Weekly update – PfG, interest rates, trade deals and fiscal stooshies

The fallout from the PfG has continued this week, with responses from opposition parties being debated in the Holyrood chamber. (ICYMI our on the day summary is here)

One issue that has emerged in the days since is around employability. There have been significant changes in the way employability services have been delivered in recent years. Centrally funded national programmes like Fair Start Scotland and Community Jobs Scotland were phased out with the funding devolved to local government to allow them to integrate these resources with their own established employability programmes – an initiative known as No-one Left Behind (NOLB).

This devolution of funding means that the Scottish Government has no direct delivery programmes that relate to helping people into work. So, when it comes to responding to emerging issues, such as concerns over rising economic inactivity rates, Ministers aren’t able to point to anything they are doing directly to help beyond sending more money to local authorities (in contrast to the UK Government who still operates schemes directly through DWP).

The PfG stated that the Scottish Government will be: “Reviewing the delivery of employability programmes to maximise their effectiveness and bring forward proposals ahead of the Budget 26-27, including consideration of a national model”. This may suggest that a further change of delivery model is being considered.

Local partners would point to many other ways that the Scottish Government could improve the employability system without upsetting the apple cart once again – for example, a recent report published by the Scottish Parliament Information Centre (SPICe) found that Scottish Government funding delays and the restrictions of annualised funding cycles affect the ability of local programmes to address the needs of marginalised groups, including disabled individuals and parents.

Bank of England cuts interest rates

The Bank of England announced on Thursday lunchtime that they are cutting interest rates from 4.5% to 4.25%. This had been widely expected by the markets – despite the expectations that inflation is likely to rise over the course of the year, the Bank feels that that will be temporary and will come back down to target by the end of next year.

The Monetary Policy Committee does have a range of views, though – the decision to cut by 0.25% was supported by 5 of the 9 members, with 2 supporting a larger cut of 0.5%, and 2 supporting no change to rates. This shows the variety of views amongst members of the MPC about what is the right next step for monetary policy.

Trade Deal – better than yesterday, but worse than the start of the year

The UK and US have set out a trade deal this week, the headlines from which are that US tariffs on UK cars have been reduced from 25% to 10%, and UK steel and aluminium tariffs have been abolished. While folks in these industries will be breathing a sigh of relief that tariffs on these goods have been lowered from the highs that the US administration wanted to put in, we have to remember that 10% tariffs on all other goods imports remain, and that these tariff levels are much higher than exporters enjoyed before 20^th January.

In exchange, the US have said they have won some access for US exports of beef and other products. Exactly how this will work is not clear, given there is no sign that the UK is prepared to lower standards in, for example, food standards.  So these non-tariff barriers are still likely to exist for many US producers.

Overall, though, the coverage in this trade agreement is fairly limited – it is a far cry from a full free trade agreement. Perhaps the political benefit is more important for the UK Government than the economic one, although that is not to dispute the benefit it will bring to car producers in the UK compared to the situation recently.

[If you are after a primer on tariffs – a word that has become ubiquitous in political discourse recently – see here, with the caveat that it was written a month ago before this deal was put in place.]

As well as the US, there has been a UK-India trade deal announced recently. This came rather out of the blue and has been overshadowed somewhat by the conflict in the region. This deal is modelled to have a relatively small impact on UK GDP, but is likely to make a difference particularly for prevalent Scottish industries like Scotch Whisky – see some research that we did in 2021 with the Scotch Whisky Association which quantified the impact that lowering of Indian tariffs could have on the Scottish economy (and also shows how long this was in the making!).

The Scottish Fiscal Commission is not amused

As we covered in our PfG reaction blog on Tuesday that the Government also revealed that afternoon that they were delaying the Medium-Term Financial Strategy (MTFS), the fiscal statement that is supposed to kick off the year-round budgeting process, and is accompanied by updated forecasts by the Scottish Fiscal Commission.

The delay was revealed in letters to the SFC and the Finance and Public Administration Committee. The SFC have now responded in terse terms, with SFC chair Graeme Roy making clear that the SFC will publish their forecasts as planned on 29^th May, as “publishing the core economic, tax and social security forecasts as planned on 29 May supports transparency and I see no reason for delay”.

This follows the displeasure that the SFC clearly felt about announcements in the budget (the mitigation of the two-child limit) coming too late for them to be costed as part of the budget. We have also recently covered the OBR’s criticism of the UK Government for undermining the agreed process between them.

Both the Scottish Government and the current UK Government in opposition were very critical of the previous UK Government which undermined the role of the OBR, and made much of the importance of independent fiscal institutions. Hopefully, we will see their actions being consistent with this position in future.