Few would envy John Swinney his position right now. After a difficult Autumn of emergency budget reviews and public sector pay disputes, many of which still have no end in sight, the Deputy First Minister has made no secret of the fact that he feels that this is the most difficult period he has overseen for the public finances.
In our report today, we set out the main issues and challenges the DFM will be grappling with when he sets out the 2023-24 budget on Thursday.
As was illustrated by the Office for Budget Responsibility (OBR) in their recent forecasts, the economic situation has deteriorated markedly since the 2022-23 budget was presented, with high inflation set to eat away at living standards over the next two years.
This high inflation environment eroded the value of the Scottish Government’s (SG’s) budget in 2022-23, leading to cuts to preannounced spend earlier in the autumn. While the impact is unlikely to be as large as the SG claims, it would be fair to say that the budget is worth about £1bn less in real terms than was the case when spending decisions were originally made.
The announcements made by the Chancellor on 17th November did not help the situation in 2022-23, but they have generated significant consequentials for 2023-24 and 2024-25 – which more or less offset the impacts of inflation on the budgets for these years. So, as difficult as the outlook is, there is no doubt that this will help the SG in setting their budget.
Of course, the SG has significant devolved tax powers and therefore has decisions to make on Thursday about whether or not to use them to generate more revenue for public services. We discuss in the detail of this report what the context could mean for income tax, council tax and non-domestic rates. It seems likely that that the SG will follow suit on most of the UK tax decisions, including income tax threshold freezes and the reduction of the Top Rate threshold to around £125k.
We will also be looking out to any further announcements on social security and any decision on uprating Scottish benefits in 2023-24. Social Security is an increasing proportion of the budget and there is increasingly a gap between the expenditure on devolved benefits and the funding from the UK Government because of devolution.
The industrial unrest we are currently seeing in public services at the moment about the current round of pay deals for 2022-23 provides an interesting backdrop to the presentation of the SG’s public sector pay policy for 2023-24, which we will see alongside the budget on Thursday.
Given the assumptions that were made in the SG’s resource spending review in May about keeping the public sector pay bill flat in cash terms (which looked infeasible even then), we will have to see how these assumptions affect the overall portfolio allocations.
Despite the excitement of Thursday, and the fun we will have trawling through all the tables, it’s important to remember that the budget is not an end in itself.
Rather, it should be a means of delivering the Scottish Government’s ‘Purpose’ as set out in the National Performance Framework and the National Outcomes.
Ensuring that the Budget allocations align with the priorities set out in government speeches and in the publication of its myriad strategies is incredibly important for trust in government.
We hope more progress is made this year in demonstrating that evidence of the impact of policies has been integral to the Budget making process.
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.
Emma is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute