Funding the Stage 1 Budget deal

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Last week, the Scottish Government reached a deal with the Greens (and 2 Lib Dems) at Stage 1 of the 2018-19 Budget Bill. Underpinning the deal was an additional £10.5 million for inter-island ferry services and £159.5 million for local government.

So where did the money come from to ‘boost’ spending and what might be the implications? For those of us who have seen a few Scottish budgets, the story sounds very familiar……

Sources of funding

We await exact details of the breakdown of the additional £170 million of spending.

But in a virtually identical scenario to 2017, only a minority of the additional spending announced after the Draft Budget was published appears to come from genuinely ‘new’ resources.

Last year, of the £220 million of new spending announced at Stage 1, only £30 million came from tax rises. The remainder came from money not spent the previous year (£125m), changes to the non-domestic rates pool (£60m) and a reduction in forecast borrowing costs (£6m).

This year, of the £170 million additional spending announced, around £55 million is from taxation, (and specifically the decision to set the Higher Rate threshold for income tax at a slightly lower than was proposed in the Draft Budget). The remainder of around £115m is from utilising “an element of the funding that is available in the Scotland Reserve and a level of additional underspend from 2017-18”.

The use of underspends and the Scotland Reserve

The use of underspends is not unusual. But is it genuinely new investment?

Back in August 2016, the Scottish Government announced a boost to capital spending of “£100 million of funding in this financial year”. This was largely funded through use of underspends from earlier years. So the government were able to announce this as more money in 2016/17.

This was followed in February 2017 by Stage 1 budget deal with the Greens which itself was boosted by £125m of underspend in 2016/17.

Now we’re told that some of the 2018 deal is actually from monies unspent in 2017/18.

You can see a pattern.

‘Moving’ money into one year but then underspending in that year, which in turn enables you to ‘move’ money again into another year, might make sense from a budgeting and political point of view, but the impact on the economy and the public services is not immediately obvious.

Moreover, the Draft Budget had already built in £158m in underspends from 2017-18. So further monies identified as being ‘un-spent’ suggests that this year’s budget is on track to be much lower than planned just 12 months ago.

The decision to change the profile in the Scotland Reserve is also interesting. Unlike the UK Government, the Scottish Government must operate a largely balanced budget (there are some exceptions for forecast error and capital spending).

To cope with this, and to protect spending when revenues come in below forecast, the government can deposit some revenue into a new Scotland Reserve.

Taking money out of the Reserve (or adding less in) to make up the £170 million again is not strictly speaking ‘new’ money. It’s simply money that is being shifted from savings to spend.

But if the Scottish Government does have limited resources in the Scotland Reserve, it will have fewer options available to it if its revenues do come in below forecast.

For example, if income tax revenues in 2017/18 turn out to be £100m below forecast, this £100m shortfall will be ‘reconciled’ in the Scottish Budget 2020/21 (there are long lags between income tax forecasts and outturn data). At that point, the Scottish Government effectively has three options available to it. It can cut spending in the 2020/21 budget by £100m relative to what it would otherwise have available to spend; it can borrow £100m and repay this (with interest) in future years; or it can use resources built up in the Scotland Reserve. But if the Scotland Reserve is effectively empty, the Scottish Government will only have two of these three options available to it.

It is presently unclear what proportion of the Stage 1 Budget deal is funded through underspends, and what proportion is funded through drawing down on the Scotland Reserve.

Conclusions

Parliamentary scrutiny of the Budget provides the parliament with an opportunity to influence the government’s tax and spending plans. In this respect, some will welcome the Stage 1 Budget deal as a positive example of parliamentary scrutiny in action.

On the other hand, the fact that the Stage 1 Budget is over £100m higher than the Draft Budget that parliament’s committees only recently scrutinised might also seem odd to some.

Whilst there is clearly a negotiating advantage in the government holding back some monies as part of their tactics to get the Budget Bill through, one can see MSPs from now on assuming that £100 million is a useful ballpark for the amount the government may have ready to hand to push through a deal.

Finally, it will be interesting to see where the money not spent in 2017/18 has come from. We know where the government has agreed to allocate this new funding – i.e. local government – but which portfolios have seen their spending in 2017/18 lower than anticipated?

February 6, 2018

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