This week, the Scottish Government released headline child poverty statistics for 2023-24. The big headline is: we’ve missed the interim child poverty targets. But what does that mean? And what comes next (write Fraser of Allander Institute’s HANNAH RANDOLPH, EMMA CONGREVE and CHIRSTY McFADYEN)?
What do the new statistics say?
First, our usual note on the data: poverty rates are usually presented as a three-year average. The pandemic interrupted data collection, so any period including 2020-21 is actually a two-year average omitting that year – although the latest data point is back to a true three-year average. The interim and final child poverty targets set out in legislation are single-year rates, though, so we needed to hit 18% relative poverty in 2023-24 to meet the interim targets.
Source: Scottish Government Notes: The questions on material deprivation changed in 2023/24, so single-year rates are not directly comparable and a three-year rate for 2021-24 has not been calculated. Rates of persistent poverty are calculated for 2018-22 and 2019-23; someone is counted as in persistent poverty in 2019-23 if they were in poverty for three or more of the four years in that period.
In sum, three of the four main measures of child poverty have fallen since last year – but not by enough to meet any of the interim targets.
How close were we to meeting the targets?
The measure of combined low income and material deprivation came closest to meeting the interim target, 9% vs. an 8% target. The relative and absolute poverty measures came in 4 and 3 percentage points above the targets, respectively (see Chart 1). It’s fair to note that the confidence intervals around these measures are relatively wide due to data limitations.
Chart 1: Relative and absolute poverty after housing costs, 2015/16 – 2023/24
Source: Scottish Government Notes: Three-year rates for periods including 2020/21 are two-year averages omitting 2020/21. The single-year rate for 2020/21 is not shown.
It’s promising that these three measures also fell from last year. The fourth measure, persistent poverty, is based on a different survey and can be relatively volatile.
Nevertheless, it’s concerning that persistent poverty, representing the proportion of children who live in relative poverty for three or more of the last four years, has risen from 17% to 23%. The rate is much higher than the interim target of 8%. However, there may be data issues driving at least part of the change – there’s potentially a lot to unpack there.
Have policies like the Scottish Child Payment made a difference?
The new data for 2023/24 represent the first year when all children under 16 in households receiving qualifying benefits got £25 per week for the full year.
As a reminder:
The Scottish Child Payment (SCP) was introduced for children under 6 in eligible households at £10 per week in February 2021;
The amount increased to £20 per week, per child in November 2021;
A system of bridging payments was introduced in 2022 for children under 16; and
Eligibility was extended to children under 16 and the payment was increased to £25 per week, per child in November 2022.
There has been some discussion of whether or not the Family Resources Survey (the survey Scotland’s child poverty statistics are based on) was accurately capturing receipt of SCP. There have been updates to the data methodology, and we’re confident that SCP is accurately represented in this year’s data. Read more on this issue here.
The new statistics today show a fall in relative and absolute poverty since last year. But it’s difficult to say what would have happened to child poverty rates in the absence of SCP; the most straightforward way to tell is to compare trends in child poverty across Scotland and the rest of the UK, where SCP is not available (see Chart 2).
Chart 2: Relative child poverty trends, Scotland vs. UK
Source: Scottish Government and DWP Notes: All rates are single-year statistics. The single-year rates for 2020/21 are not shown.
With this year’s data, we see an indication that the trend in child poverty rates since SCP was introduced may have started to diverge – but only time will tell.
The Scottish Government has also released new modelling this morning updating the estimated impact of different policies on child poverty in future years. Previous modelling from last year estimated the impact of measures like the Scottish Child Payment through this year; today’s modelling extends this period to 2029/30.
The new modelling estimates that the SCP will reduce relative child poverty by 4 percentage points in 2025/26 compared to what it would have been without it. This is slightly larger than, but similar to, JRF’s estimate of 3 percentage points.
The modelling also includes estimates of the impact of different welfare reforms at the UK level. The UK Government is due to come out with their plan to tackle child poverty in the coming months, and it will be worth watching to see what they build into their plans and how they will affect Scotland.
We expect to put a blog post out next week talking through recent modelling of potential policies, both with devolved and reserved powers. Stay tuned – and in the meantime, check out our report on a few policy packages that could meet the 2030/31 targets.
What happens next?
It’s not set out in the legislation what happens if the interim targets are not met.
Regardless, we now expect attentions to turn to the 2030/31 targets. The targets are:
Less than 10% of children in relative poverty;
Less than 5% of children in absolute poverty;
Less than 5% of children in combined low income and material deprivation; and
Less than 5% of children in persistent poverty.
No big policy changes have gone into effect in the last couple of years – so we don’t expect to see a big step change in next year’s statistics (for 2024/25) either.
In December, the Scottish Government announced that they would mitigate the UK-level two-child limit on Universal Credit from 2026/27 (or sooner if possible).
Recent estimates show that mitigation could reduce child poverty by between one and twopercentage points.
That leaves a long way to go to the 2030 targets. The Scottish Government has a number of levers available to them, but may be constrained by a tough fiscal environment. They will also have to respond to choices made by the UK Government, such as the recent cuts to disability benefits.
We’ll be looking out for the final child poverty delivery plan, which will be published next spring and will hopefully lay out the Government’s plans to reach the targets. There will also be a lot to dig into as next year’s Holyrood elections approach and different parties set out their plans to meet the targets in their manifestos.
To read more about potential policy packages to meet the 2030 targets, check out our latest modelling report here.
Welfare Green Paper: what we know and what we don’t know
Work and Pension Secretary Liz Kendall made a statement to the House of Commons yesterday outlining the main areas of ‘Pathways to Work”, the UK Government’s Green Paper that has been in the rumour mill for weeks. The statement contained some well trailed announcements and some new details, although there are also still some significant gaps in our understanding (writes FRASER of ALLANDER INSTITUTE team).
PIP will not be frozen, but eligibility will be restricted
The Secretary of State’s headline announcement was in line with news over the weekend, which suggested that rates will not be frozen. Instead, the criteria for getting the daily living element of the Personal Independence Payment (PIP) will be raised, with a minimum of four points on one daily living activity.
The Green Paper in this section is heavily focussed on the ‘sustainability’ of the disability benefits system, and on needing to make the system more ‘pro-work.’ It’s worth noting, however, that work status is unrelated to being in receipt of disability benefits, which are designed to address the additional costs of living with a disability, whether or not someone is in work.
Sustainability too is a nebulous concept in this space. But while it makes sense to talk about sustainability of the public finances as a whole, it is not immediately clear that a growing area of spending is necessarily unsustainable, especially when responding to a clear need in society. The Government has choices – for example, to raise taxes or to cut other areas of spending. So far from being a macroeconomic imperative, to focus on disability benefits seems clearly a political choice.
There is little in the way of details of how much the UK Government intends to save in the Green Paper, but the Secretary of State mentioned the much bandied about £5bn by 2029-30 that it intends to include in the OBR forecast. We do not know how much of this figure will be generated from PIP rather than other changes.
