{"id":16845,"date":"2025-02-04T17:32:43","date_gmt":"2025-02-04T17:32:43","guid":{"rendered":"https:\/\/sceptical.scot\/staging\/?p=16845"},"modified":"2025-04-17T11:15:16","modified_gmt":"2025-04-17T11:15:16","slug":"fiscal-sustainability-and-the-scottish-budget","status":"publish","type":"post","link":"https:\/\/sceptical.scot\/staging\/2025\/02\/fiscal-sustainability-and-the-scottish-budget\/","title":{"rendered":"Fiscal sustainability and the Scottish budget"},"content":{"rendered":"\n

When the draft Scottish Budget was presented to Parliament in December, we raised some concerns<\/a> about the extent to which lessons about financial planning from previous years had been learnt.<\/strong><\/p>\n

In particular, there was the decision not to budget for the likely shortfall in funding for the Employers National Insurance change, and the announcement of a commitment to mitigate the two-child limit<\/a> on certain benefits from 2026-27.<\/p>\n

The latter decision was taken too late to be included in the Scottish Fiscal Commission\u2019s (SFC) forecasts alongside the budget; the SFC published their modelling on the two-child limit <\/a>separately in January. Separately from this analysis, the First Minister has said that they will introduce it (mitigation) as early as possible in the 2025-26 financial year \u2013 even though there is no money budgeted for this in 2025-26.<\/p>\n

The two-child limit<\/h2>\n

The two-child limit is a policy introduced in 2017 that affects households in receipt of Universal Credit or Child Tax Credit with more than two children. These households do not receive additional benefit amounts for the third or further children.<\/p>\n

In this case, mitigation means that Scottish Government will top up benefit payments to replace the amount households would qualify for in the absence of the two-child limit. Households with three or more children receiving Universal Credit or Child Tax Credit will receive additional benefits for all their children regardless of their age, not just the first two.<\/p>\n

The two-child limit applies only to children born after 2017. Department for Work and Pensions (DWP) statistics show 27,000 households in Scotland<\/a> were subject to the limit as of April 2024. More families will be subject to the policy as time goes on.<\/p>\n

Our modelling shows that about 20,000 children would be kept out of poverty by mitigating the two-child limit in 2026-27, slightly higher than the Scottish Government estimate<\/a> of 15,000. The reduction would mean a 2 percentage point decrease in the relative child poverty rate.<\/strong><\/p>\n

We estimate a cost of \u00a3165 million in 2026-27, similar to the SFC\u2019s estimate<\/a> of \u00a3155 million.<\/strong> Variation in estimates is to be expected given different methods, and demonstrates a consensus around a ballpark figure. The SFC further estimates that the cost will rise to \u00a3198 million by 2029-30 as more families fall subject to the two-child limit.<\/strong><\/p>\n

Decisions about how mitigation will be implemented, some of which sit with the DWP, may impact both the cost and impact of the policy. These include whether or not the mitigation payments will interact with the UC taper rate or benefit cap.<\/p>\n

To be clear, mitigation of the two-child limit is likely to be an effective way of making progress towards meeting Scotland\u2019s 2030 child poverty targets, and it has been welcomed by many campaigning organisations. However, introducing measures like this without due consideration of their cost, funding, and risks (including not involving the Scottish Fiscal Commission) is not the way this important announcement should have come about.<\/strong><\/p>\n

Devolved choices<\/h2>\n

The choices that the Scottish Government has made on social security mean both that social security is taking up an increasing proportion of the Budget, and that it significantly outstrips the block grant provided by the UK Government.<\/p>\n

In and of itself, these so-called \u201cspending gaps\u201d, or differences in what is received from the UK Government block grant vs. what is spent in each area, are not cause for concern.<\/p>\n

The devolution of certain powers means that different choices will be made in Scotland compared to the rest of the UK. Spending on areas like social security, social care, higher education and housing is higher per person than in the rest of the UK, reflecting different priorities.<\/p>\n

However, these issues are well-worth inclusion in a conversation about fiscal sustainability. It\u2019s not the size of these spending gaps that matters most, but the risks attached to the spend.<\/p>\n

Social security spending linked to means-tested benefits does come with additional risks, as it is harder to predict demand and plan accordingly. For example, the pandemic led to an uptick in claims for Universal Credit as incomes fell. If mitigation of the two-child limit had been in place at that time, the Scottish Government would have needed to find additional money to pay for it.<\/p>\n

These issues invite a discussion about the type of social security spend the Scottish Government is taking on, and whether Scotland has the appropriate borrowing powers to manage the risk from means tested benefits such as this mitigation and the Scottish Child Payment.<\/strong><\/p>\n

Delivering fiscal sustainability<\/h2>\n

The Auditor General has previously called for a changed approach to public spending decisions, saying in November:<\/a><\/p>\n

\n

\u00a0\u201cThe Scottish Government continue to take short-term decisions, reacting to events rather than making fundamental changes\u2026 This approach has so far been effective in balancing the budget, but risks disrupting services at short notice and restricting progress towards better long-term outcomes for people.\u201d<\/p>\n<\/blockquote>\n

They have also pointed out that decisions such as last year\u2019s multi-year public pay deal require the Scottish Government to draw on one-off sources of funding.<\/p>\n

This short-term approach is in part driven by the limited borrowing powers of the Scottish Government. The budget must balance year-on-year, so the decisions taken must respond very quickly to any change in the fiscal environment. As we covered on Friday<\/a>, in 2024-25, the Scottish Government drew on the ScotWind licencing money throughout the year to varying degrees, and have just last week confirmed that they have been able to return that money due to funding uplifts through Barnett. This is not the purpose the fund was designed for; using it in this way demonstrates an issue with the flexibility open to the Scottish Government.<\/p>\n

The Scottish Government announced in the Autumn that they would publish a Fiscal Sustainability Delivery Plan alongside the Medium-Term Financial Strategy (MTFS due in May). This should presumably seek to deal with the challenges set out by Audit Scotland above. The hope is that the delivery plan is more effective than previous iterations of the MTFS, which were initially intended to provide similar information on fiscal sustainability and medium-term planning.<\/p>\n

Meeting the child poverty targets<\/h2>\n

In March, new statistics will be released telling us whether or not the interim child poverty targets were met in 2023-24. As we\u2019ve written previously<\/a>, in addition to current measures like the Scottish Child Payment, transformative policies will be needed to meet the final targets by 2030-31.<\/p>\n

The mitigation of the two-child limit shows the scale of the spend required to make a difference to child poverty, but this measure alone will not be enough to meet the targets. Delivering on the legal commitments to reducing child poverty will require further significant spend by the Scottish Government. Ensuring it is appropriately planned, evidenced, and delivered in a fiscally sustainable way will be central to successfully achieving these targets.<\/strong><\/p>\n

Authors: Mairi Spowage, Emma Congreve and Hannah Rudolph. First published by the Fraser of Allander Institute<\/a><\/em><\/p>\n

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The draft Scottish Budget raised concerns regarding financial planning, particularly about the Funding shortfall for Employer National Insurance and the late commitment to mitigate the two-child limit on benefits. 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