The outlook for Scotland’s budget in 2023-24 has undoubtedly been made more challenging due to factors wholly outwith the control of the Scottish Government, but there are decisions that Deputy First Minister John Swinney can make to ease the path ahead for Scotland, according to a report published yesterday by the Fraser of Allander Institute.
In its-pre Budget report, the University of Strathclyde-based Institute says that in the face of high inflation, the UK Government’s Autumn Statement provided some comfort with additional transfers that will more or less offset the impacts of inflation over the next two years.
The Scottish Government now needs to set out how it will use its significant devolved tax powers and whether to use them to generate more revenue for public services, including public sector workers.
The Resource Spending Review, published in May this year, provided a blueprint for spend over this parliament, but we have already seen deviations from planned spend in this financial year, and changing priorities may see further revisions when the draft Budget is set out on the 15 December.
The Fraser of Allander Institute’s annual pre-budget report, published today (12 December) examines the context to the budget and the key decisions facing the Scottish government in 2023-24.
Its findings include:
the economic situation has deteriorated markedly since the 2022-23 budget was presented, with high inflation set to eat away at living standards over the next two years.
the high inflation environment eroded the value of the Scottish Government’s budget in 2022-23 meaning that the present financial year’s budget is worth about £1bn less in real terms
Despite fears of cuts to the near-term budget, the announcements made by the UK Chancellor more or less offset the impacts of inflation on the Scottish budget in 2023-24 and 2024-25
the Scottish Government has significant devolved tax powers and therefore has decisions to make on Thursday about whether or not to use them to generate more revenue for public services.
Professor Mairi Spowage, Director of the Institute, said: “John Swinney is getting set to present his first budget in seven years, in what he has acknowledged is an unprecedentedly tricky time for the Scottish public finances.
“The challenges he has been dealing with for 2022-23 ease a bit for 2023-24: there was some additional money announced at the Autumn Statement which generated around a £1bn of consequentials, offsetting the inflationary pressures on the budget.
“But there are also flexibilities that the Deputy First Minister has for the next financial year that were not available to him for this year – the Scottish Government does have tax powers that could be used, if he wishes, to raise more revenue.”
Emma Congreve, Deputy Director, said: “In amongst all the headline-grabbing decisions, it will be important to take a step back to see how this Budget helps Scotland achieve its long term ambitions.
“We are expecting that the government will set out, clearly and transparently, the choices it has made and what the impact, both good and bad, will be for policy outcomes and the impacts on different groups.”
Less than one in five pension planners have confidence in the new government
Scots do not think the government is capable of restoring pension security, according to new research from My Pension Expert.
The at-retirement adviser surveyed 2,000 adults aged 40 and above. It found that nearly half (44%) of Scottish pension planners think the government will be unable to stabilise the pensions market, despite Rishi Sunak and Jeremy Hunt’s attempts to restore faith in the UK economy. Just 14% have confidence in the government’s plans.
Almost half (47%) of those surveyed believe the current financial crisis has negatively impacted their retirement strategy. Nearly a third (30%) said they had now lost confidence in their pension scheme.
70% said that the recent turmoil in Westminster is distracting from the cost-of-living crisis.
As winter approaches, rising energy bills were listed as the greatest financial concern amongst 67% of Scottish pension planners. The majority of those surveyed have already started implementing a range of cost-cutting measures[1].
Nearly two thirds (63%) have avoided turning on their heating, despite temperatures dropping. Over two fifths (41%) have taken fewer showers or baths, while 1 in 5 (21%) have even gone as far as to skip meals.
Andrew Megson, CEO of My Pension Expert said: “Inflation is at record levels and expected to remain in double figures for the foreseeable future. Adding increased interest rates and constant chaos in Westminster, people are understandably desperate for reassurances. It is little wonder that public confidence has plummeted.
“The government must take action to protect retirees and pension planners. Being consistent with its policies would be a strong start. So too would providing Britons with the right tools to understand their financial situation and safeguard their hard-saved money – prioritising the launch of the pension dashboard and granting individuals access to affordable independent financial advice would be a positive step in this regard. Such action would help people to understand their financial situation and take steps to improve their financial situation.
“As winter arrives, people are understandably concerned about their immediate and future finances. So, the government must prioritise outlining a clear plan to support retirees and pension planners to understand their financial situation. That would mark a powerful statement that the government is putting savers first and even begin to reinstate some public confidence.”
