This blog was first published in The Herald newspaper on 14 January 2022.
By Graeme Roy, Professor of Economics at the Adam Smith Business School, University of Glasgow
The news over the spread of the omicron variant cast a shadow over last month’s launch of the Scottish Government’s Draft Budget. It’s not hard to feel sympathy for policymakers as they try to balance pushing on with new policy agendas while having to deal with the ongoing challenges of the pandemic.
As I wrote in an article last year, one frustration with the commentary around Budget day can be the focus on short-term headline-grabbing announcements. Are people paying more tax than last year? Is the health/education/local government budget going up or down? Often though, it is what the Budget says about the long-term that is most important.
As part of the still relatively new structure that now supports the Scottish Budget, an independent forecast is provided by the Scottish Fiscal Commission of key elements of Holyrood’s fiscal responsibilities.
Its latest forecasts provide several insights into the outlook for Scotland’s Budget over the next few years. Most eye-catching was that they now forecast that next year Scotland’s “net income tax position” (that is the difference between devolved income tax revenues and the all-important block grant adjustment) is likely to be negative. To the tune of around £200 million. In other words, the Scottish Budget is forecast to be lower than it would have been if we had not gone ahead with the tax devolution reforms of the Smith Commission – and this is even despite the Government seeking to raise around £500m in additional revenues from taxpayers in Scotland.
The reason for this is that, in recent times, earnings and employment have grown more slowly in Scotland compared to the UK. Several factors lie behind this, from a more challenging demographic position through to weaker activity from sectors tied to the North Sea. The continued pace of growth in London, relative to all other parts of the UK, also puts Scotland’s tax revenues at a relative disadvantage.
The “risk and reward” promised by the Smith Commission seems to be favouring the former rather than the latter at the moment. Unfortunately, few of these risks are entirely within the gift of the Scottish Government to mitigate.
On top of this, the SFC’s forecasts also predict that the amount of funding the Scottish Government is committing to its new social security powers is running ahead of the funding received by Westminster. On the one hand, this isn’t surprising as it reflects the distinct policy choices of the Scottish Government to reform aspects of the social security system including new initiatives such as the Child Payment. All these reforms, however, cost money.
One implication is that, with tight budgets and with little sign of additional net tax revenues on the horizon, paying for these initiatives means that the money must be found from elsewhere in the Budget. This “opportunity cost” is not something often discussed in political debates, but it is important for Government (and for opposition parties too) to consider the knock-on impact of prioritising some public services over others.
With these pressures in mind, it is welcome that the Government will be holding a spending review in the spring. Spending reviews are an important opportunity for any government to take stock of the impact and sustainability of current spending priorities. It is an opportunity, too, for policymakers to seek out where efficiencies can be found.
This process isn’t likely to be easy, and the findings of any spending review always leads to “winners” and “losers”. But if done effectively, with all options on the table, it can make the country better prepared to support public services over the long term, even if we do continue to see little reward from our new tax powers.