In a few days time, on December 9th, the Scottish government will publish its budget for 2022/23. It will be the first budget of this session of parliament, following the elections in May.
Kate Forbes’ third budget in charge of the Scottish Government’s finances will arguably the most difficult she has faced.
Whilst the Scottish government will have more resources at its disposal than in 2019/20, the challenges facing public services and the wider economy are far more acute now than they were then.
If the 2022/23 budget looks challenging, subsequent years look likely to become even more difficult, as spending commitments on social security and social care, amongst other things, rub up against a total budget envelope that looks set to remain fairly constant in real terms.
An uncertain economic backdrop
The economy has recovered more quickly during 2021 than was forecast at the start of the year, and in some ways has proved remarkably resilient to the pandemic. But there are signs that the recovery is slowing. The uneven pace of the recovery across sectors and regions, combined with increasing inflation, was already making for a very uncertain outlook for the economy in 2022. The emergence of the Omicron variant adds further to that uncertainty.
The latest economic forecasts imply that the Scottish and UK economies will follow a very similar trajectory over the coming years. However, growth in total earnings was in fact slightly slower in Scotland than in rUK in 2020/21. This is currently attributed in part to the pandemic related impacts on the oil and gas sector, and as such is anticipated to be a temporary blip rather than the start of something more permanent. The modest impact on Scottish income tax revenues will affect the budget in 2023/24.
The block grant is higher than pre-pandemic, but the challenges are greater too
The Scottish government’s core resource block grant will be £35bn in 2022/23, some 8% higher in real terms than it was in 2019/20, and higher than it has ever been outwith the ‘pandemic years’ of 2020/21 and 2021/22. But whilst the most significant direct fiscal impacts of the pandemic are (hopefully) in the past, the longer term legacy of the pandemic on public services remains acute. In the subsequent two years, 2023/24 and 2024/25, the resource block grant will remain unchanged in real terms according to current UK government spending plans.
The capital block grant is also set to remain higher than it was pre-pandemic, although only marginally so. Over the coming years, the capital investment programme will be at the heart of the government’s policy aspirations to reduce climate change, by decarbonising transport, improving the efficiency of the housing stock, and invest in natural capital.
There are two key decisions on tax to look out for
The government faces two key decisions on tax in its budget.
On income tax, the government’s manifesto commitments leave it with little room for manoeuvre. It could freeze tax thresholds in cash terms or increase them in line with inflation. Freezing thresholds would constitute a tax increase. It would bring in around an additional £140m in revenue compared to a decision to increase thresholds in line with inflation.
The government’s decision on non-domestic rates has more significant revenue implications. The decision is how quickly to rollback the 100% rates reliefs for businesses in tourism, hospitality and leisure. Providing the full relief costs the government around £736m in reduced revenue. The longer the relief is maintained, the less likely it is to have tangible benefits.
Dealing with the legacy of the pandemic, and wider reforms, to health and social care will absorb a large proportion of budget increases
Health and social care are arguably the public services where the legacy of Covid-19 continues to be most significant. NHS activity remains below pre-Covid levels across many types of treatment and backlogs continue to build. Workforce pressures and constraints are acute in both sectors.
The government’s commitment to ‘pass on’ health related consequentials implies that the health budget will increase substantially in 2022/23, taking it to around £17bn. This represents a 15% real terms increase on the 2019/20 level. Over half of the increase in the government’s budget is set to be passed to the health portfolio in the coming years. Even so, addressing the challenges in the sector – including the aspiration to increase capacity by 10% alongside other pressures and commitments – looks extremely challenging.
This parliament will see significant change to the structure of social care. Its not yet clear how far the government will go in implementing all the recommendations of the Feeley review. But it seems likely that the commitment to increase social care spending by 25% will not be sufficient to fully implement all the proposals.
Transformative change to Scotland’s social security landscape will constrain the government’s wider budget choices by the middle of the parliament
Aspirations to reduce inequalities of health, income and education remain at the heart of the government’s agenda.
Nicola Sturgeon used the SNP conference last week to announce that a planned increase to the Scottish Child Payment, from £10 to £20, will take place at the start of the 2022/23 financial year. This doubling of the SCP, which was backed by all parties in their manifestos earlier this year, is critical to have any hope of achieving the legislated child poverty targets.
The rollout of the SCP is one element of broader transformational change of the social security system in Scotland during the forthcoming parliament. Taken together, the SCP and the planned more expansive system of disability and carers benefits will place significant constraints on the budget by the middle of parliament.
Meeting net zero targets will require new approaches to budgeting
The Scottish Government has legislated that Scotland will reach net zero by 2045, 5 years earlier than the UK as a whole. An interim target for 2019 was missed.
Meeting the government’s net zero ambitions will require substantial policy interventions that cut across wide areas of devolved competence. The diverse, cross-cutting nature of interventions required to support the transition to a net zero economy means that keeping track of the budget’s impact on emissions is challenging. There is a critical need to improve the way that the impact of budget decisions on net zero targets is examined and assessed, in order both to assess progress and determine what other interventions may be required.
Budget pressures are likely to increase, rather than dissipate, in subsequent years
Taken together, the commitments on health and social care and the policies on SCP and other social security will place increasing pressure on budget. The pressure is not so acute in 2022/23 but will build during parliament as changes are rolled out.
It is likely that the resources available to the Scottish government to fund spending on public services other than health, social care and social security could decline in real terms between 2022/23 and 2024/25.
In this context, the publication next year of a Spending Review takes on added significance.
The first budget of a new parliament is often a particularly exciting affair, as a new set of policy commitments and aspirations begin to shape the tax and spending decisions of government.
A core resource block grant in 2022/23 that is 8% higher than pre-pandemic might sound generous, but to deal with the pandemic’s legacy and underlying public services pressures it is anything but. In this context, Kate Forbes’ third budget may well be her most challenging.
But the challenges are unlikely to dissipate in subsequent years, as commitments and aspirations on health, social care and social security in particular rub up against a real terms budget that is currently forecast to remain flat in real terms between 2022/23 and 2024/25.
So a challenging budget for 2022/23 is the precursor to a challenging spending review next year.
Navigating the health and economic recovery from the pandemic, alongside longer term commitments on climate change and inequality will require a delicate set of budget decisions and trade-offs. This week’s budget will reveal how those choices and trade-offs have been made for 2022/23, but the more difficult trade-offs may yet be to come.
Calum is an Associate Economist at the Fraser of Allander Institute (FAI) and a Researcher at the Centre for Inclusive Trade Policy (CITP). He regularly contributes to key FAI publications like the quarterly Economic Commentary and the Scottish Business Monitor, as well as lectures on Strathclyde's Applied Economics Master’s programme. At the CITP, Calum specialises in regional trade measurement and modelling using national accounts, with a particularly focus on the distributional impacts of trade. Calum holds an MSc in Economics from the University of Edinburgh.
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.