An Open Letter from Pamela Tulloch, chief executive officer of the Scottish Library and Information Council (SLIC)
It’s no secret that Scotland’s libraries, along with the rest of our world-class culture sector, are currently embroiled in a perfect storm: budget pressures, reduced income generation, and rising costs have created a potent force for our services to contend with.
That’s why we’ve written to councillors across the City of Edinburgh, ahead of final decisions being taken on 2024/25 public spending, to not only remind them of the vast benefits a thriving public library service can provide, but to highlight those who stand to lose the most if our services are cut even further – communities across Edinburgh.
The Scottish Library and Information Council (SLIC) is the advocacy body for Scotland’s network of over 500 public libraries – celebrating the creativity, commitment, and value that libraries offer the communities they serve. A lifeline of support for so many.
Our latest research, Scotland’s Public Library Survey, helps to demonstrate the immense value, trust, and appreciation that people across Edinburgh place in their library service. With over 93 per cent of respondents agreeing that using the library improves their quality of life, the pivotal role they play is clear.
This is best evidenced by:
Closing the attainment gap by supporting children’s development, education and improving literacy through adulthood;
Combatting social isolation and helping those struggling with mental health;
Bridging the digital divide through free e-learning opportunities;
Connecting rural and remote communities through mobile library provision; and
Providing free IT equipment, employability sessions and activities to alleviate the impact of the ongoing cost-of-living crisis.
This is supported by the poignant feedback shared by library users across Edinburgh. When asked about the positive impact library use had had on their life, one local commented:
“The library is a busy meeting place for groups, acting as a hub for all sorts of activities, including groups of parents and children who meet here to play. Staff at the library are very helpful in recommending books that suit my tastes.
“The library is a very social place with a lovely atmosphere and is welcoming place to go. It always cheers me up.”
This sentiment is common and is underpinned by a strong economic case: for every £1 invested into our libraries, there’s a return on investment of £6.95 for the local economy.
And it is to the credit of our public libraries that this is the case, despite budgets having been hollowed out over the past 14 years which has resulted in reduced opening hours and staffing levels.
Indeed, Scotland’s libraries remained the most frequently visited cultural places in 2022, and also enjoy the highest customer satisfaction rate of any local authority cultural service, at 89 per cent.
Now is the time for the City of Edinburgh Council’s elected members to give libraries the financial backing that they need – that they deserve – to continue delivering the public services which have become vital to communities across the country.
This is more than a bid for culture funding – it’s a plea to prioritise community wellbeing. We hope that all elected members will consider both the financial and social cost of not maintaining these essential services and use the upcoming budget period to protect the services that matter most to their constituents by ensuring continued investment in our libraries.
Pamela Tulloch,
Chief executive officer of the Scottish Library and Information Council (SLIC)
UK Government will continue to top-up the Scottish Government’s tax revenues, worth £1.4 billion last year, as a benefit of strength and scale of the UK.
Boost to borrowing powers and backing of Barnett formula will build a better future for Scotland and help to grow the economy.
Chief Secretary to the Treasury John Glen hails a fair and responsible deal in line with the Prime Minister’s economic priorities.
The UK and Scottish Governments have today reached an agreement on an updated Fiscal Framework.
Holyrood’s capital borrowing powers will rise in line with inflation, enabling the Scottish Government to invest further in schools, hospitals, roads and other key infrastructure that will help to create better paid jobs and opportunity in Scotland.
The new deal maintains the Barnett formula, through which the Scottish Government receives over £8 billion more funding each year than if it received the levels of UK Government spending per person elsewhere in the UK. It also updates funding arrangements in relation to court revenues and the Crown Estate.
Chief Secretary to the Treasury, John Glen, said:“This is a fair and responsible deal that has been arrived at following a serious and proactive offer from the UK Government.
“We have kept what works and listened to the Scottish Government’s calls for greater certainty and flexibility to deliver for Scotland.
“The Scottish Government can now use this for greater investment in public services to help the people of Scotland prosper. These are the clear benefits of a United Kingdom that is stronger as a union.”
The funding arrangements for tax will be continued, with the Scottish Government continuing to keep every penny of devolved Scottish taxes while also receiving an additional contribution from the rest of the UK.
Under the previous Fiscal Framework, the Scottish Government could borrow £450 million per year within a £3 billion cap, as well as receiving a Barnett-based share of UK Government borrowing. Going forward these amounts will instead rise in line with inflation, which supports additional investment across Scotland and lays the foundations for economic growth.