What we now know is that the whole of the spending reductions on PIP will come from the lower end of the average award, as it is being driven through the raising the bar for claiming. But that also means that all else equal, even morepeople will lose access to the benefit. A quick calculation suggests that for every £1bn a year saved, it could mean around a quarter of a million fewer people receiving PIP, which would be a huge change.
Work capability assessment scrapped from 2028
This is a significant change, and one for which consequences in Scotland are still unknown. At the moment, the work capability assessment (WCA) is used to assess fitness for work. From 2028, the assessment for PIP will instead be used as the basis for universal credit (UC) elements related to health conditions.
This creates an issue in Scotland, because Social Security Scotland runs its own (different) assessment for Adult Disability Payment (ADP), which is the devolved equivalent of PIP. But UC is a reserved benefit administered by DWP, and that means that potential claimants in Scotland would not have access to the PIP assessment that would be used for determining eligibility for health-related UC elements. And with the PIP assessment being tightened, it will be likely further out of step with ADP.
We’ll have to wait and see what solution there will be to this – the Green Paper merely states that “consideration will be needed.” But this is an important issue that requires action on the part of both UK and Scottish departments to ensure access by claimants to this is maintained. It highlights a broader issue of the interaction between the benefits systems which is likely to be put under further strain as systems evolve separately in Scotland.
On a broader point, these proposed changes come at a time when people in receipt of Employment and Support Allowance are due to be migrated to UC by the end of 2026. Our research with people with learning disabilities showed that many are already really concerned about the upcoming changes, and these will be further changes to an already complex system. It will be crucial to clearly communicate all the changes, particularly in accessible formats.
UC rates to be rebalanced, and access to health elements restricted for those under 22
The Secretary of State also announced a big change in the relative levels of the standard and health elements of UC. The health element of UC – which is paid on top of the standard allowance – will be frozen in cash terms for the rest of the decade for those already in receipt of it, and new claims will be paid at around half the current rate (£50/week compared with the current £97/week). Alongside this, the UK Government says it will uprate the UC standard allowance by more than inflation (6% in 2026-27).
The health element of UC will also be tightened in several ways. One is that claimants will be expected to have “much more active engagement and support” in relation to work. The other large change proposed is the consultation on delaying access to the health element of UC until potential claimants are 22, with the justification being the lower likelihood of those in receipt of that element being in employment as well as the fact that those under 22 will be covered by the Youth Guarantee of employment support, training or an apprenticeship.
We note, however, that employability is an area of devolved competence, and indeed a similar scheme already exists in Scotland.
A consultation on a new ‘unemployment insurance’
The UK Government is consulting on an interesting proposal for a unified ‘unemployment insurance’ benefit, which would replace both contribution-based Jobseeker’s Allowance and Employment and Support Allowance with a single, time-limited entitlement. This is a step more in the direction of most European systems, in which contributory systems provide a much higher level of income replacement than UC, although for a limited period of time. The proposed rate is much higher than contributory JSA, which has never been a big part of the welfare system in the UK.
Higher income replacement systems are the basis of highly successful active labour market policy systems such as the Danish ‘flexicurity’ approach, and which could help smooth out cliff-edges in the labour market and incentivise retraining, but this proposal – while probably a good idea – falls well short of that kind of system. In any case, it’s also purely consultative – and as it might well cost money on net (at least in the short run), we wait to see if anything will come of this.
‘Right to try’ – a welcome development
One of the measures mentioned in the Green Paper that could have a big positive impact is the announcement of legislation to guarantee that simply starting work will not lead to a reassessment or award review. The fact that this can happen at the moment is acts as a barrier to entering employment, especially if people want to work but are unsure if it will be a good fit for their situation as they might have to reapply for benefits subsequently.
Our research with people with learning disabilities indicates that this ‘right to try’ approach might work well, as the binary ‘can work/can’t work’ doesn’t fit well for them. Many people want to work and just need the right support – so we are hopeful that some of these changes will provide just that.
We know very little about how most of the announcements will affect Scotland
PIP is being replaced in Scotland with ADP, and migration is expected to be concluded this year. None of the announcements therefore affect Scottish claimants of ADP, but they do affect the finances of the Scottish Government. As we discussed last week, the Scottish Government’s block grant adjustment is based on the projected expenditure in England and Wales, and therefore a tightening of access to PIP will (all else equal) make the Scottish Budget worse off. It is then the Scottish Government’s decision to move in lockstep or to find the additional funds from other sources.
Because the Green Paper has no costings for how much of the £5bn a year in savings comes from PIP, it’s impossible for us to say how much this will mean for the Scottish Government’s Budget. But the ready-reckoner we provided last time out – showing an effect of £90-115m for every £1bn reduction in PIP spending by the UK Government – still applies.
As we discussed before, the use of the PIP assessment for health-related UC claims is problematic in the absence of any further action, as this is not available in Scotland and the systems are diverging. The UK Government’s Green Paper says this will require “consideration”, but this is a pretty substantial change that we hope will be solved in good time. Given the proposal is for this to be done from April 2026, it is fairly urgent to get this resolved.
Employability support is a devolved area, but the UK Government says it will include an additional £1 billion to create a guarantee of personalised employment, health and skills support. Given that, we’d expect Barnett consequentials to flow from this, but the Green Paper does not explicitly state that – we’ll wait to see if there are news on this.
The restrictions on health-related UC claims for under 22s will apply in Scotland, as it’s a reserved benefit. Notwithstanding the issues with the PIP/ADP assessment compatibility, this is an area where there has certainly been growth in the past few years: in December 2024, 11,300 people aged 16-21 were in receipt of the health element of UC, compared with 4,600 in December 2019.
This gives us a first glimpse of the amount of people that might be affected by this change if it were to be introduced.
Green Paper delivers tiny income gains for up to four million households, at cost of major income losses for those who are too ill to work or no longer qualify for disability benefit support, says RESOLUTION FOUNDATION
The Health and Disability Green Paper will boost Universal Credit (UC) support for up to four million families without any health conditions or disability by around £3 a week. But these tiny gains are overshadowed by reforms that risk causing major income losses for those who are too ill to work, or those who no longer qualify for disability benefits, the Resolution Foundation said yesterday (Tuesday).
The Green Paper today sets out major reforms on entrances into the benefits system, entitlements within the system, and exits into work that aim to cut spending by £5 billion a year by the end of the decade, and change how people interact with the system.
The main savings are to be achieved through restricting entitlement to PIP – a benefit that is paid regardless of whether someone is in work, to compensate for the additional costs of being disabled.
The Foundation says that if the Government plans to save £5 billion from restricting PIP by making it harder to qualify for the ‘daily living’ component, this would mean between 800,000 and 1.2 million people losing support of between £4,200 and £6,300 per year by 2029-30.