Bank of Scotland Business Barometer for November 2022 shows:
· Business confidence in Scotland rose 19 points during November to 24% – the highest reading since July 2022 and highest of all UK nations and regions
· Scottish businesses identify top growth opportunities as investing in their teams (43%), evolving their offering (40%) and introducing new technology (35%)
· Overall UK business confidence remains robust at 10% with all regions and nations reporting a positive confidence reading apart from the South East
Business confidence in Scotland rose 19 points in November to 24% – the highest reading since July 2022 and highest of all UK nations and regions, according to the latest Business Barometer from Bank of Scotland Commercial Banking.
The survey was conducted between 1st-15th November, before the Chancellor’s Autumn Statement announcement on Thursday the 17th November.
Companies in Scotland reported higher confidence in their own business prospects month-on-month, up eight points to 30%. When taken alongside their optimism in the economy, up 30 points to 16% this gives a headline confidence reading of 24%.
Scottish businesses identified their top target areas for growth in the next six months as investing in their teams (43%), evolving their offering (40%), and introducing new technology (35%).
The Business Barometer, which questions 1,200 businesses monthly, provides early signals about UK economic trends both regionally and nationwide.
A net balance of 8% of Scottish businesses expect to increase staff levels over the next year, down eight points on last month.
Overall UK business confidence fell five points during November, but remained positive at 10%. Firms’ outlook on their future trading prospects was down two points to 25%, and their optimism in the wider economy dropped four points to -2%. Despite a seven-point dip, UK businesses remained positive about hiring intentions with 14% of firms aiming to create new jobs in the next 12 months.
All UK regions and nations, apart from the South East, reported a positive confidence reading in November, with seven recording a month-on-month increase in confidence. Of those recording an increase in confidence, Scotland, Wales (up 12 points to 17%) and the South West (up nine points to 5%) saw the largest monthly changes.
Chris Lawrie, area director for Bank of Scotland, said: “It’s encouraging to see confidence among firms in Scotland reach the highest in the UK, as they show their trademark resilience in the face of numerous headwinds and a challenging economy.
“As firms look to the year ahead, they’ll have a close eye on managing rising prices, and keeping a close eye on working capital will help firms as they try to mitigate the effects of inflation on their operations. We’ll be by their side to ensure they are in the best position possible in the months ahead and they look to capitalise on opportunities for growth.”
Business confidence in retail increased to 15% (up from 9%), perhaps reflecting a renewed confidence in trading prospects ahead of the festive season. However, business confidence in the manufacturing sector fell for the sixth month in a row, to 4%, down 9 points, the lowest confidence level since early 2021.
The construction sector held gains made in October, remaining unchanged at 20%, although this level still remains weaker than in the first half of the year.
Paul Gordon, Managing Director for SME and Mid Corporates, Lloyds Bank Business & Commercial Banking, said: “The fall in confidence shows just how tough it is for businesses right now.
“Pressures from rising costs continue and businesses are starting to feel the burden of higher energy bills. However, the tentative easing of wage expectations should provide some solace although we know the labour market is still tight.
“We would encourage businesses to keep a keen eye on their costs and cash flow as we head into the festive period. If any businesses are struggling, we would encourage them to reach out for support. At Lloyds Bank we remain by the side of businesses to help navigate these challenging times.”
Hann-Ju Ho, Senior Economist Lloyds Bank Commercial Banking, said: “Given the recent political and economic landscape, it comes as little surprise that economic optimism and business confidence have fallen this month.
“Pay growth expectations remain high by historical standards, which could signal ongoing difficulties ahead for businesses to fill vacancies.
“Looking ahead, it will be interesting to see if the clearer policy picture provided by the Autumn Statement will lead to business confidence moving in a more positive direction as we go into 2023.”
How the new interest rates affect house prices and rent across the UK
Housing market: hurry if you’re selling, halt if you’re buying, stay if you’ve borrowed, finance experts advise
Landlords will likely increase rent prices or sell to cope with increased mortgage repayments
Inflation and interest rates will keep rising, but house prices are already slowing down
TODAY, the Bank of England will decide what the new base interest rates might be, currently at 1.75%. Top market analysts expect this to further rise to 2.25%.
The Office for National Statistics announced on August 17th that UK inflation rose to 10.1%, from 9.4% two months earlier. The Bank of England expects it to further increase, peaking at 13.3% in October. The accompanying higher interest rates and bleak two-year economic outlook generally means bad news for homebuyers, landlords and renters across the UK.
Top market analysts at CMC Markets expect interest rates to further rise to 2.25% this month. This directly impacts mortgages on variable rates – around 1 in 5 households in the UK – and another 3.1 million whose fixed-rate periods expire in 2022-2023, according to UK Finance estimates.
Borrowers whose repayments are directly linked to the base rate, as set by the Bank of England, will now face mortgage repayments at rates between 3% and 4%, up from 1.75% and 2.75% only five months earlier. This will inevitably spill into rent prices.
CMC Markets analysed the latest data for June 2022 from HM Land Registry, published on August 17th, and concluded that the likely tendency for house prices is in a temporary slowdown, which is good news for those waiting a little longer to buy a home.
Michael Hewson, Chief Market Analyst at CMC Markets comments: “Houses sold in June 2022 only increased in price by 1% compared to May, whereas, last year, this constituted a much more generous 5.7% surge.
“This is only the first month this year for prices to slow down at such a fast rate, so some caution before jumping to conclusions is advised. Remember, house prices may be slowing down, but they are not decreasing. Importantly, since this is transactions data processed at the time, it does not take into account the big leap in interest rates that the Bank of England announced later that month, let alone the even bigger hike in August.
“Therefore, despite the soaring inflation and rising consumer prices across the board, UK house prices appear to be trailing behind because demand for homes has generally come to a screeching halt. Most buyers are weathering the storm for a few more months at least, while some are also working out how the cost of living crisis will pan out in the medium term so that the new mortgage is not squeezing their pockets beyond their comfort zone.
“For those still keen to get on the property ladder, there are plenty of fixed-rate banking products that can insulate them from the current spiralling interest rates on mortgages. They should, however, prepare for the possibility of being faced with higher-than-expected repayments once the fixed rate period expires, as the new variable rates are at the lender’s discretion. Fixed rates are not a cure-all either, as they may now be set to a higher level to start with.
“The buy-to-let market is equally volatile. Landlords will either pass the increased mortgage repayments onto tenants by increasing their rent or simply sell fast to lock in a better price. Right now though, those already on the property ladder are generally better off staying put rather than moving or re-mortgaging. They would not get a good deal on their old house in this market and may likely end up losing more money overall.”
What did the Bank of England do earlier in August?
The Bank of England explained that the rise in interest rates was necessary due to external pressures which are expected to persist. This means that British firms and residents will continue to feel this weight reflected on rising domestic prices, wages outpaced by soaring inflation, and even higher mortgage repayments, despite the Bank’s attempt to widen the borrowing pool through less restrictive mortgage rules.
Although historic, the Bank’s decision was not a surprise for trading analysts at CMC Markets, a London-headquartered financial services company, who believe the Bank was expected to raise interest rates higher than 1.25% during the June meeting, as a means to keep import inflation in check.
This is on the backdrop of a 10% year-to-date depreciation of the British pound sterling against the US dollar and an indication from the Federal Reserve, the US central bank, of a further interest rate increase by 0.5% or 0.75% in September.
Michael Hewson comments: “The UK currently fares worse than both the EU and the US. This is due to its closer dependence on energy shocks than the States and less government intervention to soften the blow compared to its European counterparts.”
What’s next and when will things calm down?
Other than adjusting the interest rates to the accurate level to keep abreast of import inflation, the economic projections for the UK paint a bleak outlook for the next two years.
The UK is projected to enter a recession in the final quarter of this year, the Bank of England announced. The country’s economy will contract by 1.25% in 2023 and 0.25% in 2024, however, inflation is becoming a much bigger long-term threat, with unrealistic chances of falling back to the desired 2% much before 2024.
The current political race for the Conservative Party leadership and the consequent fiscal policies promoted by the new British government is a major factor to take into account for any inflation, GDP, and unemployment projections and investment decisions.
As it stands with the current measures, inflation is expected to peak at 13.3% in October – a sharper increase than the Bank anticipated in June, originally estimated at 11%. It will continue to rise throughout 2023 only to decline in 2024.
Meanwhile, forecasts for the Consumer Price Index (CPI) are less optimistic now, expected to decrease only to 9.5% in the third quarter of 2023, although the Bank anticipates a sharp fall in prices immediately thereafter.
Selling prices are set to increase to reflect rising costs while real household post-tax income is expected to plunge in 2022 and 2023. The Bank predicted that core prices will peak at 6.5% this year, meaning that, in the following six months, food and energy will constitute more than half of the headline CPI.
The next meeting for the Monetary Policy Committee, where the Bank of England will decide what the new base interest rates might be, is today – September 22nd.