The UK Government has listened to calls from the Scottish Government for greater certainty and flexibility to help them manage their Budget and agreed a permanent doubling of the resource borrowing annual limit from £300 million to £600 million.
Limits on how much can be withdrawn from the Scotland Reserve to spend in future years will also be removed. This will boost spending through borrowing by £90 million in 2024/25. All future limits will increase in line with inflation.
Scottish Secretary Alister Jack said:“The renewed Fiscal Framework shows what can be achieved when there is a collaborative focus on delivering economic opportunity and why we are stronger and more prosperous as one United Kingdom.
“The deal – worth billions of pounds to Scotland over the coming years – builds upon work to support economic growth and provide more high skill jobs, investment and future opportunities for local people, such as the establishment of Investment Zones and Freeports in Scotland.
“The UK Government knows that high prices are still a huge worry for families. That’s why we’re sticking to our plan to halve inflation, reduce debt and grow the economy. As well as providing targeted cost of living support, we are directly investing more than £2.4 billion in hundreds of projects across Scotland as we help level up the country.”
As both governments continue to work together to tackle challenges like the cost of living, an updated Fiscal Framework equips the Scottish Government with the instruments for growth while protecting the wider public finances.
Scotland’s Deputy First Minister Shona Robison said: “This is a finely balanced agreement that gives us some extra flexibility to deal with unexpected shocks, against a background of continuing widespread concern about the sustainability of UK public finances and while it is a narrower review than we would have liked, I am grateful to the Chief Secretary to the Treasury for reaching this deal.
“As I set out in the Medium-Term Financial Strategy, we are committed to tackling poverty, building a fair, green and growing economy, and improving our public services to make them fit for the needs of future generations.
“We still face a profoundly challenging situation and will need to make tough choices in the context of a poorly performing UK economy and the constraints of devolution, to ensure finances remain sustainable.”
This morning the UK and Scottish governments have published the long-awaited update to the Fiscal Framework, following the review that has been going on for the last couple of years (writes MAIRI SPOWAGE of the Fraser of Allander Institute).
Since this was due to happen in 2021, we have been waiting for the outcome of this review. For more background, see our blog from late 2021.
For those new to it, the Fiscal Framework sets out the rules for how devolution of tax and social security powers following the Scotland Act 2016 is supposed to work in terms of finances. It sets out the mechanisms by which the Scottish block grant is adjusted to reflect the fact that large amounts of tax and social security powers are now the responsibility of the Scottish Parliament.
It also sets out fiscal flexibilities that the Scottish Government can choose to use in managing these new powers, as new tax and social security powers also come with risks that require to be managed.
In this blog, we set out the main headlines and our initial reaction to the updates.
The mechanism for adjusting the Block Grant will remain permanently as the Index Per Capita (IPC) method.
This is one of the most complex areas of the fiscal framework but definitely one of the most significant.
For tax, it sets out the mechanism for working out how much the UK Government has “given up” by devolving a tax to Scotland, given that it is a significant loss in revenue. As, following devolution, there are different policies pursued in rest of UK and Scotland, this is not straightforward. Essentially though, the mechanism agreed in 2016 was to grow the tax at the point of devolution at the rate, per person, that it grows in the rest of the UK. This is known as the Index Per Capita (IPC) method.
So, the idea is that if taxes per head grow quicker in Scotland, the Scottish Budget will be better off – conversely, if taxes per head grow more slowly, the Scottish Budget will be worse off.
In 2016, when the fiscal framework was first agreed, the IPC method was the SG’s preference, whereas the UKG preferred the “Comparable Method” (which would generally be worse than the IPC method for the Scottish Budget). SO they agreed to use IPC for the first 5 years and review it in this review published today.
They have now agreed that the IPC method will remain on a permanent basis.
Interestingly, this means that on a permanent basis, the mechanisms for adjusting the block grants for Wales and Scotland will be different, given Wales’s Fiscal Framework uses the Comparable Method, albeit with additional provisions to keep a funding floor in place.
Borrowing Powers for managing forecast error have been increased significantly
Resource borrowing powers to manage forecast error associated with tax and social security powers have been increased from £300m to £600m. This is required because when budgets are set, the tax, social security and block grant adjustment estimates are set on the basis of forecasts from both the Scottish Fiscal Commission and the Office for Budget Responsibility. When the outturn data is available, if there is a discrepancy (which is very likely) then the Scottish Budget has to reconcile these differences.