With seven-in-ten PIP claimants living in families in the poorest half of the income distribution, these losses will be heavily concentrated among lower-income households. This looks like a short-term ‘scored’ savings exercise, rather than a long-term reform, says the Foundation, given that Ministers have also said they will look again at how PIP is assessed in the future.
Further savings are to be achieved by cutting the level of the health-related LWCRA element within UC, which is currently claimed by 1.6 million people. The proposed cuts are focused on young people (aged 16-21), who may no longer be eligible for any extra support, and those who fall ill in the future, as their additional support will be halved, from £97 per week in 2024-25 to £50 per week in 2026-27.
Reinvesting some of the cuts to health-related UC into boosting the basic award for UC (which, at around £3 more per week, is roughly a sixth of the temporary £20 a week uplift to UC during the pandemic), and greater support for the newly unemployed should benefit up to four million families who don’t receive health-related UC.
Reducing the financial gap between health-related and basic UC should reduce the incentive for people to claim incapacity benefits (which, for a single adult, is over twice as much as basic UC at present). Along with the additional employment support provided to people on UC, the Government hopes this will boost employment, although figures will not be available until the Office for Budget Responsibility publishes its spring forecast next week.
Louise Murphy, Senior Economist at the Resolution Foundation, said:“The package of measures announced in today’s Green Paper should encourage more people into work. But any living standards gains risk being completely over-shadowed by the scale of income losses faced by those who will receive reduced or no support at all – irrespective of whether they’re able to work.
“Around one million people are potentially at risk of losing support from tighter restrictions on PIP, while young people and those who fall ill in the future will lose support from a huge scaling back of incapacity benefits.
“The irony of this Health and Disability Green Paper is that the main beneficiaries are those without health problems or a disability. And while it includes some sensible reforms, too many of the proposals have been driven by the need for short-term savings to meet fiscal rules, rather than long-term reform.The result risks being a major income shock for millions of low-income households.”
Money and Mental Health Policy Institute: Response to government welfare green paper
The government has published its welfare green paper, which outlines its proposals to reform the welfare system.
In particular, the green paper sets out plans to make it harder for people to qualify for Personal Independence Payments (PIP) — a benefit which people with disabilities and long-term ill-health can claim to help cover the extra costs associated with their disability, and which is not connected to work. In addition, people aged under 22 will not be able to qualify for the health top-up element of Universal Credit.
The government has also announced £1bn additional funding for personalised employment support to help people with disabilities move into work, and that people receiving benefits will be given a “right to try” work without losing their benefits entitlement.
Commenting on the proposals, Helen Undy, Chief Executive of the Money and Mental Health Policy Institute, said:“PIP is an absolute lifeline for thousands of people with mental health problems. It can be the difference between being able to afford basic things like a phone to call your crisis team or help to clean your home, or living in disarray and increasing isolation.
“Making it harder to access will jeopardise people’s financial security and cause serious distress, which won’t set up people to go back into work and to thrive.
“These changes will mean that needing help to wash or get dressed because of your mental health wouldn’t be enough to qualify for PIP.
“The government says it will ensure people with ‘genuine need’ aren’t affected, but we’re really concerned that these new reforms will take us further back to the days when people with mental health problems were treated as less worthy of help than those with physical health issues.
“The new ‘right to try’ a job without losing the benefits is welcome, as is the funding for personalised employment support for people with disabilities or health conditions. But introducing these measures alongside cuts to PIP and stopping young people from getting incapacity benefits will do more harm than good.
“It is a short sighted approach that will have a devastating impact on many people’s finances and mental health, and we urge the government to rethink these plans.”
We have heard this week that the UK Government Chancellor Rachel Reeves intends to make cuts to the welfare bill to bring UK Government borrowing down in line with her fiscal rules ahead of the next OBR forecasts due at the end of the month (writes Fraser of Allander Institute’s EMMA CONGREVE).
Reports state that the axe is likely to fall on health and disability related benefits for working age people.
Here we produce a bit of an explainer to get people up to speed on the benefits in scope and what has been happening in recent years.
Which benefits could be in line for cuts?
There are two types of benefits in Great Britain (benefits in Northern Ireland are arranged differently) that working age people with disabilities and ill health can claim.
Incapacity Benefits
The first type is an income replacement benefit that tops up income for families where the disability or health condition limits their ability to work, commonly referred to as incapacity benefits. They are means tested so that the amount you receive depends on your household income and reduces as income (e.g. from a partner’s earnings) rises.
Chart: Caseload of incapacity benefits for working age adults, Scotland
Notes: Universal credit and ESA exclude those in the assessment phase in line with OBR Welfare Trends Report analysis. Northern Ireland not included.
Sources: DWP, ONS
Universal Credit (UC) has been slowly replacing Employment and Support Allowance (ESA) for this group of people since 2018 so the reduction in ESA over time reflects migration over to UC rather than a change in disability/health status.
Disability Benefits
The second type of support for those with disabilities and ill health comes from payments to cover additional costs, for example due to reduced mobility, and are commonly referred to as disability benefits. They are not means tested and people do work whilst they are on these benefits.
In Scotland this type of benefit is now devolved, with Adult Disability Payment (ADP) slowly replacing Personal Independent Payment (PIP). PIP itself was a replacement for Disability Living Allowance (DLA) which no longer takes new applications and has a caseload that is reducing over time.
Chart: Caseload of disability benefits for working age adults, Scotland
Note: Adult Disability Payment started to replace PIP in Scotland from 2022. In England and Wales, PIP remains the main payment.
Source: DWP, ONS, Social Security Scotland
Which benefits are devolved?
Incapacity benefits (UC and ESA) are reserved benefits which means they largely operate in the same way across Great Britian, with the cost of the benefit in Scotland met by the UK Government. Any cuts made by the UK Government would apply in Scotland.
Disability benefits (PIP. SDA and ADP) are devolved, and there are differences in how the benefits operate in Scotland. The Scottish Government meets the costs of the benefit. To offset this, an amount is paid from the UK Government in the block grant, equivalent to the UK Government’s spending in Scotland if the benefits hadn’t been devolved and if spending had grown at the same per capita rate as in England and Wales.
The Scottish Government has to find additional money if expenditure on Scotland starts to diverge from the rest of GB trend due to policy changes (or perhaps, if our population gets relatively sicker).
Any cuts to PIP or SDA made by the UK Government would not apply in Scotland, but the block grant from UK Government would fall. If the Scottish Government did not replicate the cuts, they would have to find additional money from elsewhere in the Scottish Budget to offset the fall.
What has changed since the pandemic and has it been the same in Scotland as the rest of Great Britain?
As the above charts show, the caseload (the number of people claiming these benefits) has been rising steadily in recent years for both these benefits across GB and is forecast to continue to do so.
The caseload in Scotland has long been higher than in England and Wales due to a higher prevalence of people with disabilities and long-term health conditions.