Scottish Government identifies half a billion savings to tackle cost crisis
Around £500 million in savings have been found as resources are focused on tackling the “harsh reality” of the cost of living crisis, Deputy First Minister John Swinney said yesterday.
He updated the Scottish Parliament on steps being taken to meet the increased costs of public sector pay and to provide support to those who need it most, while balancing public finances.
Soaring inflation means the Scottish Government’s budget is now worth £1.7 billion less in real terms than it was last December. Since then inflation has risen from around 4% to more than 10% – with possible further increases when figures come out next week.
Mr Swinney set out to Parliament where savings have so far been made to help pay for initiatives such as fair public sector pay settlements and doubling the Fuel Insecurity Fund. He has also written to the Finance and Public Administration Committee outlining the details of reductions in planned spending made in recent weeks.
The Deputy First Minister has committed to setting out the Emergency Budget Review within two weeks of the UK Government budget update expected later this month. He warned further intervention will represent a significant challenge given the largely fixed Scottish Government budget and limited fiscal powers.
Mr Swinney said: “Our budget was based on a UK Spending Review that simply did not foresee the levels of inflation that are now a reality.
“That alone would require the budget to be revisited. But in times of crisis the job of the finance secretary is not simply to balance the books. It is to find the money to help families, to back business and to fund the priority projects that improve lives for the long term. And so, the Emergency Budget Review must both identify funding to cope with inflation-driven cost increases and aim to support those who most need our help during this crisis.
“This is the harsh reality of a fixed budget and limited powers. The Scottish Government simply does not have access to many of the levers which would provide the greatest support in this crisis. We will do everything we can. We will make the hard choices. But only the UK Government can act to end this crisis. They should do so – and I encourage them to do so now.”
Millions of people will be protected through strengthening regulation of interest-free Buy-Now Pay-Later credit agreements, under plans announced by the government today.
Lenders will be required to ensure loans are affordable and rules will be amended to ensure advertisements are fair, clear and not misleading.
UK Government will expand rules to cover other forms of unsecured short-term credit that pose similar risks to consumers, such as those used for dentistry work. Millions of people will be protected through strengthening regulation of interest-free Buy-Now Pay-Later credit agreements, under plans announced by the government today (20th June).
Buy-Now Pay-Later credit agreements can be a helpful way to manage your finances, allowing people to spread the full cost of a purchase over time. However, people do not currently have the usual full range of borrower protections when taking out this type of loan and they are rapidly increasing in popularity, resulting in a potential risk of harm to consumers.
Under plans set out by the government today it confirmed that lenders will be required to carry out affordability checks, ensuring loans are affordable for consumers, and will amend financial promotion rules to ensure Buy-Now Pay-Later advertisements are fair, clear, and not misleading. Lenders offering the product will need to be approved by the Financial Conduct Authority (FCA), and borrowers will also be able to take a complaint to the Financial Ombudsman Service (FOS).
Economic Secretary to the Treasury, John Glen said: “Buy-Now Pay-Later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place.
“By holding Buy-Now Pay-Later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”
Today’s consultation response sets out the government’s proposals for regulation of the sector. Given its complexity, the government will publish a consultation on draft legislation toward the end of this year. Following this, the government aims to lay secondary legislation by mid-2023, after which the FCA will consult on its rules for the sector.
The government has also confirmed that other forms of short-term interest-free credit, such as those used to pay for dental work or larger items like furniture, will be required to comply with the same rules announced today, given the risks posed are similar and consumers should receive consistent protections from similar products.
These rules will apply to businesses who partner with a third-party lender to provide credit, and the government is asking for further stakeholder feedback to confirm whether they should also apply to online merchants who directly offer credit for the purchase of their own products.
Today’s announcement forms part of the government’s plan to grow the economy to tackle the cost of living. The Chancellor has provided £37 billion of support to help, including providing the eight million most vulnerable British families with at least £1,200 of direct payments this year – and giving every household right across the UK £400 to help with their energy bills.
The Scottish Government moved at pace with its partners to respond financially to the pandemic – but public sector leaders need to be clearer about how one-off Covid-19 funding is being spent and what impact it has had, according to a new report by public spending watchdog Audit Scotland.
The Scottish Government worked with councils, NHS boards and other public sector bodies to direct billions of Covid-19 funding in difficult circumstances. However, they were not prepared for the scale or speed of the response required and lessons need to be learned.
