Next Tuesday (25 August), the Scottish
Fiscal Commission will publish
a Fiscal Update', which will set out the
implications of economic and fiscal development since the last
Scottish Budget for the Scottish Government's
finances.
Extra funding from the UK government
and a bigger-than-assumed underspend of last year's final budget
will together provide around £790 million in additional funding
for day-to-day (resource) spending this year, 202627, compared
with initial expectations. This
could ease the immediate financial pressures facing the Scottish
Government, but the challenges facing the Finance Secretary Ms
Gilruth remain daunting.
First, most of the as-yet
unallocated funding is currently set to be one-off'. Using
it to boost budgets this year to help meet
recurring spending pressures would therefore be
risky: if the funding does prove to be one-off, money
to meet these pressures would need to be found from core,
recurring budgets next year and
beyond.
Second, current plans imply a
real-terms cut in day-to-day health and social care spending this
year, once funding for councils to pay for increases for social
care workers is stripped out. If the Scottish Government does
decide to use the as-yet unallocated funding to address this,
around two-thirds would be needed to deliver a real-terms
increase in health and social care spending that matches that
planned in England this year (2.2%). Delivering an increase in
line with the Scottish Government's medium-term projection of
spending needs growth (3.3%) would take nearly all of the
unallocated funding. There may therefore be little if any funding
for other priorities, such as the SNP's various manifesto
pledges.
Third is that the outlook for 202728
and beyond looks much tougher. If all currently unallocated
funding this year is in fact spent this year, funding for
day-to-day spending on public services may fall by 2% or more in
real terms next year. And while current forecasts suggest overall
funding will start to increase again in 202829, the small scale
of these forecast increases implies many services are likely to
face cuts in that year and beyond too.
It may therefore make sense to carry
forward at least some of the as-yet unallocated funding this year
into next year through the Scotland Reserve to slightly smooth
the financial path ahead even if that means more difficult
choices in the remainder of this year.
David Phillips, head of
devolved and local government finance at the Institute for Fiscal
Studies, said:
Next week's Fiscal Update will
confirm that the Scottish Government has more money to spend this
year than when the initial 202627 Scottish Budget was
set. This will ease financial pressures in the
short term and reduce the likelihood that some areas of
spending will need to be cut back in-year to top up
others such as the NHS as was seen in
202324.
But this is just the calm
before what looks like a particularly nasty Budget storm looming
for 202728. Funding for day-to-day
spending on public services currently looks set to fall
by nearly 2% in real terms next
year compared with this year and
the fall could be even greater than
this if, come the Budget, the
Scottish Fiscal Commission downgrades income tax
revenue forecasts in light of recent
disappointing news on past revenues. A cut in
overall public service spending of this scale
would almost certainly require much bigger
cuts to some services in order
to protect NHS spending. This could include
areas such as justice and local
government, for which the Scottish Spending
Review already pencilled in
2% real-terms cuts in
spending next year perhaps
presaging another year of bumper increases
in council
tax bills.
This financial crunch is in part
driven by UK government spending decisions which in
turn are a major driver of Scottish Government funding via the
Barnett formula. But as we and others have highlighted,
the Scottish Government's habit of using one-off or
temporary sources of funding to pay for
recurrent spending pressures has also contributed to
the long-term financial challenges that now loom and
which new Finance Secretary will
need to grapple with in her first Scottish
Budget.'