In recent years, incapacity benefits caseload growth has been slower (49% in Scotland compared to 59% in rGB between May 2019 and August 2024) but due to different levels of population growth caseload per capita (which is the caseload measure shown in the charts) has been slightly higher in Scotland (7% to 11% of working age population compared to 5 % to 8% for rGB).
For disability benefits, the introduction of Adult Disability Payment makes it difficult to compare like-with-like. Although eligibility has remained broadly the same, the application process has been made more accessible and this appears to have led to an increase in people applying following its introduction.
For more detail on this, see this paper from our sister organisation the Scottish Health Equity Research Unit (SHERU). It’s also possible that some people in Scotland delayed making a PIP application to DWP in anticipation of ADP opening for applications.
This may help to explain why, since 2019, the growth in the caseload in Scotland has been only slightly higher than rGB (63% increase in Scotland between May 2019 and Aug 2024 compared to 61% for rGB). In per-capita terms, due to lower population growth in Scotland, the growth has been a bit more significant (increase from 8% of the working age population to 14% in Scotland between May 2019 and Aug 2024, compared to 6% to 9% for rGB).
Do we know why rates have increased?
There are many theories as to why rates have increased but, for a number of reasons, it has been difficult to fully evidence exactly what is going on.
We know from IFS research that rates have increased more in Great Britain than they have in other countries. The IFS also looked at entry and exit rates for disability benefits England and Wales and concluded that around 2/3 of the increase is due to people starting claims and 1/3 is due to fewer people ending their claim.
There are likely to be a number of intersecting factors. We summarise some of these issues below but overall emphasise that we don’t fully know the extent to which these interact.
The working age population is getting older
On average, people’s health deteriorates as they age. With falling birth rates there are currently proportionally fewer younger working age people than older working age people. Coupled with this, pension age changes mean that more older people have become classified as ‘working age’ in recent years. The Resolution Foundation have calculated that an ageing working age population accounts for 1/5 of the rise in caseloads for health-related benefits since the pandemic.
The increases for younger people are concerning but the biggest impact on expenditure would come from tackling ill-health and disability in older age groups
For disability benefits, the growth has been highest in the older working age population, with then broadly comparable rises across other age groups. For incapacity benefits, after the 55-64 age group the second largest rise has come from 25-34 year olds. Growth in the number of young people out of work due to disability and ill health are concerning and needs attention, but if rates are going to come down, focussing on the older generation is key. Whilst we can’t fully attribute the rise to longer waiting times in the NHS, this is likely to be part of the explanation.
Some of the rise may be due to people struggling financially and needing to maximise benefit income
This rise in benefit caseloads has coincided with relatively high rates of inflation and the ‘cost of living crisis’. People struggling financially may have been more likely to make claims during this period compared to previous years when they did not feel they needed the extra income.
There is also some suggestion that people may have switched the type of claim they make for out-of-work benefits to benefit so they can receive a higher level of payment for disability and ill-health related claims. The fact that they are successful in these claims means that people are simply claiming what they are entitled to rather than somehow ‘gaming the system’.
Mental health related claims have grown, but so have claims related to other conditions
The largest absolute rise in claims for disability benefits has been related to mental health conditions, but across Great Britain, there have been rises in a range of physical conditions too (see IFS and SHERU work on this linked above). The extent to which this is due to an increased prevalence of health conditions versus an increased likelihood to claim a health-related benefit is difficult to disentangle.
There has been a rise in the in-work population reporting a disability as well and it may be that people are becoming more comfortable with disclosing mental health conditions. This could mean that people with multiple health conditions are more comfortable with citing mental health as their primary condition in benefit claims now than was previously the case.
We don’t know how much is due to long-covid or longer-term impacts of the pandemic
The extent of available data frustrates efforts to pin down the emergence of new or worsened conditions due to the pandemic and how this has changed people’s financial circumstances (for example, ability to work).
Issues with the official Labour Force Survey have limited the usefulness of the data collected there on reasons for ill health and inactivity (see SHERU blog on this issue here) and qualitative research that is able to produce more in-depth insights usually can’t be scaled up to population level.
As more longitudinal data is made available that tracks people through the period, alongside progress towards more routine data linkage of health records to other administrative data sources such as tax records, we might be able to get a better picture of the intersecting factors that have changed people’s health, benefit and work status in recent years.
What happens next?
The Spring Statement is due on the 26th March. When we know what the proposals are, we’ll be able to unpick what this will mean for people in Scotland and for Scottish Government budgets.
Whilst cuts to welfare spending may help in the short term, longer term solutions are tied up with efforts to improve both living standards and the ability of public services to support people further upstream (for example, through the NHS and employability services) which can reduce their need to recourse to the social security system.
Any decision to make cuts could come with fiscal risks. Cutting benefits for people already experiencing ill health and disability could make their conditions worse and increase demand for public services and/or lead to longer-term reliance on non-health related benefits.
A recent BBC verify article also provides a note of caution: reducing spending on the welfare bill is historically difficult and estimates of savings are often not achieved.
As well as looking at the details of the cuts, we’ll be looking at what the OBR say regarding their effectiveness of cutting UK Government spending with a keen eye.
An exciting new toolkit aimed at supporting workers and businesses within Scotland’s hospitality sector has been launched.
The Tourism and Hospitality toolkit is aimed at supporting the growth and success of Scotland’s hospitality sector by providing a one-stop shop with the tools and resources businesses and employees need to thrive.
It has also been shaped by industry experts and key players such as Skills Development Scotland, Scotland’s Tourism & Hospitality Industry Leadership Group, and industry charity Springboard.
The toolkit will provide support to the sector on key areas such as training and development, achieving net zero, recruitment and retention, and fair work. Employees will be able to access information on their rights at work, education and training, visa sponsorship and immigration, and more links to support when working in hospitality.
Kelly Johnstone, Chief Operations Officer of Springboard said: “Our mission with this toolkit is to support the growth and success of Scotland’s hospitality sector so both employers and employees can thrive.
“The toolkit brings together expert advice and practical solutions into one accessible platform to help the hospitality industry excel.
“Case studies included in the toolkit from Serving the Future highlight good practice which is already happening in Scotland – we hope many more businesses and employees can benefit from accessing this information.”
Dr Laura Robertson, research manager at The Poverty Alliance, which is a partner in Serving the Future said: “We know that low-pay and job insecurity have a big impact on households in Scotland.
“We hope this toolkit will empower businesses and workers to strengthen fair work and living wages in the hospitality sector. Scotland has signed up to legal child poverty targets and we know that making positive change in the world of work can contribute to reaching them. We are excited to see how the toolkit does that.”
Chirsty McFadyen, economist at the Fraser of Allander Institute and lead investigator on Serving the Future said: “We feel very privileged as a research team to have been let into the hospitality industry with such a warm welcome.
“Few research projects have worked with both employers and employees to create sustainable solutions in the way that Serving the Future has.
“We are keen to continue building the relationships we’ve gained from this work, and we’re looking forward to seeing the industry’s reaction to the toolkit.”