Spending decisions were recorded differently across government departments, and it was not always clear how data was used to inform funding allocations. Decisions were not centrally collated, making it hard to see how some financial decisions were reached. So far, there has also been limited evaluation of the difference the financial response to the pandemic has made to people’s lives.
The Scottish Government managed its budget effectively over the last two years, but some Covid-19 funding remains unspent. At the end of 2020/21 over £2 billion was added to reserves by the Scottish Government, councils and integration authorities – but it is not possible to say how much of that is from Covid-19 funding.
Stephen Boyle, Auditor General for Scotland, said: “The Scottish Government and public bodies worked well together to distribute money during the pandemic, but lessons should be learned to improve planning for any future large-scale disruptions.
“It is vital for transparency and financial planning that the Scottish Government and other public bodies are clear about how one-off Covid-19 funding is being spent, including money in reserves.
“More work is also needed by the Scottish Government to collect the data that will allow it to understand the difference its interventions have made and plan the country’s recovery from Covid.”
William Moyes, Chair of the Accounts Commission, said: “Councils played an important role in the financial response to Covid-19 because of their local knowledge and the systems they had in place to distribute money.
“Pandemic spending largely protected councils and other public bodies over the last two years. But the financial challenges they were facing pre-Covid remain, and council budgets are particularly under pressure.
“Many services relied on one-off Covid-19 funding to remain sustainable, and it’s important that there is clarity about how they will be paid for in the future.”
Evaluating the financial response to the Covid-19 pandemic – which saw the Scottish Government allocate £15.5 billion between 2020-2022 – the report highlights the significant challenges faced across the country.
The report acknowledges that despite these extraordinary difficulties:
existing Scottish Government systems were utilised efficiently to help deliver financial support as quickly as possible, whilst developing new, streamlined processes that minimised the risk of fraud
the Scottish Government maintained a balanced budget
short notice UK Government funding was directed quickly by the Scottish Government to tackle the wide ranging impacts of the pandemic
over £5 billion was allocated for health and social care to support vital services and public health infrastructure for testing and vaccinations programmes
more than £4.7 billion was allocated to businesses in lifeline support
local authorities were allocated £1.8 billion to fund vital general and targeted services, including £200 million to cover councils’ lost income
Finance Secretary Kate Forbes said: “The COVID-19 pandemic created challenges on a scale our economy and people have never faced in living memory. At every stage, the Scottish Government worked to safeguard lives, businesses, jobs and livelihoods, acting as quickly and efficiently as possible to support people and businesses.
“Despite the impacts of the pandemic, many of which are still being acutely felt, we worked collaboratively with all sectors of the economy to identify those most in need and then with local authorities and partners to utilise existing systems to ensure financial support was delivered swiftly and effectively.
“We also set up a number of new support streams, to make sure businesses were being paid as quickly as possible. My thanks go to all of our partners who worked with us to deliver support at pace.
“It is important to remember the severity of the pandemic and that decisions were taken at pace as we considered how best to allocate funding to support business and people through the necessary public health restrictions.
“We will now carefully consider the Audit Scotland report and engage with relevant sectors to ensure that future decision making is as informed as possible and best supports the people of Scotland.”
Innovators to share in £150K prize fund and other business growth support measures
A host of University of Edinburgh students and alumni who have founded their own startup companies are celebrating after taking honours at this year’s Scottish EDGE Awards.
Xiaoyan Ma, founder of Danu Robotics, an innovative business focused on developing sustainable technological solutions for the benefit of the environment, was named among this year’s main award winners. The company secures £75K in grant funding to accompany its award.
Three other company founders, which have also been supported by Edinburgh Innovations (EI), the University’s commercialisation service, were named as Young EDGE winners. They include Alex Hodson of Podspectrix; Niall McGrath of Robocean; and Elena Höge of Yaldi Games.
Meanwhile Ioannis Stasinopoulos of Prozymi Biolabs, a further EI-supported startup, was named as a Wildcard EDGE award winner. Between them, the four companies will share a further £45K in grant funding along with their awards.
The annual Scottish EDGE Awards, aimed at identifying and supporting Scotland’s up-and-coming, innovative, high-growth entrepreneurial talent, recognises and supports entrepreneurs and startup businesses.
Funded by the Hunter Foundation, the Royal Bank of Scotland, the Scottish Government, Scottish Enterprise and private donors, the competition is delivered twice annually and has to date supported 395 early-stage Scottish businesses with over £15m in award funding.
The winners from this year’s Scottish EDGE Awards will share in more than £150K ingrants and benefit from other forms of support and mentoring to help them maximise their growth aspirations.
John Lonsdale, Head of Enterprise Services from Edinburgh Innovations said:“We congratulate all the University of Edinburgh students and alumni in their success at this year’s Scottish EDGE Awards.
“We are delighted to have supported these emerging companies, all of which are focused on developing innovative solutions to some of the key challenges facing society.
“As an organisation committed to helping University of Edinburgh startups reach their full potential, Edinburgh Innovations is proud of its role in supporting entrepreneurs who are driving economic growth in Scotland and beyond.”
An ‘ambitious but realistic’ public spending framework has been published which outlines how more than £180 billion will be invested to deliver priorities for Scotland.
The Resource Spending Review, which is not a budget, outlines how the Scottish Government will focus public finances in the coming years to tackle child poverty, address the climate crisis, strengthen the public sector as Scotland recovers from Covid and grow a stronger, fairer and greener economy.
A targeted capital spending review has also been published to address a reduction in capital investment by the UK Government. As well as supporting the NHS and affordable housing, the capital spending review will invest around £18 billion up to 31 March 2026, with over half a billion of additional funding directed to net zero programmes compared to previous plans.
Finance Secretary Kate Forbes said: “We are of course still recovering from the Coronavirus pandemic. There is still acute pressure on the NHS, on business and the wider economy. The illegal Russian invasion of Ukraine is a humanitarian crisis, which is affecting the global economy. Rising energy prices and constrained supply chains have affected countries worldwide. While inflation is also impacting other countries, it is not impacting them equally.
“The UK currently has the highest inflation of any G7 country– almost twice the rate of France. Brexit has made this problem worse, with increases in food prices, hitting the poorest hardest. We are experiencing an unprecedented cost of living crisis. Inflation is at a 40-year high of 9 per cent with households facing considerable hardship.
“Today’s Resource Spending Review is not a Budget. However, it is essential to share high-level financial parameters with public bodies, local government and the third sector, so we can plan ahead together.
“Today I set out an ambitious but realistic public spending framework for the years ahead. It does not ignore the realities of our financial position, but neither does it roll back on our ambitions for change.”
Further changes to Scotland’s fiscal position and to tax and social security forecasts are expected to change the funding picture ahead of annual budgets.
The spending review however does prioritise sending in key policy areas.
These are:
Tackling child poverty and supporting households and businesses with the cost of living
£22.9 billion for social security assistance
increasing the Scottish Child Payment from £10 to £25 and expanding eligibility by the end of this year
providing universal free school meals to primary school children in P1-5 and expanding provision beyond that
uprating devolved benefits
Securing stronger public services
investing £73.1 billion in health and social care including developing a National Care Service
increasing investment in frontline health services by 20 per cent over this Parliament
spending more on primary and community care to ensure people get the right treatment in the right place
funding of £42.5 billion for local government for the delivery of services
investing £11.6 billion in the justice system
Achieving net zero and tackling the climate crisis
up to £75 million per year to deliver the Heat in Building Strategy, enabling £1.8 billion investment towards decarbonisation
up to £95 million towards meeting woodland creation targets
£46 million to introduce the community bus fund and an increase in funding for concessionary travel schemes
investment of over £12 million in peatland restoration
£4 million of resource spending alongside £150 million capital and financial investment for the North East and Moray Just Transition Fund
Building a stronger, fairer and greener economy
capital investment of £581 million to support the economy, including our enterprise agencies and the Scottish National Investment Bank
continuing through the Inward Investment Plan to attract high quality inward investment in areas such as energy transition and the space sector
pushing forward with the export growth plan A Trading Nation to scale up Scotland’s international reach
embedding entrepreneurship in education, to give young people opportunities to start and grow businesses
The spending review provides a platform for engagement ahead of the next budget on how best to reform Scotland’s high performing public sector to become more efficient, to deliver ambitious outcomes. That means rapidly digitalising the public sector, maximising revenue through public sector innovation, reforming the public sector estate and the public body landscape, and improving public procurement.
The annual Medium Term Financial Strategy has also been published to provide the economic and fiscal context for the Resource Spending Review and Capital Spending Review, including the fiscal challenges that lie ahead.
COSLA has stated that the implications of the Scottish Government’s spending plans for the rest of the parliament are deeply concerning for communities across Scotland and fail to recognise the fundamental role Local Government has in addressing the Government’s own priorities of child poverty, climate change and a stronger economy.
