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Two more years of ‘challenging’ Scottish budgets, Fraser of Allander Institute predicts

Blancing the budget - Image credit: Adobe Stock

Two more years of ‘challenging’ Scottish budgets, Fraser of Allander Institute predicts

Scotland can expect two more years of “challenging” budgets “despite the wider UK rhetoric of an end to austerity”, according to new budget analysis.

In its annual Scottish budget report, the Fraser of Allander Institute predicts that the Scottish Government’s resource budget will grow by less than one per cent in real terms in 2020-21 and 2021-22.

It notes that forecasts imply that the “relatively weaker revenue outlook for Scotland will persist for the foreseeable future”, although some more recent data suggests that conditions “have picked up”.

While Scotland’s resource block grant – the share of UK Government spending that is passed on to Scotland through the Barnett formula – has “improved substantially” since the UK Government announced increased spending at the autumn spending review in September, this is offset by weaker than predicted tax intake.

Chancellor Sajid Javid announced the biggest increase in public spending in more than 15 years at the September spending review, with an increase to UK departmental budgets in this financial year and an extra £13.4bn of real-terms departmental spending in 2020-21.

According to the Fraser of Allander Institute, this increase in UK Government spending means that the resource block grant given to Scotland in 2019-20 will now be £600m higher than expected at the draft budget in December 2018.

The block grant will then grow by a further £1.1bn, or 2.1 per cent, in 2020-21, and “looks likely” to go up by a similar amount in 2021-22 – although that would still be 3.6 per cent lower in 2020-21 than its pre-austerity peak of 2010-11 and 1.7 per cent lower in 2021-22.

In addition, an overestimate of the amount of income tax that would come under the new Scottish rate of income tax in the first two years the tax was devolved (2017-18 and 2018-19) means that adjustments will be made to the 2020-21 and 2021-22 budgets as a ‘reconciliation’ to recoup the shortfall.

This means a £200m reduction in the 2020-21 budget and a possible £600m loss to the 2021-22 budget, with forecasts also predicting continued weak tax revenue in Scotland.

In addition, the transfer of financial responsibility for eleven social security benefits from 2020-12 adds another layer of unpredictability and risk.

Cuts to the Scottish Government’s resource budget have had a knock-on effect on spending in certain areas.

The institute notes that spending on health in Scotland has increased by almost £800m or 5.2 per cent, with education, skills and the police also protected, but there have been cuts to funding for local government, universities and other areas of justice, with council budgets “disproportionately” reduced.

The report says: “If health spending is the clear winner, local government is the clear loser.

“The resource allocation to local government has fallen 3.7 per cent in real terms between the 2016/17 and 2019/20 budgets.

“The total revenue settlement to local government has fallen by less than this, as it is supported by revenues from non-domestic rates, but this does not alter the conclusion that local government’s allocation has been disproportionately squeezed.”

These challenges are added to by “significant levels of uncertainty” around the projections due to the general election.

The UK budget has already been cancelled until after the election, meaning the Scottish Government does not have the figures to set its own budget.

In addition, during the campaign itself political parties are likely to make new spending announcements, while any changes to income tax in the rest of the UK following the election would have an effect on the block grant.

Commenting on the analysis, head of fiscal analysis at the Fraser of Allander Institute David Eiser said: “The 2020-21 budget will have to manage new responsibilities for social security alongside existing spending commitments and the effects of weaker than forecast tax revenues in previous years.

“But until the spending and tax plans of the next UK Government are known in more detail – and Scottish forecasts have been updated to reflect the latest economic trends – there remains uncertainty around what level of resource the Scottish Government will have to manage these challenges.”

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