The toolkit includes a feedback form so that that businesses and employees can reflect on the usefulness of the information available.
The team behind the website will be evaluating responses and adapting the content throughout 2025.
Budget Deals, Budget Revisions, and Budget Pressures
There was a lot of focus this week on the Budget deal struck by the Scottish Government, which will allow the Budget to be supported by the Scottish Green Party and the Scottish Liberal Democrats (write Fraser of Allander Institute’s MAIRI SPOWAGE and SANJAM SURI).
In early January, Anas Sarwar announced that Scottish Labour would abstain on the Budget as the Scottish Government were likely to secure support from the budget from one or other of these parties. Of course, this meant that the Scottish Government did not need to secure support from other parties to ensure that the budget would pass.
However, no doubt John Swinney will be pleased that he can demonstrate working across the chamber, and particularly constitutional boundaries, to come to a deal.
On the face of it, the price paid for the support of these parties seems pretty cheap (in the scheme of the SG Budget!), totalling £16.7m.
With the Scottish Liberal Democrats (TOTAL £7.7m):
Increase Drugs and Neonatal Service Investment. +£2.5m
Strengthen support for Hospices. Increase the funding from £4m to £5m. +£1m
Invest in targeted support for the College sector. +£3.5m in creating an Offshore Wind Skills Programme and College Care Skill Programme.
Support the continuation of Corseford College. + 0.7m
Offer flexibility to Orkney Island Council in terms of capital and resource funding.
With the Scottish Greens (~£9m):
Establish a £2 bus fare cap pilot in a regional transport partnership area. +£3m in 25-26 (£10m in total)
Increase Nature Restoration funding. increase from £23 million to £26 million. +£3m
Extend free school meal eligibility in S1-S3 in 8 local authority areas – covering pupils in an urban, rural, semi-urban and island authorities in receipt of Scottish Child Payment. +£3m (although it looks like most costs will fall in 2026/27, so not sure about the exact cost in 2025-26)
The Scottish Government say that this will be funded by another draw down from the Scotwind fund (more on Scotwind below) of £3 million to support the capital spending on nature restoration, and the remaining amendments are funded through debt servicing costs which they expect will be lower than they expected at the Draft Budget in early December.
The Spring Budget Revision changes the picture for 2024-25 considerably
Getting less coverage this week is the Spring Budget Revision, which was laid before parliament on Thursday. This is a pretty technical document, with the “supporting notes” document running to 146 pages. This is for the current year, and now reflects the additional Barnett consequentials which were announced through the UK Budget for 2024-25
[By way of background, these revisions happen twice a year, once in the Autumn and once in the Spring, to update the parliament to changes in the funding positions for the current fiscal year. The Budget bill will normally be passed by late February. The ABR comes in roughly Oct/Nov, then the Spring one in Jan/Feb]
The Government did not include any of these announcements in the baseline comparisons for the Budget in December. When asked about the uplifts for 2024-25 in the wake of the UK Budget, they said that the £1.4bn extra in resource funding for 2024-25 was “in line with internal planning assumptions”. This was in the context of the clear budgetary pressures earlier in the financial year, which lead to the emergency budget announcements in September 2024.
The Scottish Fiscal Commission were not please with this, saying “This is a material limitation to information available to the Scottish Parliament for its scrutiny of the Budget and in the spending analysis we can do.”
The SBR published yesterday shows how this money has been allocated in the current year.
The highlights for us are:
The £338m resource borrowing that had been planned to cover for a forecast error reconciliation will not be necessary (so they had planned that borrowing into the 2024-25 budget due to this negative reconciliation from previous years, and now do not need to use it because of the funding received)
That the planned £424m drawdown for the Scotwind licencing fund will all now be returned (they had already announced that they would reduce this drawdown by £300m at the Budget but now they are returning all of it because of the funding received)
That £103m more than planned will be put into the Scotland reserve.
Two things are demonstrated by where the money has gone – first, that it does not seem credible that it was in line with “internal planning assumptions”, in the context of emergency budget measures prior to the UK Budget followed by cancelling of already planned borrowing. Second, it would have helped scrutiny for the 2025-26 Budget if this had been included in the baseline presented at the Scottish Budget, given the SFC role in assessing borrowing and use of the reserve and the role of the Finance and Public Administration Committee.
The restoration of the Scotwind fund is welcome – let’s hope now it will be exclusively committed to capital/infrastructure spending to support the energy transition. It would be good if this could be formally done so the money cannot be used in this way in the future.
Employer NICs likely to cause more budget pressures
We’ve covered the impacts that the employer NICS rises could cause to public services in Scotland.
As a reminder, the Chancellor increased both the rate of employer NICS (from 13.8% to 15%) and lowered the threshold at which employers have to start paying NICS (from £9,100 to £5,000). At the time of the Budget, the Treasury said that public sector employers will be compensated – but no amounts were confirmed, which caused the Scottish Government to (quite rightly) raise concerns about the uncertainty that this would cause.
We’ve heard from the Scottish Government that the expected impact is expected to range anywhere between £550m (for public sector workers), and £750m (including indirect employees such as childcare, higher education, social care). We estimated around £500 for the direct public sector. The rumoured amount on the table from the Treasury is £280-300m. Our blog explains the reasons behind these different amounts.
[But, in short, the difference between the SG and the Treasury is what “compensating” the public sector means – the actual cost, or the actual cost if the size and pay bill of the public sector in Scotland was proportionately the same as the UK.]
Whatever the final amount, it is unlikely the whole cost to the public sector will be covered. We said at the time of the Budget that the Scottish Government hadn’t budgeted for this likely shortfall.
Kate Forbes said this week that the public sector in Scotland will have to “absorb” the shortfall- which basically means that the public sector would have to find savings or efficiencies elsewhere to absorb the budgetary impacts of higher NICS.
The confirmation of the compensation will not come until the Supplementary Estimates are published (which might be as late as the end of February). This means that bodies like councils, who are currently trying to set their budgets, will likely have to plan on the basis of absorbing maybe 40-70% of this additional cost until they get confirmation.
LAST WEEK the Scottish government confirmed that plans for a National Care Service (NCS) in Scotland have been scrapped in favour of an advisory board and smaller, more targeted reforms (write FRASER of ALLANDER INSTITUTE’s MAIRI SPOWAGE and EMMA CONGREVE).
The decision came after months of declining support from key organizations and stakeholders including COSLA, key trade unions and representative bodies for social care providers in Scotland.
Beyond the wavering support for the NCS plans, there is clear support for social care reform, particularly in enhancing access to and the quality of services.
Our interest in the National Care Service, and wider social care reform stems back to 2022, in which we conducted analysis of the NCS bill published in June of that year. Following this work, published in August 2022, we engaged with a number of stakeholders across the private, public and third sector.
Among concerns around governance and funding of the NCS, one of the key concerns from stakeholders we engaged with was the lack of good quality and timely data that is crucial to ensuring that any reforms to social care are well informed. In particular, the need to better understand what future levels of social care demand might be, the workforce requirements to accommodate this, and the associated expenditure on social care.