This will be good news for the Deputy First Minister looking ahead to delivering her first budget in December, given that it was confirmed recently that there will be a large negative reconciliation to reflect income tax receipts in 2021-22 of £390m. As these changes are coming into effect for the 2024-25 budget year, this means she will have more flexibility to borrow to cover this.
All limits, such as resource and capital borrowing powers, will be uprated in line with inflation
When the Fiscal Framework was first agreed, the limits on borrowing for both resource and capital, and the limits for what could be put into the Scotland reserve, were set in cash terms and have been fixed ever since.
This agreement today sets out that the ones that remain will be uprated by inflation (although the exact inflation measure and timing is still to be confirmed), and that the limits on the additions and drawdowns on the Scotland Reserve will also be abolished.
The VAT Assignment can gets kicked down the road again
One thing that is a little disappointing is that there was no final decision on VAT Assignment. See our blog from 2019 to get the background in this.
VAT Assignment was included as part of the Smith Commission powers. The idea was that half of VAT raised in Scotland would be assigned to the Scottish Budget, which would mean, if the Scottish Economy was performing better than the UK as a whole, the budget would be better off, and conversely, if VAT was growing less quickly in Scotland, the budget would be worse off.
However, after almost 10 years, it has become clear that there is no way to estimate VAT in Scotland that is precise enough for this to have budgetary implications. It is a large amount of money (more than £5 billion) so even small fluctuations in how it is estimated can mean changes of hundreds of millions of pounds.
Today, the Governments have agreed to just keep discussing it. We think it is time that everyone admitted it is just not a sensible idea.
We’ll keep digging through the detail of everything published today and will provide more commentary through our weekly update on Friday.
The Scottish Government needs to improve its set up to deliver the country’s climate change goals. says public spending watchdog Audit Scotland.
The government’s climate governance has improved since the former First Minister declared a climate emergency in 2019 – however, adapting to the impact of climate change has received less focus than reducing emissions and hitting net zero targets.
The government is not clear enough on how its internal groups co-ordinate their work. There are gaps in reporting, making it difficult to assess progress against climate policy.
And there has been no workforce plan for climate change since the Net Zero department was established in late 2021. However, one is expected in spring 2023.
Government risk management arrangements around climate change are underdeveloped. For example, the process to identify risks is not always clear. Actions to address risks are sometimes vague.
And there is not a systematic process in place for tracking actions in risk registers.
Stephen Boyle, Auditor General for Scotland, said: “The Scottish Government’s set up for responding to the climate crisis has constantly evolved since 2019. But the different parts of government could be better co-ordinated.
“The government’s risk management arrangements also need to improve, particularly the work needed to ensure Scotland adapts to the impact of climate change.
“Work is ongoing across the Scottish Government to tackle these organisational weaknesses, and it’s vital that happens quickly given the urgency of the climate situation.”
Additional half a billion pounds raised for public services
Changes to income tax in Scotland have come into force and are estimated to raise more than half a billion pounds of additional revenue this financial year to support vital public services.
The tax rates for earnings between £12,571 and £43,662 remain the same while earnings above £43,663 are now taxed at the Higher tax rate of 42%.
The threshold at which people pay the Top Rate of tax has reduced from £150,000 to £125,140 with earnings over that threshold now taxed at 47%.
According to the Scottish Fiscal Commission, these changes will raise £129 million in 2023-24.
The Higher Rate threshold will also remain at its 2022-23 level, applying to earnings over £43,662, which will increase revenue by a further £390 million when compared to uprating the threshold by inflation, according to Scottish Government estimates.
As the new financial year begins, Scottish taxpayers are also being encouraged to check if their tax code on their first payslip is correct – people paying Scottish Income Tax should have a tax code that starts with an S.
Deputy First Minister Shona Robison said: “The decisions we have made on income tax are fair and progressive by ensuring that those who can, contribute more. They strengthen our social contract with the people of Scotland who will continue to enjoy many benefits not available in the rest of the UK such as free prescriptions.
“The additional revenue will help us invest in our vital public services including the NHS, above and beyond the funding received from the UK Government. At the same time, the majority of taxpayers in Scotland will still be paying less income tax than if they lived in the rest of the UK.
“Now that the new financial year has started, I’d also encourage people to check that the tax code is correct on the first payslip they get. If you think your tax code is wrong, you can check your details with HMRC who will be able to help.”
