Scottish budget facing £1.6 billion cuts - Fraser of Allander Institute

Professor Graeme Roy
Professor Graeme Roy

The Scottish Government should prepare for further real-term cuts of up to £1.6 billion in its resource budget by 2020-21, according to a major publication launched by the influential Fraser of Allander Institute at the University of Strathclyde Business School.

This new annual report produced by the institute sets out a range of scenarios for Scotland’s budget over the next four years, and the options available to the Scottish Finance Secretary.

Even before the uncertainty caused by Brexit, the Scottish Government’s budget was forecast to fall by just over 3 percent in real terms by 2020-21 as result of the UK Government’s ongoing fiscal consolidation. But the report warns that under a worst case scenario for the block grant and revenues from Scotland’s new tax powers, the Scottish Government may have to prepare for cuts of up to six per cent – or up to £1.6 billion – over the course of the parliamentary term.

Even under more optimistic scenarios, the Scottish budget is still projected to fall in real terms over the course of the parliament.

And with Scottish Government plans in place to deliver major policy priorities, the Fraser of Allander report warns difficult choices for unprotected budgets – including the grant to local authorities - will be required.

Professor Graeme Roy, director of the University of Strathclyde’s Fraser of Allander Institute, said: “The Scottish Government has set out plans to deliver ambitious new policy priorities, including real terms increases in the health budget, a doubling of childcare provision, and protection of the police budget.

“Delivering on these will, however, require a tough re-prioritisation in other areas.

“As an area of unprotected spend, the grant to local government could be cut by around £1 billion on a like-for-like basis by 2020-21. Without radical reform, cuts to services are likely to become increasingly apparent in the years ahead, providing a controversial backdrop for next year’s local elections.”

Scotland’s Budget, the first major, independent analysis of the opportunities and challenges facing Scotland’s Finance Secretary Derek McKay ahead of his forthcoming Budget, was presented by the University of Strathclyde’s Fraser of Allander Institute to politicians from all parties, as well as leading experts from the private, public and third sectors, in Edinburgh yesterday.

The event will also argue of the importance of a wider debate around options to grow revenues and manage demand in public services in a sustainable way and to have a frank discussion about the priorities for Scotland in the years ahead.

The report comes as the Scottish Parliament’s fiscal responsibilities are expanding rapidly. Around 40 per cent of devolved expenditure will now be funded by tax revenues collected in Scotland, a figure that will rise to 50 per cent once half of VAT revenues are assigned.

Scotland’s economic performance – and more particularly, Scotland’s relative performance compared to the UK – will have a much greater bearing on the spending plans of Holyrood than ever before.

If Scotland can grow its economy more quickly than the rest of the UK, then it will now retain a share of the revenues that this generates. But if it grows more slowly, then it will bear the risk of lower revenues.

The Scottish Government will also have the opportunity to set different tax rates and allowances within devolved taxes to raise or lower revenues and to determine spending on new devolved benefits.

Professor Roy continued: “Brexit uncertainty, a weakening UK fiscal position, ongoing UK welfare reform, and a fragile Scottish economy, means that the devolution of powers over tax and social security could not have come at a more challenging time.

“The combination of a weakening in the outlook for the UK public finances impacting on Scotland’s block grant, a challenging outlook for devolved revenues, and a series of significant spending priorities – particularly in health and the planned transformation in childcare – will require a substantial re-prioritisation of spend and reform of public services in Scotland.

“While the challenge falls on the Finance Secretary, critics of the forecast cuts in unprotected public services will have to point out where – with a highly constrained overall funding settlement – their priorities for cuts would be and what taxes they would increase.”

Derek MacKay
Derek MacKay

Welcoming the report, Finance Secretary Derek Mackay said: “This report backs up my calls for the UK Government to end austerity, reverse its spending plans and invest immediately in public services and economic growth.

“The UK government’s austerity means we are already facing a 10 per cent real terms cut to our budget over the 10 years to 2020 - now the chaos caused by Brexit threatens to make those cuts even harder. In fact Fraser of Allander suggest that following the Brexit vote, real terms cuts to Scotland’s resource budget could increase from £937 million to over £1.6 billion.

“At the same time as we are facing further cuts, this report confirms Brexit is putting pressure on our economy and risking economic growth. This report adds to pressure on the UK Government to maintain membership of the single market to support our businesses and to minimise the damage Brexit will do to the economy.

“The Scottish Government has taken action to support the economy in the face of Brexit by bringing forward £100 million of capital investment, setting out plans for a £500 million Scottish Growth Scheme and working hard to secure Scotland’s continued place in the EU. Alongside a budget that will support growth and protect public services we will use our new powers responsibly, balancing the need to invest in and reform our public services with the need to support growth and protect household income.”

“However what is clear, from this helpful intervention by the Fraser of Allander, is that Brexit has put Scotland’s economy and our public services at risk and the UK Government must change course immediately.

“The Chancellor must stimulate the economy not compound austerity and end the indecision by backing the single market.”

‘The report highlights that:

  • The Scottish budget has faced unprecedented cuts since 2010. In 2016-17, Scotland’s resource budget is 5% lower in real terms than 2010-11 as a result of cuts to Scotland’s block grant from Westminster. Capital has been hit particularly hard, down 12% in real terms since 2010-11.
    • The outlook looks just as – if not more challenging. Real terms cuts to public spending are likely to continue into the next decade, taking the process of consolidation to over 10 years from when it started back in 2010, even after efforts by the Scottish Government to increase revenues from its new devolved tax powers.
      • Overall, the Scottish Government should prepare for possible further real-terms cuts of 6% - or up to £1.6 billion – in its resource budget by 2020-21. To put this in context, this is more than the entire Finance and Economy; Fair Work, Skills and Training; Culture and External Affairs; and Rural Affairs, Food and Environment portfolios combined.
        • These real-terms cuts come alongside a number of high profile new spending commitments. The government plans to increase health spending by £500 million more than inflation by the end of parliament. It has also committed to maintain real terms spending on police, and has a flagship policy to double the provision of free child care.
          • Delivering these commitments will require a serious re-prioritisation of spend. Unprotected areas of the budget will face average real terms cuts over the period to 2020-21 of between 10% - 17% (2.6%-4.5% annually), depending on the size of the Scottish block grant and the revenues from Scotland’s new devolved taxes.
            • Local government will likely be a key focal point. As an area of unprotected spend, the grant to local government could be cut by around £1 billion on a like-for-like basis by 2020-21 - with increases in business rate and council tax income only providing partial protection.
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