Humza Yousaf addressed the Scottish National Party Conference for the first time as First Minister, in a speech that contained a few new proposals. We’ll take you through some of the main consequences of what was announced (writes MAIRI SPOWAGE, Director of the Fraser of Allander Institute). 

Council tax frozen, but at what cost?

The centrepiece announcement was that 2024-25 council tax rates across Scotland would remain the same as in 2023-24. This was a surprise to many – including COSLA – although the Scottish Government has said it “will fully fund the freeze to ensure councils can maintain their services.”

What does that mean in practice? Councils will already have been in the process of deciding what council tax policy will be for the 2024-25 financial year – many of us will have seen consultations and discussions in our local area about this. As they are constrained to fund current spending out of current sources of revenue – of which council tax is a significant component – decisions on spending going forward may have already been taken on the basis of future income from council tax. The First Minister’s announcement changes that prospective revenue.

Whether or not the promise of “fully funding” the freeze in council tax will depend on what the Scottish Government assesses as the counterfactual for what increases in rates would have been – and how that will be put into practice.

Our calculations indicate that accounting for growth in the number of properties expected in 2024-25, total net revenue from council tax will be £2,865m.

But it we assume councils would have applied the same increases as they did last year (which averaged 5%), revenues would have been £3,013m. And if the proposal for increasing multipliers for the higher bands in the recent council tax consultation had been taken forward revenues would have been higher still, at £3,196m.

In summary then, the freeze in council tax – assuming that councils would have followed the increases from the previous year – will cost £148m. In addition, the decision not to increase the multipliers as has been consulted on will cost £183m.

The true size of the shortfall will depend on what councils were actually budgeting for. If we assumed an 8% increase was being planned – which is lower than some councils implemented last year, and would still not bring much in terms of real increases in funding for local authorities – the total shortfall would be £417m (£229m from the freeze plus £188m from not increasing the multipliers).

How much of the shortfall is covered by the First Minister’s funding pledge will be the subject of a negotiation process with COSLA, and we’ll need to wait to see how it plays out. But ultimately it could lead to councils having less spending power than was expected if the definition of “fully funded” is in dispute.

The Scottish Government was already facing challenges on its budgetary position, given the gap it set out in the Medium Term Financial Strategy in May, of an estimated £1 billion gap between its commitments and likely resources.

Despite a better outturn on income tax than expected, and an increase in borrowing powers, prior to the Programme for Government this was still likely to be around £600m. It is not clear where the extra funding will come from to pay for the council tax freeze – and indeed the announcement on health below.

An “additional” £100m a year to cut NHS waiting lists – but within the fixed envelope

The First Minister also outlined a proposal to spend an extra £100m a year on reducing the NHS waiting lists. The goal is to reduce waiting list by 100,000 by 2026.

As with so many of these proposals, the devil is in the detail, and in this case, the additionality of the pledge is questionable. While the First Minister has announced that more money will be spent on this particular issue, there was no detail where the money was coming from.

With the Scottish spending envelope through the Block Grant largely fixed, spending commitments well ahead of funding sources (as discussed above) for 2024-25, and limited options in terms of yield from tax rises, this announcement seems like it will lead to a reallocation of funding, either from other areas of the health service or from other areas of government spending rather than actual additional spending.

Scottish bonds for capital investments announced – how and why?

The FM announced plans to issue the first-ever government bonds for Scotland to finance infrastructure.

In theory, the power to issue government bonds was devolved as part of the Scotland Act 2012, with the power given full effect in April 2015.

So what would be the process for this? One of the key steps is likely to be establishing a credit rating from major rating agencies. This would provide potential investors with a professional evaluation of Scotland’s creditworthiness.

This process is likely to be fairly involved, consisting of a detailed assessment of Scotland’s economic, fiscal and political environment.

Two questions we’ve been asked already are (i) what will this rating (and therefore the likely interest rate that would have to be paid) be compared to UK government bonds and (ii) to what extent does this tell us about the likely cost of borrowing for an independent Scotland?

The answer to the first question is that there is likely to be a premium to be paid by Scotland compared to UK Government bonds (i.e. it will be more expensive), as a new entrant to the bond market. However, given that ultimately the borrowing is underwritten by the UK Government, it may be that the premium is fairly small. But it will of course depend on the rating and then investors’ reaction to that.

The answer to the second is much more unknown. Given this is underwritten by the UK Government, it is likely that this tells us little about the interest rate that may need to be paid by an independent Scotland.

It is worth underlining that this plan does not increase the borrowing available to the Scottish Government. The annual limit (of £450m in 2023-24 prices) and total cap (of £3bn in 2023-24 prices) will still apply. Rather, it is an alternative to borrowing from the National Loans Fund (essentially from the UKG).

It’s unlikely that the terms of borrowing through issuing bonds will be more favourable than borrowing from the National Loans Fund, which tends to be very close to Bank Rate plus a minimal spread.

Another point to note is that the Scottish Government in recent years has used its capital borrowing powers extensively. In the current year, its debt stock sits at 73% of the debt cap already – forecast to rise to around 80% by the end of the parliament. Therefore the borrowing that will be possible may be more limited by the end of the parliament, particularly as borrowing costs are rising.

The FM set out why they may wish to do this in his speech – focussing on the enhanced profile it could give Scotland internationally, and the additional investment it could attract from international investors. It may be that the process of establishing and issuing the bonds is seen as strengthening the Scottish state in advance of a future independent Scotland.

But in a constrained fiscal environment, it will be fair to ask whether borrowing in a more expensive way makes sense.