The new Scottish Income Tax bands and rates for the financial year 2023-24 are:
Band
Band name
Rate
£12,571* – £14,732
Starter Rate
19%
£14,733 – £25,688
Basic Rate
20%
£25,689 – £43,662
Intermediate Rate
21%
£43,663 – £125,140**
Higher Rate
42%
Over £125,140
Top Rate
47%
* Assumes individuals are in receipt of the standard Personal Allowance.
** Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.
The Personal Allowance threshold remains reserved and is set by the UK Government at the UK Budget.
Spending plan ‘will protect families and public services’
The 2023-24 Scottish Budget will take a distinctive approach to creating a fairer, more equal Scotland, Deputy First Minister John Swinney said.
He stressed the three Budget priorities of eradicating child poverty, strengthening public services and moving towards a net zero economy were strongly linked and would give more people the opportunity to flourish.
Ahead of delivering the Budget to Parliament today, Mr Swinney visited a scheme in Wester Hailes, delivered by City of Edinburgh Council and part-funded by the Scottish Government, installing insulation for households at risk of fuel poverty.
He said: “I was encouraged to see the vital work being carried out to improve energy efficiency and make homes warmer for families facing significantly higher bills this winter. This scheme highlights how tackling the increased cost of living can assist our drive towards net zero, and is an example of the importance of effective public services.
“Our Budget goals are mutually beneficial and represent a distinctive approach to the economic challenges we face. The Scottish Budget will take further steps to address inequality and eradicate child poverty. It will encourage a just transition to net zero, creating wealth and opportunity across the country. And it will be the catalyst for reforms necessary to ensure our first-class public services remain sustainable in the face of the challenges to come.
“I would like to go even further but the cost of living crisis has also laid bare the fiscal constraints of devolution, as we cannot borrow to support day to day expenditure when times are hard to assist us through these difficult days. It is clear that businesses and households are paying a steep price for the economic mismanagement of the UK Government.
“The cost of living crisis requires decisive action. In setting this Budget, the Scottish Government will use its limited powers to the maximum extent that is responsible, to meet the challenges faced by the people of Scotland.”
The Scottish Budget 2023-24 will be presented to the Scottish Parliament TODAY (Thursday 15 December).
This week has seen the appointment of a new Prime Minister, but in terms of economic news it has been a far less tumultuous week than recent ones (writes EMMA CONGREVE, Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute).
Both the UK and Scottish governments announced the postponement of planned budget events. The Scottish Government’s decision not to go ahead with its ‘Emergency Budget Review’ at this time was not surprising. However, there are questions around what budgetary changes will be made this financial year in response to inflation’s impact on public spending.
As highlighted in an article last week, that includes understanding the detail of employability cuts (announced back in September), and indeed the detail of where else the Scottish Government is eking out savings. We need better transparency over how these decisions have been made and the impact on people providing services and the people they support.
If/when the Emergency Budget Review goes ahead is unclear. It may well end up being rolled into the draft Scottish budget announcement for 2023/24, due on the 15th December.
The UK government’s decision to postpone its planned fiscal statement (now rebranded as the Autumn Statement) from the 31st October to the 17th November is justifiable given the prime ministerial change (and in light of the decisions of the incoming Chancellor Jeremy Hunt the previous week).
Delaying the fiscal statement should also mean that the outlook for borrowing costs should be slightly better than it would have been had the statement been published next week since it shifts the reference period for bond yields that the OBR will use in its forecasts.
The publication of the UK Autumn Statement on 17th November means there will be a window of four weeks between the UK Autumn Statement and the Scottish budget on 15th December.
Assuming the UK Autumn Statement is definitive about spending plans in 2023/24, this should provide adequate time for the Scottish government to prepare its 2023/24 by the 15th. There is little scope to push back the draft budget statement into January due to the timescales required to get the Budget Bill through the Scottish Parliament in time for the 2023/24 financial year.
With an expectation of further fiscal tightening by the UK government, the Scottish Government will be braced for more difficult decisions.
Until we see the UK Autumn Statement however, it remains very uncertain how the UK government will prioritise different tax and spending measures, and over what timescales, and hence the implications for the Scottish budget in 2023/24 and beyond.
As always, we will be looking for evidence-based rationales and transparency in how spend has been prioritised from both governments; a subject we will no doubt return to in the coming weeks.
More detail on the impact of the cost of living crisis
As we discussed last week, CPI inflation for September was estimated at 10.1%. This week, the ONS have published supplementary analysis on how rising prices are affecting adults across Great Britain.
9 in 10 people surveyed reported that their cost of living had increased compared to a year ago and the survey asked questions on the extent to which this had impacted their lives.