The ‘Resource Spending Review’, published on 31 May, shows no prospect of an increase to Local Government’s core funding for the next 3 years, which is especially concerning in the current context of soaring inflation and energy costs.
This “flat-cash” scenario gives extremely limited scope for recognising the essential work of our staff, whose expectations around pay continue to be, quite rightly, influenced by Scottish Government’s decisions in relation to other parts of public sector. Put simply, the plans as they stand will mean fewer jobs and cuts to services. COSLA is seeking an urgent meeting with the First Minister and Cabinet Secretary for Finance to discuss this further.
COSLA’s Resources Spokesperson Gail Macgregor said “Every year at Budget time, COSLA argues for fair funding for Local Government to maintain the essential services our communities rely on.
“No increase in our core funding damages these services and yesterday’s announcement will see this continue for at least the next three years. Our communities are starting to see and feel the difference”
Yesterday, the Fraser of Allander Institute also immediately recognised the impact on councils – “The local government budget will decline by 7% in real terms between 2022/23 and 2026/27…….the real terms erosion of the funding allocations of local authorities represents the continuation of a longer trend”
Commenting on the resource spending review, a spokesperson for the Scottish Children’s Services Coalition commented: “The Scottish Government’s resource review, which highlights a spending gap of around £3.5 billion by 2026/27, points to highly challenging times ahead for our public services (1st June 2022).
“The Fraser of Allander Institute noted that, within this, councils will see real term cuts of 7 per cent between 2022/23 and 2026/27, the implications of which are highly disturbing for those with additional support needs (ASN) who we support.
“Those with ASN make up around a third of our children and young people, including autism, dyslexia and mental health problems, many of whom were already facing considerable barriers to support and not receiving the care they need when they need it.
“While we have witnessed a more than doubling in the number of these individuals over the last decade, putting an immense strain on services, there has been a cut in spending on additional support for learning and a slashing in specialist educational support.
“Covid-19 has had a further major impact, denying care to many, and with these latest swingeing public service cuts we are potentially facing a ‘lost generation’ of vulnerable children and young people.
“We would urge the Scottish Government and newly elected councils to work together to ensure that those children and young people with ASN are made a priority, able to access the necessary support to allow them to reach their full potential.”
The STUC have yet to comment on the Spending Review.
Tomorrow (Tuesday 31 May) the Scottish government will publish a Spending Review and a Medium Term Financial Strategy. At the same time, the Scottish Fiscal Commission will publish updated economic and fiscal forecasts for the period to 2027.
This article by DAVID EISER at the FRASER of ALLANDER iNSTITUTE considers six key things to look out for:
How much detail will the government provide about its spending plans?
The government has said that its resource spending review will ‘outline resource spending plans to the end of this Parliament in 2026-27’. This will, it says, ‘give our public bodies and delivery partners greater financial certainty to help them rebuild from the pandemic and refocus their resources on our long-term priorities’.
What has remained unclear is the level of granularity at which the government intends to set its spending plans.
A spending review is not a multi-year budget, and we shouldn’t expect it to look like one. But we have no idea whether the government is going to set out spending plans at portfolio level, or in more detail than this. Portfolio-level plans would be useful, but some organisations would, justifiably, point out that Portfolio level plans provide them with little if any certainty about their own allocations.
There is a possibility too that the government does not in fact set-out portfolio level spending plans, but instead provides information about its spending plans for only a selective list of its policy ‘priorities’. This sort of approach would certainly represent a missed opportunity.
How will the government address uncertainty?
The UK government’s Spending Review in October set out spending allocations for the Scottish government for each year until 2024/25. These allocations aren’t necessarily set in stone, but whilst they might well increase a bit, they almost certainly won’t be reduced.
The Scottish government does not have confirmed allocations for 2025/26 and 2026/27 and there is significant uncertainty around what the government’s allocations will be in these years.
It will be interesting to see how the Scottish government addresses this uncertainty in the spending review. Will it set out plans for a single scenario only? Will it set out a central scenario, together with spending plans under alternative scenarios? Or will it provide broad ranges over which it expects spending on different public services to fall?
There is a reasonable case for the government to adopt a different approach for 2023/24 and 2024/25 than it does for 2025/26 and 2026/27. But it shouldn’t use the uncertainty in the last two years of the parliament as justification for providing less detailed information in the next two years.
What insights will we get into the government’s policy commitments… and the implications for non-prioritised areas of spending?
The Spending Review should give us some further clues about the government’s emerging plans in various areas. For example, the timescales for, and financial implications of, plans to establish a national care service may emerge more clearly.
