6 reforms for the Scottish Budget Process

As the various Committees begin to finalise their detailed scrutiny of the Draft Scottish Budget, we thought that we’d take the opportunity to reflect upon the process itself.

In the light of the Parliament’s new powers, a Budget Review Group has been established “to carry out a fundamental review of the Scottish Parliament’s budget process following the devolution of further powers in the Scotland Act 2012 and Scotland Act 2016”. The Group will report in the spring.

This blog offers some thoughts on possible reforms –

  1. A return to multi-year budgeting
  2. A change to the timing of the Scottish Budget so that it follows the new UK Autumn Budget but with increased time for parliamentary scrutiny earlier in the year
  3. A radical reworking of the structure and approach of the budget document itself
  4. A change of emphasis from reporting changes in portfolio spend to a focus more on outcomes
  5. More information presented on long-term commitments, constraints and liabilities
  6. A more transparent presentation of the new fiscal framework

In our view, it would be a missed opportunity if the reforms focused solely on how to incorporate the new powers over tax, welfare and borrowing into the budget process. Yes, careful consideration is needed about how to account for these powers, but the overall process requires wider reform.

Given the importance the budget carries for those who rely on the public services it supports, for the workers that deliver these services, and for taxpayers, a process that is informative and transparent is the least we should expect.

1. A return to multi-year budgeting is urgently needed

For the 2nd year in a row, and despite a UK Government multi-year spending review published over a year ago, the Scottish Government has chosen again to publish only a 1-year budget.

We were told that last year’s 1-year budget was an exception. So apparently is this year’s.

A 1-year budget makes it impossible to gauge the government’s medium term plans or priorities – particularly in areas such as local government where there are important elections this May.

More generally, it can create significant problems for service providers, particularly smaller and/or local organisations, which can undermine the quality and continuity of provision. It makes planning more difficult (particularly with long-term preventative spending) and retaining skilled/motivated staff more challenging. It creates uncertainty for both the providers and those using a service and leads to inefficiencies from renegotiating contracts on a short term basis.

It is vital that we return to a rolling multi-year framework – and the Parliament should insist on this being the case.

With UK Spending Reviews typically published shortly after a General Election and the staggering of UK and Scottish elections on a fixed term basis now agreed, embedding multi-year budgets into the parliamentary calendar should be relatively straightforward.

2. The Scottish Budget should follow the new UK Autumn Budget but scrutiny should continue throughout the year

In November, the Chancellor announced his intention to move to an Autumn Budget.

With the UK Budget providing up to date figures on both the block grant and the block grant adjustments (i.e. the changes made to the grant from Westminster to account for the new tax powers), it makes sense for the Scottish budget to follow afterwards.

Going earlier runs the risk of creating unnecessary confusion between the timing of Scottish and UK tax and economic forecasts.

But with the UK Budget not likely to be until late October or November each year, this will necessarily curtail the time available for parliamentary scrutiny. Traditionally the Scottish Budget is published in September.

New mechanisms to support scrutiny throughout the year will be required. For example, it would seem sensible for evidence sessions on key multi-year budget issues such as public sector pay, capital investment, or the long-term sustainability of the public finances (see below) to take place earlier in the calendar. The outputs could then inform the budget process later on in the year.

3. The format of the Draft Budget Document needs to be overhauled

The Draft Budget document is confusing and overly complex. It is difficult for even seasoned public finance professionals like ourselves to follow.

Improvements should include:

  1. The Budget document needs to be clearer on the split between factual information/data and policy/political interpretation. At the moment it is a muddle between a policy document and the authoritative source of budget data.
  2. Rather than helping to clarify the complexities of public sector budgets, the current document often only adds to the confusion. Different chapters focus on different definitions of spending (e.g fiscal DEL, total DEL or TME) for no apparent reason. Some settlements – e.g. the exact settlement for local government – aren’t even in the budget at all but published elsewhere. Greater consistency is needed.
  3. A time series should be published from – at the very least – the start of the last spending review (and ideally longer).
  4. The practice of apportioning monies to one portfolio but appearing elsewhere in the actual accounts needs to be clarified. The verbal sparring around local services vs. local government budgets this year is a case in point.
4. Spending by portfolio can only take us so far – greater focus on how the budget delivers the outcomes the government wants to achieve is required

It is understandable that the budget continues to set out spending by portfolio.