Around 45% of adults in both GB and Scotland reported finding energy bills somewhat or very difficult to pay and around 30% of GB and 25% of Scottish adults reported finding rent and mortgage payments difficult to afford.
Other breakdowns by protected characteristics showed different experiences. For example, 55% of disabled people, 69% of Black or Black British adults, 59% of Asian or Asian British adults and 60% of renters were finding it somewhat or very difficult to pay energy bills (compared to the population average of around 45%).
These differences are likely to be linked to socioeconomic status: around half of those with a personal income of less than £20,000 per year said they found it difficult to afford their energy bills which reduced to 23% for those with a personal income of more than £50,000.
This week, the ONS also published a ‘highly experimental’ (their words!) analysis of low-cost groceries. For half of the sampled items, the average lowest price goods increased at a faster rate than the official CPI inflation measure for food and non-alcoholic beverages over the past year.
The highest rising prices were for vegetable oil (65%); pasta (60%) and tea (46%). Bread and milk were among other items that rose by more than the CPI average.
The pressures are also of course affecting businesses. The latest Scottish Government analysis of the BICS survey found that 49.8% of businesses reported that the prices of materials, goods and services bought in September 2022 were higher than in August 2022. Around 60% of businesses reported absorbing these costs, and around 35% reported that at least some of the price increases were passed on to customers.
Going back to the previous survey of GB adults, the most significant behavioural changes reported were ‘spending less on non-essentials’ (62% of adults in GB and in Scotland) and ‘using less fuel such as gas and electricity in my home’ (52% of GB adults, 57% in Scotland). If the latter prevails into the colder season, there is of course a concern that this will have serious adverse impacts on health.
Upcoming webinar for your diary
On the subject of health impacts, the Fraser of Allander Institute, in collaboration with MRC/CSO Social and Public Health Sciences Unit at the University of Glasgow and the Health Foundation are holding a webinar on the 15th November (3 – 4.30pm) to discuss trends in health and the socioeconomic drivers of health in Scotland.
Our report on the trends in socioeconomic determinants of health over the past twenty years will be out in the coming weeks.
Click here to sign up to the webinar to hear all about it.
The publication of the Scottish Government’s Resource Spending Review Framework in May set out possible spending of £11.6 billion on the justice sector over the next four financial years.
However, independent research by the Scottish Parliament Information Centre (SPICe) has suggested that if current inflationary pressures persist, this settlement would represent a significant reduction in spending across the justice sector.
Speaking as the call for views was launched, Criminal Justice Committee Convener Audrey Nicoll MSP, said: “There is no doubt the Scottish Government and public services will face cost pressures in the upcoming years and the ongoing cost of living crisis is creating a real sense of uncertainty over what is to come.
“However, if the current trend of rapidly increasing inflation continues then those in the justice sector will have some difficult decisions to make in order to balance budgets.
“We want to hear a range of views as part of our pre-budget scrutiny and are seeking views from those within the sector.
“But we also want to hear the views of ordinary people, any third sector organisations who may be impacted by these potential cuts in justice spending and groups who work to support those within the justice portfolio. This will help us to scrutinise the possible impact of cuts to key services such as the police, fire and rescue, courts and prosecution services and prisons.”
The call for views closes on Friday 21 October 2022.
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.”
SNP MSP Gordon Macdonald has welcomed nearly £4.7 billion of extra investment for Scotland’s Health and Social Care portfolio over the next 4 years.
The Resource Spending Review, outlined by Finance Secretary Kate Forbes this week, invests in frontline services and outlines over £70 billion of investment in the Health and Social Care budget between 2023/24 and 2026/27.
This investment will increase capacity in the health service, help establish the National Care Service, help deliver care in the community, and tackle health inequalities.
Gordon Macdonald MSP said: “The SNP Scottish Government has invested significantly in difficult financial times to ensure our NHS and social care sector are fit for the 21st Century.
“I’m delighted that this week’s Resource Spending Review will see significant investment in the Health and Social Care budget – which will help health services across Edinburgh as Scotland recovers from the pandemic, where there will undoubtedly be pressures on the healthcare sector.
“The SNP Government’s twin approach of delivering record investment and taking forward vital reforms will help ensure that the people of Scotland get the care they need in the right place at the right time.
“None of this would be possible to deliver without our hard-working NHS and social care staff working across Edinburgh. I’d like to extend my personal thanks for their tremendous efforts over a very difficult few years.”
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
