Scotland’s Budget Report Preview #3: The 2023-24 funding position and its consequences for 2024-25

When Deputy First Minister Shona Robison presented the Medium-Term Financial Strategy (MTFS) in May, she highlighted the challenges in the coming years. Based on funding projections and spending commitments, there was a funding gap of around £1bn for 2024-25. With additional borrowing flexibilities in the Fiscal Framework Agreement and a less unfavourable income tax reconciliation, our best guess was that on the MTFS basis, that gap was down to around £600m – still a substantial sum, and that does not even include potentially expensive additional measures such as the council tax freeze announced in October.

Nevertheless, the central projection at the MTFS for the net funding position was for a balanced budget in 2023-24 – a position that the Scottish Government has to achieve in each year. But in-year spending pressures, in large part as a result of inflation and pay deals, had increased the gap between spending commitments and funding available. By the time of the Autumn Budget Revision (ABR) at the end of September 2023, this had risen from £0 to an implied £928m.

At the ABR, the DFM announced £164m of spending cuts in-year, in addition to increased funding of £376m. Of that £376m, £120m represented additional funding from the UK Government through Barnett consequentials from additions to spending over the Summer and £256m were other sources of income – mostly through additional use the Scotland Reserve. This left the funding gap at £387m for this year.

Chart: Cumulative changes in the net funding position after successive announcements relative to the MTFS

Source: Scottish Government, FAI calculations

On the eve of the Autumn Statement, the DFM presented plans in the Debating Chamber and informed the Finance and Public Administration Committee of her plans to further reduce spending by £360m, which when combined with some £35m in additional funding already in place as a result of Main Estimates, meant a combined easing of pressures of around £395m on top of the ABR.

This means total reductions in spending are around £525m (compared to the pre-ABR baseline) in 2023-24, with Education and Skills (£165m), Transport, Net Zero and Just Transition (£145m) and NHS Recovery, Health and Social Care (£70m) the most severely affected portfolios. Though this was presented as £680m of in-year ‘savings’, actually £155m of those are additional UK Government income through Barnett consequentials.

However, the documentation alongside these £525m reductions in spending is not clear at all in terms of how much are genuine savings to be baselined into future years and how much are one-off reductions, and it requires some detective work and inference to arrive at estimates of true savings.

A few of the items are exceptional revenues (for example, out-of-court settlements that cannot be expected to be repeated). Others still are presented as ‘reprofiling’ of spending into future years. And we have no idea what impact items like the £10m savings on employability spending will do – the note in the DFM’s letter makes it sound like it should have no impact at all, which at first glance is slightly surprising.

As far as we can tell, baseline reductions probably amount to as much as £200m of the total £525m, or just below two-fifths – and that is assuming that the cut to the Scottish Funding Council by £100m (the single largest saving announced) is permanent.

But that still means £325m in deferred spending – which in practical terms translates as increasing spending in future years. But is that really credible when the Scottish Government was already facing such a large funding gap for next year?

There are two main considerations for these planned cuts, in particular the £360m itemised in the letter to the Committee but not included in the ABR. The first is that the Autumn Statement did allocate an additional £223m to Scotland in the current financial year as a result of consequentials from the NHS pay deal in England. This would mean that the required spending cuts to balance the budget in the Spring Budget Revision in February would be in the region of £125m, not the additional £360m claimed in the letter.

The second point is that these cuts may be presented as deferrals by the DFM, but they will more than likely need to be permanent unless substantial additional revenue is found. With a large funding gap already in the baseline for next year, the Scottish Government would either have to increase tax revenues or limit its spending further.

Of course, it is perfectly possible for the Government to choose to continue to fund some or even of all these deferred programmes into future years. But if it were to do so, and in the absence of higher revenues, other areas would have to be squeezed instead – making for a difficult set of trade-offs for the DFM.