But what actual outcomes are we anticipating and how will the resource allocated help to deliver them?

Apportioning spending into regimented portfolios often encourages a focus just on inputs – ‘how much portfolio X is rising’; ‘real-terms protection of Y budget line or ‘1,000 more staff for service Z’ etc. Consideration of outcomes – e.g. boosting growth, tackling inequality – and how the budget might support their delivery, can often be crowded out.

A greater focus on outcomes/policy priorities, perhaps via a table showing how changes in spending from one year to the next are supporting a particular objective/policy commitment, would be helpful. The UK Government publishes a policy costings table in its Budget.

At the very least, identification by the government of the key expenditure lines that they believe are crucial to the achievement of each targeted outcome would be extremely valuable. With budget numbers presented alongside, voters would be able to see how much more/less was being added in to support ‘attainment’ or ‘economic growth’ etc.

Whilst this will never be a perfect exercise, if government and parliament are serious about moving to an outcomes framework, greater thought into monitoring how the budget supports (or doesn’t support) key policy objectives is essential.

5. Much greater information should be presented on long-term commitments, constraints and liabilities

Key parts of the budget are subject to long-term/fixed spending commitments. Some are policy related (e.g. demographic pressures, pay progression), whilst others are legal commitments (e.g. pre-signed contracts, statutory obligations etc). But very little information is published on these elements in an accessible form.

Greater transparency over what these are, their trajectory, and their scale is needed.

For example, existing PPP/PFI and NPD commitments make up a significant proportion of the Scottish budget – with repayments of £1.2bn per annum over the course of this parliament. But the allocation is not uniform. For example, PPP payments now make up a relatively large chunk of the education budget each year (around 10%).

We never know therefore, whether or not an increase in a particular portfolio implies genuine new resource or is simply covering rising pre-commitments.

Greater transparency around such issues will also help improve our understanding of the medium to long-term sustainability of public services. We know that demand for public services continues to increase, but we don’t yet have a regular assessment of the implications of this for future budgets. We also only have limited knowledge of long-term liabilities facing the public sector in Scotland.

Whilst it is unreasonable to expect government to set out detailed and specific long-term forecasts, an annual report setting out different scenarios and the direction of travel would be welcome.

6. Information showing how the new fiscal framework is working needs to be more transparent

The new fiscal framework is inherently complex. The result is a budget process that does not naturally lend itself to transparency. For example, under the new framework there is the potential for budgets well into the next decade to still to be impacted by the fall-out from any forecast errors made this year!

Some suggested ways to help tackle this include:

  1. When the Scottish Government makes a tax decision – e.g. to set a different income tax policy to the UK – it should publish an estimate of the cost (or revenue raised). Despite being a key manifesto commitment, no such information was provided in this year’s Draft Budget for the government’s decision to set a lower higher rate threshold compared to the UK (despite the government publishing an initial estimate in March)
  2. It will be important to clearly set out how Scotland is faring vis-à-vis the UK in terms of devolved tax revenues. Are any differences down to economic performance? Policy decisions? Or different methodologies?
  3. Related to the above, it will also be important to clearly set out what is driving changes in the overall budget– is it because of UK cuts to the block grant, better/worse economic performance in Scotland (or the UK) or technical adjustments to the fiscal framework?

Finally, the way the OBR and the Scottish Fiscal Commission have been established means that they will – on occasion – adopt different methodologies and approaches when developing their forecasts. Irrespective of the rights or wrongs of this, it will be important to ensure that there is full transparency over these different methodologies and the impact on the results. It won’t be enough to simply explain away the results by saying ‘our methodologies are different’.