Our concerns about the lack of investment in social care research were highlighted in our response to the Wave 2 consultation. The Scottish Government has not commissioned any work in this area, and we have not been able to find independent funders willing to fund work of this nature in Scotland.
It is our view that projections of demand and cost of the current service, and any future reforms, is urgently required.
New labour market data published
The latest data on the labour market in the UK was published last week. There are many documented issues with the data at the moment due to the challenges faced by the Labour Force Survey, which means the headline figure are no longer considered accredited Official Statistics.
If you can set that aside for a moment, the headline results show on the surface a strong Labour market in Scotland, with high employment (74.1%) and low unemployment (3.8%). Inactivity rates remain slightly higher than the UK at 22.9%.
There are a number of other data sources published alongside the LFS data which is used to supplement our understanding of what is going on in the Scottish economy. One of these is the payrolled employment data, known as the PAYE Real-Term Information, which is published every month by the ONS. This draws on administrative records, and so is likely to be more reliable in terms of employment (although, of course, tells us nothing about unemployment or inactivity).
This data shows that payrolled employment is almost 3% higher in Scotland than pre-pandemic levels. However, we had a look at replicating the sectoral breakdowns in this interesting piece by think.ing, which looks at government-dominated sectors vs the rest.
Chart:Payrolled employment in all sectors, government dominated sectors (public administration, health and education, and total excluding government, Scotland, January 2020=100
Source: ONS
This shows that once the government dominated sectors are excluded, payroll employment has been falling since March 2024, and is now almost back at the levels seen in January 2020. In contrast, government dominated sectors are 8% about pre-COVID levels.
Given some of the challenges facing the private sector in the first half of 2025, including large increases in employer National insurance contributions which will come in in April, the trend in private sector employment is concerning, and points to a weakness masked if we just look at employment in total.
However, it is worth emphasising again that this is just payrolled employment, and does not cover self-employment.
Despite increases in funding for Scotland from the UK Government’s October Budget, Scottish Government Finance Minister Shona Robison has little room for manoeuvre when she presents her Budget for 2025-26 next week (write FRASER OF ALLANDER INSTITUTE’S Joao Sousa and Mairi Spowage).
This is the headline message of the Scotland’s Budget Report 2024, published yesterday by the Fraser of Allander Institute at the University of Strathclyde.
Significant Barnett Formula consequentials have been generated by UK Chancellor Rachel Reeves announcements last month – £1.5bn in 2024-25 (of which £1.4bn is resource) and £3.4billion in 2025-26 (of which £2.8bn is resource).
However, the Scottish Government has said the funding provided in the 2024-25 year is already largely committed. If this is the case, the uplift for 2025-26 is under more pressure than it would appear. On the resource side, this would mean an uplift of £1.4 bn in 2024-25 being followed by an uplift of £1.4bn in 2025-26.
Public Sector Pay makes up over half of the Scottish Government’s resource budget, and therefore the decisions made on pay will have significant bearing on the overall budget position. Wage bills recur every year, thus current and future 2024-25 pay decisions will have a big impact on the overall budgetary decisions.
The fact that public sector workers are, on average, paid more in Scotland, will mean that the challenges are even more acute, given the country’s much larger public sector. The decisions on this, and on areas like social security, have put additional pressure on the Scottish Government’s budget.
Dr João Sousa, Deputy Director of the Institute, said: “As part of our report today, we have published where we think the Scottish Government are in terms of their funding position for 2024-25.
“Figuring out the funding position for 2025-26 has been much more challenging. The lack of a Medium Term Financial Strategy this year has made calculating this near impossible, but we have set out the various pressures that the budget is likely to be under.
“Health Spending, all other pay, social security and grants to local government make up £7 in every £8 the Scottish Government spends. This seriously limits their room for manoeuvre in changing the overall shape of the Budget.”
The report includes significant analysis of how Scotland spends its money to understand more about the discretionary power the Government has to prioritise its budgetary decisions.
Also included is analysis of the impact of employer National Insurance Contribution rises on the Scottish Government’s Budget, and analysis of the cost to the Scottish Government of replicating the 40% retail, hospitality and leisure relief (RHL) announced by Rachel Reeves in Scotland.
Our analysis also that although spending on reducing child poverty – stated by successive Scottish First Ministers as one of the main, if not their utmost priority – has grown significantly since 2018-19, it would not be fair to say that it has become a large part of the Scottish Budget.
It remains under 3% of all discretionary resource funding, and capital spending on child poverty reduction through the provision of affordable housing and urban regeneration has actually fallen by 13% in real terms since 2019-20.
In the Budget, the Chancellor announced that Retail, Hospitality and Leisure (RHL) businesses would receive 40% rates relief in England next year, following a 75% relief in the current year (write Fraser of Allander Institute’s MAIRI SPOWAGE and JOAO SOUSA).
RHL businesses in Scotland have had no such relief since 2021-22, which (as you can imagine) has led to many businesses saying they are at a disadvantage to their counterparts South of the Border. Given this extension in relief in England, businesses in the RHL sector are likely to be calling on the Scottish Government to follow suit.
Such a decision by the Chancellor does generate Barnett consequentials for the Scottish Government, because the UK Government compensated English councils for the lost revenue. Business rates are devolved to all three devolved nations, and there is no obligation for any of the devolved governments to replicate measures in their jurisdiction.
Last year, we looked at the 75% relief announcement in England and tried to estimate how much it would cost to replicate. This analysis concluded that it was likely to cost considerably more in Scotland to replicate the relief than was provided through Barnett, because:
The business rates system is just differently structured in Scotland; but mainly;
RHL businesses make up a larger share of the property tax base in Scotland.
What about the 40% relief?
As we did last year, we have looked at the data available on the tax base for business rates to try to estimate how much it might cost to replicate the 40% relief in Scotland.
We must emphasise that this is not completely straightforward from the publicly available data. Whilst the Valuation Roll (which lists all properties and their rateable value) is a public document, the extent to which different properties attract reliefs is not on this database, so we have to make some assumptions about the extent to which properties may already be receiving reliefs. Obviously, for example, if a property is already receiving 100% relief (e.g. through the Small Business Bonus Scheme), then they cannot receive any more relief from the 40% measure, even if they are in RHL.
This is important because 100% relief for property is actually quite common: 48% of properties receive this.
Chart 1: Proportion of properties that receive 100% relief, selected property classes
Source: Scottish Government
The second challenge is that there is a cap on the amount of relief that an individual company can receive, which limits the amount of relief paid, but requires a property-by-property analysis (and some assumptions about multi-property companies) to understand the impact this has on the overall cost.
All of these assumptions mean our analysis will not be as accurate as a proper costing by the Scottish Fiscal Commission if the Scottish Government were to introduce this measure (given the additional data they have access to): and our attempt to account for multi-property enterprises is likely to be imperfect which might mean we are underestimating the impact of the cap (so slightly overestimating the cost of a new relief).
