the process is more complicated in Scotland due to devolved tax.

There would be a serious risk were the Scottish Government to set a budget before the UK has published its growth figures.

An obvious one is the risk of the total budget ending up far lower than expected, with the process of incorporating income tax estimates and growth predictions a complicating factor.

While the spending announcements made by the UK Government should mean an increase to the block grant of around £1.1bn, or two per cent in real terms, according to calculations by the Fraser of Allender Institute, over or underestimates of either UK or Scottish income tax take have an effect in both that financial year and future ones, with, for example, £200m to be deducted from the 2020-21 budget to make up for an overestimate of Scottish income-tax take in 2017-18.

In a letter to the Chancellor on 22 December, Finance Secretary Derek Mackay said: “I am also concerned about a scenario where, if the Scottish budget was published before the UK budget, the use of provisional block grant adjustments and economic forecasts that will subsequently be updated for the UK budget lead to fewer resources being available in 2020-21 to fund public services than should be the case. Such an eventuality would be a result of factors outwith the Scottish Government’s control.”

In its budget commentary, the Fraser of Allender Institute notes: “The outlook for the Scottish budget – and the viability and outcomes of tax and spending policies – is heavily dependent on UK Government policy decisions.

“A Scottish budget published in advance of knowing the complexion of the UK Government would have had to be underpinned by a range of caveats and uncertainties, and could have been subject to substantial revision once the UK Government’s plans became known with greater certainty.”

All this is taking place in the context of a Scottish economy that is not as strong as it might be and facing the challenges of Brexit and constitutional uncertainty.

Last year growth in the Scottish economy fluctuated from exceeding estimates and growing by 0.6 per cent – its fastest for two years and more than the rest of the UK – in the first three months of the year, to contracting by 0.3 per cent in the second quarter from April to June amid warnings of a possible recession and the impact of Brexit stockpiling.

The latest GDP figures from December showed Scotland returned to growth in quarter three, growing by 0.3 per cent.

“This marks another year of disappointing performance for the Scottish economy,” said the Fraser of Allander Institute, predicting that overall growth for the year 2019 would only be one per cent.

As the SNP pushes for a second independence referendum in light of Brexit and the UK Government’s wider treatment of Scotland, the party is also under pressure to make a stronger economic case for an independent Scotland following suggestions from the Institute for Fiscal Studies that independence would mean “more not less” austerity for the first decade and ongoing questions over the issue of currency.

And just because there is a time pressure, that does not mean that the process of getting the budget passed will be any easier than usual.

As a minority government, the SNP needs another party to back it. Labour and the Tories are unlikely partners and the relationship between the SNP and the Lib Dems has become more strained due to entrenched opposing views on a second independence referendum, leaving the Greens as the Scottish Government’s best, if not only, chance of getting its budget through.

The Scottish Greens have said that Derek Mackay must produce a “climate emergency budget” that has “decisive action” to reduce climate change if he wants their support this time round, so there remains pressure over the content as well as the timing of the budget.

Scottish Green co-leader Patrick Harvie said: “The Scottish Greens have delivered real change in the budget negotiations in previous years, giving Scotland a fairer income tax system, protecting local services across the country and advancing urgent environmental priorities.

“This next one must go further; it must be a climate emergency budget if it is to win our support.

“The Scottish Government cannot continue to brag about its long-term targets while sitting on its hands when it comes to the transformative action needed to address this crisis.

“The Climate Committee’s report shows that in the areas that are devolved, there has been precious little progress, with transport emissions actually going up for four years in a row.

“The UK Government is creating a potential crisis by delaying its own budget, and the Scottish Government’s task in responding to that irresponsible behaviour is not easy.

“However, this must not be used as an excuse for a budget which lacks ambition for Scotland.”