Scottish Economy

Government faces taxing choices in 2021/22

That 2020 has been a year without precedent scarcely needs saying.

Should you need further evidence, consider this. The Scottish Government’s budget this financial year is on course to be almost one quarter (£7bn) higher by the end of 2020/21 year than it anticipated when it set out its initial plans in February.

That’s an extra £1,300 of spending – by the Scottish Government, the NHS, and local authorities – for each person in Scotland.

And this is despite granting business rates reliefs worth £900m, cancelling LBTT tax revenues on the majority of residential property transactions, and the inevitable (but as yet uncertain) fall in Scottish income tax revenues.

During the recent months of restrictions, budgeting has been, in one sense, relatively straightforward. Barnett consequentials have gushed down the funding pipe, at times more quickly than the Scottish Government appears able to allocate them. At the time of writing, well over £1bn remains to be allocated for this financial year.

The focus of public funding has been to protect those most seriously affected – whether financially or socially – by the lockdown. Throw money and hope at least some of it sticks where it is needed has been the tactic. This is not a criticism – the priority has been to deal with the immediacy of the challenge – but a full audit of policy successes and failures will be required in due course.  

The Scottish Government will soon begin turning its thoughts to its budget for 2021/22 – Finance Minister Kate Forbes is due to present her tax and spending plans to parliament on 28th January.

There are emerging grounds for optimism. The prospects of one or more vaccines being rolled out from early next, combined with better systems for widespread rapid testing, supports the view that restrictions will be able to be lifted in earnest from Spring, paving the way for economic recovery.

But it is in the transition from a world of widespread restrictions towards one without restrictions that budget choices may be most stark, and trade-offs the most intense.

As the economy opens back up next year, we will get a clearer sense of the scale of structural damage wrought by the crisis, and the role of public policy in easing the transition to a new normal.

One policy area that crystallises these challenges is business rates and the question of when – and how quickly – to begin rolling back various Non Domestic Rates reliefs put in place during 2020 to ease pressure on firms in restricted sectors. Rolling back reliefs too soon risks thwarting recovery. But delaying a return to the status quo longer than necessary risks depriving the government of funding which could potentially be used in more targeted ways.

Scottish ministers are no doubt already thinking about these questions, but at the moment they are having to do that without any information about what level of resource might flow from the UK Government next year.

That will change on Wednesday next week, when Rishi Sunak sets out UK Government spending plans for 2021/22. A key question will be the extent to which additional public spending to deal with the pandemic remains locked-in to budgets next year, or is deemed temporary and is withdrawn in expectation of a return to normality.

The answer will give the Scottish Government a steer on the likely budget envelope it will have at its disposal in 2021/22, from which it can begin its own planning.

Next year’s budget might be smaller in financial terms, but the decisions will be more finely balanced.


David is Senior Knowledge Exchange Fellow at the Fraser of Allander Institute