Spending Review 2020 and Scotland

The 2020 Spending Review was underpinned by the anticipated ‘scary’ numbers on the UK economy and public finances.

The economy will shrink 11% this year, and recover only about half that ground next year. Unemployment is forecast to reach 7.5% next year – and potentially higher under a ‘no deal’ Brexit scenario.

The pandemic is anticipated to cause permanent damage – with the economy and earnings remaining lower even in five years’ time than was expected before the arrival of Covid.

The deficit is anticipated to reach 19% of GDP this year (close to £400 billion), and debt as a percentage of GDP will rise throughout the period to 2024/25. But there is some good news in that debt servicing costs will actually fall. The debate about what is ‘sustainable’ in the context of UK public finances will continue to run.

But what does it all mean for Scotland?

The Spending Review does not cover welfare, and many of the specific policy announcements apply to England only.

So, for example, the public pay policy announced by Sunak will not directly apply to NHS workers or teachers in Scotland – and it will be up to the Scottish Government to set pay policy in its budget in January.

But spending by the UK Government on reserved matters does generate ‘consequentials’ for the Scottish budget.

The two big questions from a Scottish perspective at the start of today were:

  • How much would Scotland’s ‘core’ block grant – to cover normal devolved public services – increase in 2021/22 compared to last year?; and
  • How much of the additional monies to mitigate the effects of Covid-19 during 20/21 would persist into next financial year?

In terms of ‘normal’ public services, the Spending Review shows Scotland’s core resource block grant increasing by £1.3bn, to £31.7bn, in 2021/22. This implies real terms increases of 3.5% per year between 19/20 and 21/22, and for the first time takes the Scottish budget above 2010/11 levels in real terms.

But the block grant to fund capital spending will fall by £0.3bn in 21/22. This is something of a puzzle given the wider real terms increases in capital spending announced by the UK – and will need further exploration.

What about the ongoing costs associated with Covid? At the moment, the Scottish budget is due to receive £1.3bn of additional resource consequentials in 21/22 as a result of the UK Government’s currently anticipated Covid-related spending interventions in England.

This figure should probably be thought of as a lower bound – further Covid related interventions may be required throughout next year, and the Spending Review does set aside some reserve funding to address this eventuality.

Nonetheless, in the context of £8.2bn Covid consequentials received by the Scottish Government in 2020/21, £1.3bn represents a big fall – and implies that the a big chunk of the Scottish Government’s temporary spending in 20/21, on business grants, NDR reliefs, support for transport providers, local authorities, the NHS, and so on – will need to be ‘unwound’ pretty quickly.

At the moment for example, the Spending Review works on the assumption that 100% business rates reliefs for businesses in tourism and hospitality sectors in England will cease completely in 2021/22. But the Spending Review notes that the UK Government is

‘considering options for further Covid-19 related support through business rates reliefs. In order to ensure that any decisions best meet the evolving challenges presented by Covid-19, the government will outline plans for 2021-22 reliefs in the New Year.’

The implication here is that, if some form of business rates reliefs for the hospitality sector does continue in England in 2021/22, additional consequentials will flow to the Scottish budget at that point.

The need to remain flexible in the face of huge ongoing uncertainty is inevitable – but the reasonable desire of the UK Government to be flexible is potentially at odds with the statement in the Spending Review that the settlement ‘provides the devolved administrations with the certainty they need to set their budgets for 2021-22’.

As part of its claim to ‘unleash the potential of the Union’ the Spending Review also announced policies in relation to City and Growth Deals in Scotland, and the Shared Prosperity Fund – the replacement for EU Structural Funds.

The announcement on ‘City and Growth Deals’ amounts to an acceleration of existing Deals covering Tay Cities, Borderlands, Moray and the Scottish Islands. Arguably this is more about soundbite than substance, with the schemes being implemented over 10 years rather than 15, but without any direct funding implications.

The Spending Review also provided limited further details of the new UK Shared Prosperity Fund (UKSPF) – the UK’s replacement for EU Structural Funds. Here, tensions are likely to emerge over both the levels of funding identified, and how funds will be allocated and prioritised.

In terms of overall funding levels, the Spending Review commits to ‘ramping up’ UKSPF funding to £1.5bn in future years to match EU funding receipts. Whilst £1.5bn might match recent EU funding receipts, it ignores UK Government match funding that might have previously been provided, and the fact that receipts tend to be lower than allocations. Moreover in 2021/22, funding amounts to just £220m to support local areas ‘pilot’ new approaches. .

There will also be concern about the way in which the UKSPF may operate in a devolved context. The scheme will apparently operate ‘UK wide, using the new financial assistance powers in the UK Internal Market Bill’. Whilst the fine details are awaited, the lack of explicit reference to the devolved governments will antagonise intergovernmental relations in area where tensions are already running high.

Authors

David leads the FAI's work on fiscal policy and the Scottish budget.

 

 

Director of the Fraser of Allander Institute.

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