Budget 2020: Scottish implications

This was one of the most significant UK budgets in recent years – although it has very limited ‘Scottish specific’ implications.

What a difference a decade makes. Less than 10 years ago (in June 2010) George Osborne set out plans for a major fiscal consolidation which aimed to reduce public spending below 40% of GDP by 2015/16. The plans involved reducing the fiscal deficit to 1 per cent of GDP by 2015, as part of plans to prevent the debt to GDP ratio exceeding what was framed as an unsustainable level of 70%.

Today Rishi Sunak commended his expansionary budget which will see the deficit rise to 2.4% of GDP this year whilst the government now seems quite relaxed about a debt-to-GDP ratio stabilising closer to 80% than 70%. And these forecasts were largely made before major concerns about the impact of coronavirus materialised.

What’s changed? A decade of unprecedented weak growth has strengthened the case (made by many people back in 2010 of course) that public investment is a key part of boosting productivity – especially given ongoing uncertainty around the UK’s economic relationships with key trading partners – whilst the cost to the government of servicing its debt has continued its long trend downward. The response to the coronavirus plays a role too of course, but only in the immediate term, rather than in the general policy direction.

Together with last year’s Spending Round, UK fiscal policy has changed course significantly during the past couple of years.

How will all the changes announced today affect the Scottish budget?

This was first and foremost a budget about mitigating the economic impacts of the coronavirus, and many of the measures – particularly those on tax and welfare, together with the Bank of England’s announcements this morning – are UK-wide.

But there were some additional spending announcements that will generate ‘consequentials’ for the Scottish budget. Specifically, an additional £220m of resource spending and £410m capital spending for 2020/21. These spending increases come on top of the consequentials that were announced at last September’s Spending Round.

However, a large chunk of these additional consequentials have effectively already been allocated in the Scottish budget 2020/21. In setting out its 2020/21 spending plans (and in negotiating a budget deal with the Scottish Greens), the Scottish Government had worked on an assumption that the UK Budget would result in additional consequentials of around £500m. Exactly how much additional flexibility the Budget provides the Scottish Government on top of existing commitments is therefore unclear.

Complicating things further, the UK Government has set aside a £5bn COVID-19 Emergency Response Fund, which should in principle generate further consequentials for the Scottish budget if and when it is drawn down – but this remains a contingency at the moment.

The Chancellor announced no changes to UK income tax, and thus there are no significant Scottish budgetary effects on that front.

But changes to Non-Domestic Rates (business rates) in England announced by the Chancellor will not apply in Scotland. These include the temporary abolishment of business rates for some businesses in the retail, hospitality and leisure sectors.

Whilst this policy will not apply in Scotland, the Scottish Government will get additional funds through the opereration of the Barnett Formula as a result of the policy in England (the fall in English revenues effectively generates a consequential for the Scottish budget because implicitly it means a larger proportion of English local authorities’ spending is coming from central government, rather than from devolved business rates).

In principle, this means the Scottish Government could fund a similar business rates policy in Scotland without needing to cut spending or raise revenue elsewhere. But it’s unlikely to have much spare change for other things once it has done this, given that most of the new consequentials announced today are already baked-in to the Scottish Government’s spending plans.

We’ll wait to see if and when the Scottish Government will respond. It will clearly be under pressure to match cuts to business rates sooner rather than later.

Beyond that, the next major UK fiscal event is anticipated to be a Spending Review later this year. Whether it gets knocked off-course by the coronavirus– as last year’s was postponed by Brexit – remains to be seen.

Authors

The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.

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