Having said all that (sorry for all the caveats), our analysis suggests that it will cost roughly £220m to replicate this relief in Scotland, compared to the £147m that was generated by the decision in England through Barnett.
[For those who are interested, you will note that this is not a linear reduction on our estimate for the 75% relief. This is because of the cap for each company again: companies are more likely to hit the cap with a higher level of relief so it is not as simple as it appears, unfortunately!]
Look out for more analysis
We will be producing Scotland’s Budget Report 2024 on 29 November, which will set the context for the Scottish Budget on 4 December. In the run-up, we will continue to publish blogs with new analysis to add to the discussion!
Budget speculation, the economy returns to growth, the impact of cuts, and the disability employment gap
Three weeks still to go, and speculation about what will be in the Budget on 30th October continues (writes Fraser of Allander Institute’s MAIRI SPOWAGE, SANJAM SURI and EMMA CONGREVE).
Will the Chancellor change her fiscal rules? It looks likely that there will be some movement on this, whether in the definition of debt or something more fundamental, however much that could undermine their commitments in the manifesto.
Will there be increases in Capital Gains Tax? The speculation on this has reached fever pitch, with some stories suggested rates from 33% to 39% are being considered. (Interestingly, when we look at the ready reckoners from the HMRC, changes of this magnitude in some forms of CGT actually may result in less revenue when behavioural effects are taken into account). There certainly seems to be expectations out there in the economy that the rate may change, with lots of signs that disposals have increased hugely in anticipation.
Will there be increases to employer national insurance contributions? There has been much discussion about this, given the commitment of the UK Government not to “raise taxes on working people”, and due to the fact that the PM would not rule this out this week. A 1 percentage point rise in employers NICS would raise almost £9bn according to the ready reckoner (although we think that doesn’t include the additional costs to departments).
We’ll be going into the detail of some of these issues in the run up to the Budget, so there will be plenty for you all to chew over as we wait… and wait… for the Budget.
UK Economy Returns to growth in August
Data released this morning showed that the UK economy posted its first monthly GDP increase since May 2024. ONS reported this morning that monthly real GDP grew 0.2% in August 2024. There were no revisions made to the “no growth” months of June and July. While monthly numbers were in line with consensus forecasts, they show an economy that has slowed down from the beginning of 2024.
The good news is that growth in August came from all key sectors- with services rising by 0.1%, and production and construction rising by 0.5% and 0.4% respectively. Crucially- August was also the first time all three sectors positively contributed to growth since March 2024.
A more granular breakdown of service sector growth indicates that the biggest positive contribution came from the professional, scientific, and technical activities subsector- where monthly change in output was +1.6% from the previous month. Despite overall growth in services sector- seven subsectors saw decline in economic activity- with arts, entertainment, and recreation falling 2.5% over July 2024.
The production sector grew by 0.5% in August after hefty decline of 0.7% in July. Despite a rebound in August, the production output is essentially flat since the end of May 2024. The biggest contributor to production sector came from 1.1% rise in manufacturing activity- driven by transport equipment manufacturing However, mining and quarrying output declined 4.0% over July 2024- continuing their downward trend since end of December 2023.
What is the impact of cuts in spending?
When the Scottish Government presented their Fiscal Statement to parliament in early September, the Cabinet Secretary for Finance said that impact assessments had been done to understand the impact that the announced cuts could have on different groups.
These assessments were not published at the time, but finally were published last week. We welcome the publication of these, and although there are lots of criticisms that could be made of the assessments, it is good to see this transparency. One area of weakness is assuming that if funding was maintained at previous levels, there will be minimal impact, which assumes that previous levels was the correct level… so why was the budget being increased in the first place?
One of the main things to note though is the lack of analysis of cumulative impact on groups. A number of “minimal impacts” could still add up to something significant if they are affecting the same group.
Final report of the parliamentary Inquiry into the disability employment gap published
In 2016, the Scottish Government published A Fairer Scotland for Disabled People, which outlined how the government intended to shape policy – especially labour market policy – for disabled people living in Scotland.
One of the key goals this report outlined was reducing the gap in the employment rate between disabled and non-disabled adults. In 2016, 80.4% of non-disabled working aged adults were employed in Scotland, compared to 42.8% of disabled working aged adults, making for an employment gap of 37.5 percentage points. The government’s goal was to cut this gap in half by 2038.
In 2023, the Economy and Fair Work Committee in Scottish Parliament launched an inquiry into how this policy goal was going. In fact, in 2023, it seemed like it was going quite well.
The gap was down to 30.3 percentage points, which was actually ahead of schedule: if progress were linear, the disability employment gap would drop by about 0.85 percentage points each year, meaning that it would be 31.5 percentage points in 2023.
Two of our economists at the FAI, Allison Catalano and Christy McFadyen, contributed to this inquiry through a fellowship with the Scottish Parliament Information Centre (SPICe). Their work, which we published back in January, found that the majority of the change in disability employment is due to a rise in disability prevalence, rather than any specific policy.
Their report also highlighted some significant data issues: people with different types of disability have vastly different capacities for employment, vastly different support needs within employment, and vastly different rates of employment. Yet, in Scottish data and policymaking, disabled people are often treated as a singular entity, meaning that it is not possible to understand where policy interventions might be most effective.
The final inquiry publication highlights our work and a variety of other issues which will need to be addressed in order to improve work access for disabled people, all of which can be found here. They have produced 44 recommendations to improve employment prospects for disabled people.
It ain’t pretty. But there’s also politics at play.
Rachel Reeves gave a statement to the House of Commons on what the government calls the “spending inheritance” (writes Fraser of Allander Institute’s JOAO SOUSA).
It’s important to make clear what this is and isn’t about. If you hear people saying that this is all to do with fiscal rules, that’s incorrect. We have highlighted many problems with them, but this statement is all to do with this year’s public finances, meaning 2024-25 – all the fiscal rules will apply to 2029-30, although there will be some knock-on effects into future years from these decisions.
Ultimately, this is only a partial fiscal statement – setting the scene for the Budget, the date of which has been announced for 30 October. It is a welcome return to normality in that there will be more than 10 weeks for the OBR to prepare its forecast.
The spending pressures and the ‘black hole’ – how does the Treasury calculate it?
Rachel Reeves said in her statement that pressures on public spending exceeded allocated funding by £35 billion. Some of this is additional spending from accepting the recommended pay awards from the Pay Review Boards in England, which are higher than the previous government had budgeted for.
Others come from areas like accommodation for asylum claimants, which the previous government had just assumed would come from the Home Office’s spending limit. Given that the Home Office’s total allocation is £21 billion, you can see why accommodating a pressure worth nearly a third the size of its envelope was not credible.
The Treasury had set aside £9 billion in reserve – a usual management practice for unforeseen circumstances during the course of the year, and which allows the government to plan in some budget cover for unspecified departments. This reduces spending pressures to £26 billion.
