So now we know: the UK Budget will be presented on 11 March, having been postponed from its original date of 6 November.
What are the implications for the Scottish budget?
It seems now inevitable that the Scottish budget will have to be published in some form before 11 March.
One option is to seek to finalise all elements of the budget before the UK budget. An alternative, (with the agreement of Parliament) would be to push some final elements of the legislative process back to the second half of March, potentially allowing for last minute adjustments.
Either scenario is undoubtedly sub-optimal for the Scottish Government, Parliament, and a range of other organisations, from local authorities to Revenue Scotland.
But the idea that the Scottish budget can be delayed in full until mid to late March seems unrealistic.
Publishing a Scottish budget before the UK budget does carry uncertainties and risks, however. But what options are open to the Scottish Government to try to mitigate these challenges?
How much difference will the UK budget make?
The outlook for the Scottish budget is strongly dependent on the policy decisions and forecasts made at the time of the UK budget. UK Government spending decisions affect the size of the block grant via the Barnett Formula, whilst OBR forecasts of UK tax revenues affect the ‘block grant adjustments’ – deductions to the block grant to account for devolved revenues, and additions to the block grant to account for newly transferred social security payments.
Estimates of all these parameters are already available. The key question is: supposing the Scottish Government published a budget in late January or early February based on the available information and data they have so far, to what extent are any of the key budget parameters likely to change subsequently on 11 March?
Here we highlight the different avenues through which the UK Budget may impact upon the Scottish Budget for 2020/21.
The risk of changes to the block grant
The UK Chancellor Sajid Javid set out his departmental spending plans for 2020/21 at the Spending Round last September.
With the General Election result, and return of Mr Javid to the post of Chancellor, it seems likely that the broad envelope of the Scottish block grant is known with a fair degree of certainty.
It is possible of course that some further spending increases are announced in March, and there will no doubt be changes to individual department budgets that will have an impact at the margin, but it seems much less likely that overall UK spending (and hence the block grant) ends up lower than was set out in September and underpinned by the Conservatives manifesto.
So there seems limited downside risk for the Scottish Government to manage here.
What about the block grant adjustments for tax?
The BGAs are deducted from the Scottish block grant to represent the revenues foregone by the UK Government from devolving tax streams to Scotland. The faster the growth in rUK revenues, the faster the growth of the BGAs.
Even if there are no policy changes by the UK Government at the forthcoming budget, the forecasts for the BGAs in 2020/21 that the OBR will publish in March 2020 will clearly differ from those it published in March 2019*.
In the absence of policy change, the change to the BGAs could actually be relatively small, as there has not been fundamental change to economic conditions and no major surprises on tax receipts.
But there is a risk that the forecast for the tax BGAs increases in March relative to latest forecasts. To mitigate against this risk, the Scottish Government could set out in a provisional Jan/Feb budget provision for a couple of hundred million pounds in the Scotland Reserve. If the March budget resulted in an increase in the size of the BGAs (compared to what the Scottish Government had budgeted for), these resources could be brought into play without affecting the announced spending plans (and if the resources were not required, they could be allocated to spending at a later stage of the budget process, or as part of Autumn budget revisions, or kept in the reserve for future years).
The risk of UK Government tax policy change
The announcement of UKG tax policy changes at Budget 2020 could have more material implications. An increase in rUK income tax rates would mean a higher BGA, and hence a bigger deduction from the block grant – the Scottish Government would have less resources available to it than it had thought, potentially substantially so. A reduction in rUK income tax rates (or an increase in thresholds) would have the opposite effect.
Of course, the possibility of increases in rUK income tax rates (or decreases in thresholds) for 2020/21 seems relatively unlikely given recent manifesto commitments. Increases to English Stamp Duty are perhaps more likely (a levy on overseas buyers has been mooted) but would have relatively minor impacts on the size of the Scottish budget.
Major income tax cuts are possible, but again seem unlikely given the constraints imposed by the Chancellor’s stated fiscal rule. rUK income tax cuts at the March budget would actually lead to additional resources for the Scottish budget (via a reduced BGA), so from a financial point of view this risk would not be especially difficult to manage, although politically it may pose larger challenges if it resulted in a wider than desired gap between Scottish and rUK tax policy.
How might this risk be mitigated?*
One option is for the Scottish Government and Parliament to agree a bespoke legislative process that straddles the 11 March. Budget scrutiny and stages 1 (and possibly 2) of the Budget Bill could take place prior to 11 March. But the Budget Bill at Stage 2/3 and the Scottish Rates Resolution would not happen until after 11 March. If the UK budget contained no major tax policy change and limited spending change, the legislative aspects of the Scottish budget could be finalised relatively painlessly.
