Osbo’s traps for Sturgeon and Swinney

The Scottish government’s block grant allocation between 2015-16 and 2020-21 was set in the 25th November spending review delivered by the Chancellor of the Exchequer. Current spending will increase from £25.9 billion now, to £26.5 billion in 2019-20. This represents a 5% real cut (equivalent to £1.3 billion).

In contrast, due to the UK government’s decision to increase capital spending by £12 billion compared with its plans last July, Scotland’s capital budget will increase from £3 billion to £3.5 billion by 2020-21, an increase of around 10% in real terms.

The change in Scotland’s allocated grant is much in line with those in Wales and Northern Ireland. Having suffered more severely than Scotland in the last spending review, the real reduction in the grant to Wales is 4.5% on this occasion, while the cut in Northern Ireland’s budget is exactly the same as that in Scotland.

The devolved parliaments have been partly protected by the importance of health within their overall budgets and the decision to increase real health spending in England by 3.3%, which passes through the Barnett formula, boosting their budget allocations. Local government spending in England is to remain fixed in cash terms over the Parliament, representing a real cut of around 10%. This has a negative effect on Scotland’s grant since local government in England spending, like health, affects Scotland’s settlement through the Barnett formula.

Local authorities in England have been given the power to increase council tax by 2%, above the existing referendum threshold, provided that this funding is directed towards social care. The intention is that this measure will help avert the crisis in social care provision in England. However, this poses a significant challenge to the Scottish government as to whether it will follow suit. Council tax has been frozen in Scotland since 2007, but rising demand for social care may lead to some councils seeking the freedom to follow their counterparts south of the border.

Local authorities may also have to deal with some of the changes in welfare announced in the spending review. Instead of going ahead with the full set of cuts in tax credits that were announced last July, the Chancellor instead opted to retain the two child limit on child tax credit claims and to scrap the family element for new claimants. In addition, housing benefit and pension credit payments are to be stopped for people leaving the country for more than one month. These changes will perhaps have less media impact than the previously proposed tax credit cuts, but nevertheless will cause difficulties for many families.

 

David Eiser adds: What about the implications for Scotland? In funding terms, the Scottish Government will see a 5% real terms cut in its allocation for day-to-day resource spending, from £25.9 in 2015/16 to £24.6bn in 2020/21. There has been a slight tweak in the way that Scotland’s ‘Barnett consequentials’ are calculated, meaning that Scotland is no longer protected from cuts to Local Government spending in England to the same extent that it used to be.

Over the same period, the Scottish Government’s capital allocation will rise by 5% in real terms, from £3 to £3.2bn.

Buried deeply in the OBR forecasts is some slightly bad news for John Swinney. The OBR has reduced its forecast of revenue from the Land and Buildings Transactions Tax in Scotland, (equivalent to Stamp Duty, which is now devolved to Scotland). For 2015/16, the forecast for LBTT has been reduced from £540m to £397m. This is perhaps not huge in respect of the Scottish Government’s total budget, but it represents a fairly substantial fall in percentage terms.

Of course, given that LBTT is now devolved to Scotland, the Chancellor’s proposal to raise Stamp Duty on second homes and buy-to-let properties will not apply here. It remains to be seen whether (and how quickly) the Scottish Government follows the UK policy change.

Overall, the departmental spending plans contained within the Spending Review are higher than were forecast in the Summer Budget (and substantially higher than were implied by the Conservative Manifesto), funded partly through better economic news (higher growth and lower debt interest spending), and partly through some tax increases. Welfare cuts have been delayed rather than eliminated. The big question is whether the economic forecasts that underpin these plans will turn out to be overly optimistic.

This (amalgamated) blog appeared at the Centre for Constitutional Change site and is reproduced here with permission

David Eiser is a research fellow at Stirling University. His full blog can be read here

The authors also wrote this IFS study on Scotland’s new  fiscal framework

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