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Fraser of Allander Institute update: Comings and goings of Prime Ministers and fiscal statements

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 15^th December.

The UK government’s decision to postpone its planned fiscal statement (now rebranded as the Autumn Statement) from the 31^st October to the 17^th 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 17^th November means there will be a window of four weeks between the UK Autumn Statement and the Scottish budget on 15^th 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 15^th 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.

MSPs seek views on difficult spending decisions ahead for justice sector

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.

‘Hard choices’ to prioritise spending

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.”

Read the DFM’s letter to the Finance and Public Administration Committee

Read the Deputy First Minister’s statement to Parliament

Six things to look out for in Tuesday’s spending review and fiscal forecasts

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

Kate Forbes: Setting spending priorities for a stronger Scotland

‘We face a very difficult financial position over the new few years’

Prioritising public spending is essential to grow a stronger economy as Scotland recovers from the pandemic and faces up to the cost of living crisis, Finance Secretary Kate Forbes has said.

Speaking ahead of the publication of the Resource Spending Review, Ms Forbes said more focused government and public sector funds would achieve ambitions to tackle child poverty, reach net zero and deliver sustainable services for the future.

The Spending Review will give broad parameters for spending for the next four years and set out a series of government reforms.

Finance Secretary Kate Forbes said: “These are challenging times, and we need to be canny with our spending, but I’m confident that if we work together we can get through this cost of living crisis and still achieve our ambitions.

“That means tackling child poverty, driving our economic recovery from COVID and achieving net zero, while building a stronger public sector that is sustainable for the future.

“We face a very difficult financial position over the next few years with funding increases below inflation levels and the challenge of recovering from the pandemic without the financial tools available to every other government in the world. That means while the spending review is not a budget, it will include difficult decisions, to ensure we can really focus on supporting households and services at this time.

“The Resource Spending Review will detail the funding available over the coming years to achieve these goals, and it will be published alongside the Medium-Term Financial Strategy (MTFS) which gives economic context to the challenges and opportunities which lie ahead.”

Ms Forbes will outline the Resource Spending Review to Parliament when it is published tomorrow (May 31).

The Scottish Government says it is doing ‘everything within its powers and fixed budgets to ensure people, communities and businesses are supported as far as possible’, including investing almost £770 million this year in cost of living support and doubling the Scottish Child Payment to £20 per week.

Earlier this year it increased eight Scottish benefits by 6%, the rate of inflation at the time, and introduced a range of benefits not available elsewhere in the UK.

Expanding free school meals and providing £150 council tax payments to low income families are included in further actions to put money back into people’s pockets at a time when they need it most.