If major tax policy change was announced on 11 March, the Scottish Government would still be able to respond by passing a rate resolution before the end of March, and whilst this would not be ideal, it would still be preferable to have had a reasonably robust period of scrutiny on the other aspects of the budget.
What about the Scottish tax forecasts?
Another piece in the jigsaw is the outlook for Scottish tax revenues. These are forecast by the Scottish Fiscal Commission.
The SFC will not be keen on the idea of producing its Scottish forecasts before the OBR has produced the UK economic and fiscal forecasts (as it would like to see the OBR’s machinations on the outlook for UK growth). But ultimately, there is no real reason to believe that a set of Scottish forecasts produced in mid March will be materially more reliable than some produced in late January – its not like data will be released in that time to drastically alter the outlook for Scottish or UK economic or revenue growth.
The further complication of social security
Almost £3.5bn of social security payments are being transferred to the Scottish budget in April 2020. The SFC will forecast Scottish spending on these payments, whilst the scale of increases to the block grant will depend on OBR forecasts of rUK spending on the same payments.
The risks here are similar to those on tax. In the absence of UKG policy change, the risks that there are material changes to the block grant adjustments between any provisional BGAs that are produced with existing data and the post UK Budget forecasts is fairly small. And the Scottish Government could mitigate these risks either by choosing to ‘lock-in’ existing forecasts until outturn expenditure data is available, or by making provision in its Jan/Feb budget for the possibility of revisions post March 11, via the Scotland Reserve.
Summary – options and risks
The Scottish Government, Parliament, and public bodies have been placed in a difficult position by the delay to the UK budget.
The Scottish budget is strongly dependent on the policy decisions and forecasts made at the time of the UK budget. It is possible to argue that the probability of major change to the parameters of the Scottish budget on 11 March is small, but nonetheless this does pose a risk. The challenge therefore is to design a process that does allow time for scrutiny and debate, but that also offers some flexibility to respond to unanticipated and material changes that occur on 11 March.
The Scottish Government now has broadly two options. It can produce its budget for late Jan/ early Feb with the aim of finalising the budget legislation by early March, regardless of what comes out of the UK budget. This approach prioritiss early confirmation of funding and tax policy for 2020/21. But it comes with the risk that subsequent policy changes by the UK Government make Scottish policy choices look unsustainable or unviable in some way – whilst the budgetary implications of (potentially larger) ‘reconciliations’ are merely pushed into the future.
The second option is to produce a somewhat more provisional budget in Jan/Feb, with the provision for some revision in March if that was required. Such an approach could provide a guaranteed minimum level of funding to local authorities before March, allowing them to set budgets and council tax rates in the time required by legislation.
In the case that the UK Budget had limited implications for the Scottish budget, the final legislative stages could proceed promptly after the 11 March (albeit with a truncated process for Royal Assent). The use of any budget contingencies made by the provisional budget could be negotiated between the parties at that point.
If the UK budget did contain policy changes with major implications for the Scottish budget, the process of negotiating and agreeing changes at that point would be challenging. But the scope for delaying the budget in its entirety until a week or so after 11 March is really not an option.
Summary – wider implications
It seems possible therefore, whilst still being subject to uncertainties and risks, that the Scottish Government could try to navigate through this unprecedented situation it finds itself in. It will require cooperation and support from Parliament.
Whilst a solution may be possible, it is clear that this has been poorly handled by the UK Government. One of the implications of fiscal devolution is that it must lead to changes in behaviours and responsibilities at all levels of government – both devolved and Westminster. This spirit of respect and responsibility underpins the Fiscal Framework. Either through naivety or design, the UK Government has left the devolved administrations – and most importantly, many of the organisations that depend upon public support – in an unenviable and undesirable situation.
Whilst the UK Government might argue that this year is exceptional, there is a danger that the reversion to a UK March budget this year might be seen to set a precedent for future years. But the Scottish fiscal framework and new budget process would be undermined by this outcome, creating a further source of constitutional tension.
* In fact the OBR updated its forecasts of rUK income tax revenues just prior to Christmas in order to inform the Welsh budget, so the latest available forecasts take recent data developments into account.
** Another approach is available although it is less flexible. The SG can request that whatever BGAs it uses to inform its Jan/Feb budget are ‘locked in’ until outturn data is available. The UK Government has stated that this would be viable. What this means is that the resources available to the Scottish Government are not affected by the updated forecasts or policy decisions of the UKG’s March 2020 budget.
There are two downsides with this approach. The first is that the impact of UKG tax policy decisions on the Scottish budget would merely be delayed until reconciliation at some point in future (which would be 2023/24 in the case of income tax), potentially leading to larger reconciliations at that point (although these reconciliations could be on the upside). The second downside is that this would not allow the Scottish Government to address any perceived mismatch in Scottish v rUK tax policy in 2020/21 that opened up following the UK budget.
The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.