What is less clear is how much the spending review will tell us – explicitly – about levels of spending for non priority areas.
The Scottish government’s MTFS in December pointed out that the difference between its spending aspirations and its likely budget was over £2bn in 2024/25 (see Figure 6). This is a substantial funding gap (although it is not clear what assumptions lie behind it).
The spending review framework notes that ‘With limited resources, increased investment in the Scottish Government’s priorities will require efficiencies and reductions in spending elsewhere: we need to review long-standing decisions and encourage reform to ensure that our available funding is delivering effectively for the people of Scotland.’
It will be interesting to see whether the spending review document itself is as candid about where spending reductions are taking place as the framework document implied it might be.
How significantly will the economic outlook deteriorate?
The last set of SFC forecasts were published in December 2021. A huge amount has changed in the five months since then.
The December 2021 forecasts described an economy that had recovered from the pandemic more strongly and smoothly than had been anticipated earlier that year. The economy was forecast to grow 2.2% this financial year and 1.2% next.
Unemployment was forecast to peak at 4.9% in 2022, down from an expected peak of over 7% in its previous forecast. Inflation was expected to increase in 2022 to around 4.4% – enough at the time to cause the SFC to forecast a fall in real earnings.
We live in a different world now. By March 2022, inflation was 7%, and by May the Bank of England was expecting inflation to peak at 10% this year. The rise in inflation, together with tax increases, leads the Bank to forecast that 2022 will see the second largest annual fall in disposable household incomes since the 1960s.
The SFC’s forecasts will inevitably paint a similarly gloomy picture for real household incomes in Scotland, which in turn will result in a contraction of its forecasts for economic growth, and probably a deterioration in its medium term outlook for the labour market. Exactly how the SFC sees the cost of living crisis play out will be interesting to see.
In May the Bank of England’s forecast implied prolonged stagnation in UK economic activity, although it did not (quite) forecast a recession in a technical sense. If the SFC does forecast a recession in Scotland, this will no doubt dominate headlines, but it will be important to look closely at how different the UK and Scottish economic forecasts are in a tangible sense.
What will be the implications of the fiscal forecasts for income tax and the Scottish budget?
The SFC’s economic forecasts will have implications for the Scottish budget, via the income tax forecasts in particular. These implications are not as immediate as you might think – Tuesday’s forecasts do not themselves have major significance for Scottish government spending this year, since the forecasts made at the time of the budget are what really matters until tax outturn data is available.
But Tuesday’s forecasts will give an indication of whether the outlook for the contribution of income tax to the budget has improved or deteriorated since the budget forecasts in December.
Its very difficult to predict the outcome. Its quite conceivable that the forecasts for Scottish income tax revenue will be revised up, if the SFC believes that higher inflation and recent further falls in unemployment will drive up earnings growth. But what ultimately matters is how the SFC’s judgements play out alongside the OBR’s equivalent judgements for the UK (since these are what determine value of the income tax block grant adjustment).
The December forecasts painted a gloomy picture. Scottish income tax in 2022/23 was forecast to raise £190m less than what was taken out of the block grant to account for tax devolution, and £257m less in 2023/24.
Kate Forbes will be hoping for any signs of an improvement in the outlook. But whatever the implication of Tuesday’s income tax forecasts, they will in reality need to be taken with a pinch of salt, given the differences in timing between the OBR and SFC forecasts.
The other really important element of the fiscal forecasts will be what they say about the outlook for devolved Scottish social security spending, relative to the related uplift in the block grant.
Spending will inevitably be substantially higher than the level of additional resources flowing through the block grant, as a result of policy divergence in Scotland (in relation to disability benefits, carer’s allowance, and the new Scottish Child Payment). But the extent of the gap will have implications for the resources available to the Scottish government in other areas of devolved spending.
What will the MTFS tell us about the government’s wider strategic ambitions?
The Medium Term Financial Strategy sets out risks to the devolved budget over a five year period. We can expect the MTFS to analyse issues including uncertainties relating to inflation and the implications for public sector pay.
But past MTFS documents have also given a steer about some of the government’s wider strategic fiscal objectives and asks. It will be worth looking at what this year’s MTFS says about these issues – which potentially include positioning statements in relation to further tax devolution, or extension of borrowing and budget management tools – particularly in the context of the upcoming review of the fiscal framework.
David Eiser is Senior Knowledge Exchange Fellow at the Fraser of Allander Institute
