Published:

Scottish Economy

Weekly update: A relatively quiet week in Scotland. Elsewhere, not so much!

Twas the first week of recess and all was quiet in Scottish politics, but that has been more than made up by developments south of the border. It has been a week in politics that few will forget. What this will all mean for UK economic policy is difficult to fathom at the moment.

We were expecting a joint PM-Chancellor speech on the economy in the coming weeks, disagreements over which appear to have partly been the reason (at least the stated reason) for the former chancellor Rishi Sunak’s departure. It seems unlikely that we will see any major policy announcements to deal with the cost of living crisis before the next Prime Minister is in office, presumably in early autumn.

Another, substantial, increase in the energy price cap is due in October and a lot of households (and indeed businesses who do not have the temporary protection of the energy price cap) will be very concerned about how to cope with energy bills for the coming winter. We expect this issue to be a key topic in the upcoming leadership contest.

One piece of news that was not related to resignations was the PM’s refusal to grant another referendum on Scottish independence. It is difficult to imagine other leadership candidates taking a different view on this, and therefore we will await the view of the Supreme Court in due course.

Budget head-scratching continues

Large political events aside, the pressure on public finances on the cost of living continue. A leaked document set out the scale of decisions that the Scottish Government may be forced to contend with to balance the budget in the face of pressures such as increases in public sector pay. This type of contingency planning is what we’d expect to be happening, and we shouldn’t read too much into some of the proposals that were made in the briefing.

However, it has been clear for a while that the pressures on the devolved Scottish budget are extremely acute. The UK government has so far refused to increase the departmental spending plans it set out last autumn, when the outlook for inflation was more benign. This means that the Scottish government’s block grant looks less generous in real terms than it did just a few months ago, and in this context, some of the assumptions on public sector pay in the resource spending review looked difficult to achieve. We will need to wait until the fiscal events in the autumn to see how this all pans out.

New National Care Service estimated spend only part of the picture

As well as existing policy, the Scottish Government will need to find money for new initiatives. Just before recess, the Scottish Government introduced its National Care Service Bill to the Scottish Parliament. This set out a framework for the establishment of a new way of organising social care, but included very little in the way of additional funding for frontline services. Even so, the financial memorandum estimates costs of £24-36m this financial year, rising to £63-95 next year and reaching £241-527m by the time the National Care Service is hoped to be fully up and running by 2026-27.

These are costs above and beyond what is currently spent on administering social care in Scotland, and although efficiencies will be hoped for, there will be substantial outlay for the Scottish Government to manage if this goes ahead as planned. The Resource Spending Review mentioned £840m available for social care over the course of the parliament, although uncertainty remains over which budget line this had been allocated to, and indeed whether or not some of it has already been spent. Either way, a lot of this money it seems could be swallowed up in back-office operations before any improvements to the care people receive even enters the frame.

This is just one of the areas likely to occupy thinking of the parliamentary committees in the Scottish Parliament as they go into their pre-budget scrutiny phase in the Autumn.

Fiscal framework fun begins again

Another recent announcement was that the review of the Scottish fiscal framework has finally got underway. The first stage in this process is the commissioning – jointly by the Scottish and UK governments – of an independent report to evaluate the block grant adjustment funding arrangements for tax and welfare devolution. This rather technical report is anticipated to be completed by autumn. Once this is complete, the wider intergovernmental review of the fiscal framework more generally should kick-off in earnest. This will cover a range of issues, from the appropriateness of current Scottish government borrowing powers, to the scope for further fiscal devolution in some areas.

There are many more weeks of recess to go. It is probably unlikely that they will all be as eventful as this one… but, as we are fond of saying, forecasting is pretty difficult right now!

Authors

Emma is a Knowledge Exchange Fellow at the Fraser of Allander Institute

David is Senior Knowledge Exchange Fellow at the Fraser of Allander Institute

 

 

Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.