Fiscal Policy and Tax, Scottish Budget

Boosting the Scottish Government’s Budget?

Yesterday, the Scottish Government announced a ‘Budget boost for economy and public services’. This included an additional £220 million of spending on top of plans set out December’s Draft Budget.

Details on the various sources of this ‘new money’ are as yet unclear and clearly there will be ongoing debates about whether or not it is too much or too little. But setting the political choices aside, yesterday’s announcement was interesting in its own right. It also raises some questions about the transparency of the budget process. This blog poses some issues that might help enlighten the debate as the Budget Bill continues its progress through Parliament.

Breakdown of the £220 million

The amended Scottish Budget contains an additional £220 million of spending for 2017-18 beyond that set out in December’s Draft Budget. A large element of this is being directed toward local authorities with an additional £160 million made available to them next year.

Interestingly, only £30 million of this is from new tax raising decisions from the Scottish Government. This is the estimated increase from freezing the Higher Rate Threshold in cash terms in 2017-18.

There have been no Barnett Consequentials from the UK Government since the Draft Budget.

So where does the remaining £190 million come from? According to the Scottish Government it is from “use of the budget exchange mechanism, updated profile of the Scottish Government contribution required to bring the non-domestic rates pool into balance and a reduction in the anticipated cost of borrowing repayments next year.”

So that clears that up then!!

Seriously, whilst we await details of the specific contribution of each element we can summarise our take on each:

  • Any savings from a reduction in the cost of borrowing next year are likely to be relatively small. The Scottish Government has only had its new borrowing powers for just over a year so it seems unlikely that this is a substantial source of revenue.
  • The operation of the non-domestic rates pool is complex. Essentially, each year the Scottish Government makes a forecast for business rates and distributes that forecast to local authorities as part of the local government settlement. This acts like a withdrawal from the pool. The government then receives the revenue as the year progresses. This acts as a payment into the pool. Over time this is expected to balance out. In order for the government to have freed up resources from this source one would expect that they must be confident that the pool is in surplus and that this will remain the case – perhaps by their forecasts being over-optimistic. But there has been little evidence of this in recent years and we’ll return to this in a future blog.
  • The Budget Exchange Mechanism is essentially the vehicle through which money not spent by the Scottish Government in previous years can be saved and spent at some future date. One suspects that this is likely to be a significant part of the new money announced yesterday.

So what?

The Finance Secretary has made clear that the opportunity to provide this new investment arises from his “latest assessment of the financial position this year and our projections for 2017/18” and that this “has enabled me to identify available resources to support additional spending”.

There are a number of things to reflect on here.

Firstly, it would be interesting to have further detail on what has changed in the last 6 or 7 weeks since the Draft Budget was published that has enabled this revised assessment to be made – and when this information became available.

Secondly, it’ll be important for the government to set out the breakdown of the £190 million. Is it coming largely from higher than anticipated business rates income or underspends? This is important not just for transparency but also informing other debates such as the government’s business rates policy (e.g. if business rate revenues are better than anticipated some may argue that the money could be spent on lowering taxes on business?)

Thirdly, and following on from this, the Parliament has only just finished scrutinising a Draft Budget that – just a few weeks later – turns out to be £190 million lower than the one they were asked to vote on (even before any plans to increase taxation). In the future, MSPs may press the government for greater information on the scope to use underspend or changes to non-domestic rates profiling at the outset of the scrutiny process. Obviously there is clearly a negotiating advantage in the government holding back some monies as part of their tactics to get the Bill through, but similarly one can see MSPs from now on demanding greater clarity over what is really on the table. In addition, MSPs will also be looking for greater clarity on how total funding reconciles with total spending.

Fourthly, the use of Budget Exchange or ‘underspend’ to provide ‘additional investment’ is interesting. In August last year, the Scottish Government announced a boost to capital spending of “£100 million of funding in this financial year”. This was largely funded through use of underspends from earlier years to effectively increase government spending in 2016-17 beyond initial plans. The aim was to help stimulate the economy in the aftermath of the Brexit vote. But if a large chunk of yesterday’s announcement of ‘additional investment’ is actually now just underspends from 2016-17 (or, at the very least, could have been spent in 2016-17), then some may question whether or not the use of underspends in this way on a regular basis is genuinely ‘net additional investment’. ‘Moving’ money into one year but then underspending in that year, which in turn enables you to ‘move’ money again into another year, makes sense from a budgeting point of view, but the impact on the economy and the public services may not be immediately obvious. This makes the case for multi-year budgeting all the more important.

The Scottish Budget Bill will pass. But the way in which ‘additional money’ has been found in such a short period of time after the Draft Budget was published raises some interesting issues about the overall Budget process and options for reform.



The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.