The Scottish Fiscal Commission have today published their first Fiscal Sustainability Report (FSR).
This is a very different analysis to their regular forecasts for the Scottish Economy, tax receipts and social security payments. The idea of measures of fiscal sustainability are to assess whether current policies on both spending and revenues can continue over the long-term, given the expectations for how the population and the economy are likely to change.
The idea of these is to flag areas of fiscal risk: indicating where particular issues become problematic, and how long-term factors, such as changes in demography, economic growth, or even issues like climate change may suggest that current policies are likely to be unsustainable in the long-term. And, for these types of reports, we really are talking about the long-term – the FSR published today looks at a 50 year time horizon.
These types of reports are a common feature of Independent Fiscal Institutions (IFIs) internationally. The Office for Budget Responsibility (OBR) at the UK level has published both Fiscal Sustainability and Fiscal Risks Reports since 2011. These have flagged up that the UK Public finances are on an unsustainable path in the long-term.
The SFC have been asked to do this following recommendations from both the OECD and the Scottish Parliament that they should expand their analysis to this longer term view.
What does the report today show?
The report today will make difficult reading for the Scottish Government, but this also highlights how important this sort of long-term analysis is to ensure that sustainable decisions are taken. There are considerable challenges for the Scottish Government in funding public services in the future.
The SFC highlight that over the next 50 years spending on public services will increase because of pressures from rising costs of delivery and an ageing population.
Building on the trends from recent years, spending on health is projected to grow more quickly than that on other services, increasing from around a third of total devolved spending at present to about half in 50 years’ time.
Importantly, the increased spending on public services will run ahead of the likely increases in the funding available to the Scottish Government (from the Block Grant and devolved taxes).
Despite significant tax devolution, the Scottish Budget is still mainly funded from the block grant, which is linked to spending levels on devolved services in England. In other words, the fiscal sustainability of the Scottish Government’s spending and tax policies is interlinked with that of the UK Government’s.
The headline here is that under current Scottish and UK fiscal policies, if public services in Scotland are to continue to be delivered as they are today, Scottish Government spending over the next 50 years will exceed the estimated funding available by an average of 1.7% each year.
However, this is in the face of an unsustainable position at the UK level, as outlined in the OBR’s most recent report. If the UK Government were to move towards a more sustainable position for the UK as a whole, the average budget gap would be 10.1% in Scotland.
Chart: Scottish Government’s projected Annual Budget Gap with UK Government response to long-term pressures
We’ll be digging through the detailed analysis over the next few days and weeks, but these figures show how important it is that these long-term analyses are produced. Policymakers in Scotland have long been aware that there will be significant pressures on public finances from long-term factors: now we have this analytical resource that highlight where these pressures lie.
Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.