The Treasury also assumes that some of these pressures will either not materialise (they are pressures after all, not crystallised spending yet) or that some will be “managed away” – usually by playing hardball and forcing departments to find savings somewhere else.
Ever wondered why the Home Office keeps putting fees for anything to do with visas and passports? The Treasury allows them to deduct it against their budget (fees are classified in Estimates as “negative spending”, for the fiscal aficionados) and it’s the quid pro quo of accepting responsibility for the financial risk for spending pressures.
There are a few rounds of this over the course of the year, and by the time of Supplementary Estimates – usually mid-February – the Treasury and other departments essentially have a stare-down contest, which tends to end up with both sides conceding somewhat, and so the Treasury assumes something about its ability to do that – what is called ‘fallaway’ in the document. This amounts to £7.1 billion, and bring estimated pressures down to £19 billion.
The Treasury then adds back £2.9 billion to get to what they call “total pressures”, because this is how much the OBR assumes that the UK Government will underspend its limits by. Essentially, the OBR assumed actual spending would be £2.9 billion lower than the limits; given that pressures on the Treasury side are relative to the limits, this amount needs added to get to the total pressures compared with the OBR forecast.
This ‘Treasury maths’ is all fine – but what does this mean in practice?
This statement only looked at the spending side of the ledger, comparing what had been budgeted for with what the most recent view of spending plans is. It’s actually quite consistent with the latest data from the ONS as well, which when compared with the OBR’s forecast and extrapolated for the rest of the year, would suggest that consumption spending (mostly comprising of departmental spending) is running around £20 billion higher than expected in March.
Faced with this, the Chancellor has several options: she can let borrowing increase – which would happen automatically if she accommodated pressures; she can reallocate spending from other areas to combat pressures; she could raise taxes; or a combination of the three.
The immediate signal appears to be that the Chancellor is not prepared to just borrow the additional £22 billion. She has committed to £5.5 billion in savings this year: £1.4 billion coming from means-testing winter fuel payments to pensioners, with most of the rest coming from as-yet not fully specified ‘efficiencies’: out of the £3.2 billion pencilled in, just £0.9 billion are itemised.
This is a legitimate criticism of the plans – these savings are hard to deliver and can’t just be magicked into existence. Although the same (or even more) could be said about the fantasy £20 billion in productivity improvements that Jeremy Hunt claimed he had delivered in his response.
But this still leaves around £16 billion to cover. Rachel Reeves left the door open to some tax rises – she said she would not increase any of the headline rates of income tax, National Insurance contributions, VAT or corporation tax, but that still leaves room for base-broadening reforms and increases in other taxes.
We’ll have to wait until the Autumn to see how much of this additional £16 billion will be covered by tax rises, and to what extent the Chancellor will accommodate some additional borrowing. A combination of the two seems likely.
Did Jeremy Hunt or the Treasury hide this?
The more politically heated debate was the extent to which there was some sort of hiding of the ugly truth of what spending pressures looked like in March, at the time which the OBR included the Treasury’s plans in the forecasts for the public finances.
Richard Hughes, Chair of the OBR, wrote a letter to the Treasury Committee announcing a review of the “adequacy of the information and the assurances provided to the OBR by the Treasury regarding departmental spending.”
This is a pretty strongly worded letter, and in my view – as someone who was included in the scrutiny of these spending plans – reflects long-standing frustrations of OBR officials and commissioners about their inability to fully assess the credibility of spending plans.
The Chancellor announced she would be updating the Charter for Budget Responsibility to include the sharing information on ‘immediate spending pressures’ with the OBR. This sounds like a good idea, right? So good that in fact it already is in place, and is provided in legislation by compelling the Government to make available to the OBR essentially any information that is relevant for the preparation of the forecasts.
And the Treasury does share this, in my experience – although with some prompting required at times. Ultimately, the biggest issue here is more political and less tractable than the Chancellor let on, and reflects what former commissioner Andy King wrote earlier in the year.
The OBR is really in a bit of a bind, having to reflect spending policy which is set at a very aggregate level and which it cannot opt out of including in the forecasts. If it did, it would be the nuclear option – it would cause a breakdown in the institutional framework between it and the Treasury.
This is quite a difficult institutional arrangement, and there’s probably no single solution that would solve that. But I do think that a bigger focus on economic categories such as pay, procurement and other elements – much like Andy King’s suggestion – would be helpful in increasing scrutiny and understanding of the underpinnings of the forecast.
I would go further in suggesting doing this for the largest departments as well as the overall central government sector – which would allow further scrutiny in terms of understanding what’s being planned for different areas in the face of an ageing population.
This is an area where the Treasury’s lack of interest and buy-in into providing always struck me as odd and self-defeating. Of course it might unearth some difficult trade-offs, but it is also what a responsible workforce planning authority should be doing anyway. And in any case, to govern is to choose – and all of us members of the public would benefit from having access to better information on this.
That alone would be enough to make it worthwhile keeping the pressure on the Treasury to agree to provide this.
Brace yourselves: a spending review is coming
The Chancellor also provided some much needed clarity in terms of the spending review timetable. We now know that what is essentially an interim 1-year review will be concluded alongside the Budget on 30 October, where 2025-26 budgets will be set.
The spring of 2025 will see a welcome return to multi-year budgeting, with a full spending review covering at least three of the five forecast years. There will also be a requirement for a spending review every two calendar years, bringing a much-needed default assumption about the frequency of these exercises. They had become progressively ad hoc, and it will be up to the Government to show it does indeed comply with its own set of timetables.
Implications for the Scottish Government
A few things stand out in terms of what this means for the Scottish Government. In terms of timings, we now know when the UK Budget will be and that it will come alongside a block grant settlement for 2025-26, a pre-condition for the Scottish Budget.
This means we are likely to see the Cabinet Secretary for Finance appearing in the Debating Chamber to deliver the Budget Statement in late November or early December – hopefully avoiding the difficulties the Finance Committee had in scrutinising the Budget last year due to proximity to recess.
In the case of most of the measures announced, the direct impact on the Scottish Budget might be relatively limited, though we’ll have to wait until 30 October to be sure. A non-negligible proportion of the accommodated pressures will come from reductions in other spending areas – most of those reallocations would not change budget totals, although composition matters for Barnett consequentials.
If there is increased borrowing to allow for some of this additional spending, then there might be some added funding for Scotland.
But where there is an immediate prospect of a decision for the Scottish Government to make is on winter fuel payments (or pension age winter heating payments, as they are now known in Scotland). This is now a devolved benefit, and the Scottish Government gets an additional block of funding on the basis of equivalent in England and Wales, worth around £180 million.
With eligibility being restricted, the transfer from Westminster will be reduced, and it will therefore be for the Scottish Government to decide whether it follows the UK Government in changing eligibility or whether it wants to maintain universality and therefore needs to find additional funds for it.
