Scottish Budget to increase but pressures on spending continue to rise: Fraser of Allander Scotland's Budget Report 2018

Institute calls for a frank debate about the future of public services and taxation in Scotland

  • Analysis shows that the outlook for the Scottish budget has improved since last year, but many portfolios will continue to face a tough financial squeeze.
  • Some of the uplift to the budget flowing from new consequentials at last month’s UK Budget are likely to be offset by weak income tax forecasts from the Scottish Fiscal Commission.
  • Overall the size of the Scottish budget is unlikely to be much different in 2019/20 compared to 2018/19. But the budget will still be lower by the end of the current parliamentary term than in 2010 – a cut of around 7% in per capita terms.
  • The report’s authors argue that with spending on the NHS likely to account for £1 of every £2 of the Scottish resource budget by the start of the next decade – and with ever growing pressures on health spending from an ageing population – an urgent debate is needed about future priorities for tax and spending in Scotland.
  • Further tweaks to income tax are possible, but the government will – in time – need to consider a wider range of options to raise revenue and/or take a more strategic look at areas of the public sector where cutbacks will have to be made, no matter how politically challenging.

The outlook for the Scottish budget over the remaining years of the parliament has improved since last year, following the announcement of significant Barnett Formula consequentials in last month’s UK Budget, according to the Fraser of Allander Institute.

However, the Institute also cautions that some of this improvement is likely to be offset by weaker income tax forecasts should the Scottish Fiscal Commission continue with their relatively pessimistic outlook for Scotland’s public finances.

Despite this, the Scottish budget on a like-for-like basis is now projected to rise by 3% between 2018/19 and the end of the parliament. But it will remain below its 2010/11 peak and, in per capita terms, it will be around 7% lower than it was at the start of the austerity period.

Professor Graeme Roy, Director of the Fraser of Allander Institute said, “Whilst the outlook for public spending in Scotland next year has improved compared to what Mr Mackay will have been planning for this time last year, for many parts of the public sector austerity will be far from over.”

“Public spending since 2010 has been focused on core areas of health, education and social care. This pattern is set to continue and whilst the outlook for unprotected areas has improved, further cuts cannot be avoided.”

The report’s authors find that – based on current plans of both the UK and Scottish Governments – health spending will account for almost 50% of the Scottish Government’s resource budget by the end of this parliament, if not before.

This trend is only likely to continue, with any further increases in health spending to meet projected growth in demand, only leading to an even tighter squeeze elsewhere.

Faced with such an outlook, the report considers options to help deliver greater sustainability to Scotland’s devolved public finances.

David Eiser, the report’s lead author added, “Over time, such incremental changes to spending priorities are amounting to a substantial change in the distribution of the Scottish budget.

“In the last two Scottish budgets, the Finance Secretary raised money from income tax. These changes have been progressive across the distribution, but opened up a tax differential with the rest of the UK that is increasingly visible for Scotland’s 14% highest income taxpayers.

“Income tax choices will be hotly debated again this year, with the Finance Secretary likely to come under pressure to at least partly close the income tax gap with the rest of the UK. But this would come with a big price tag. Matching the UK Higher Rate Threshold of £50,000 would cost around £280 million.

“The Finance Secretary does have other options to raise revenue, but may need to consider bolder ideas over the longer-term. Perhaps given the parliamentary arithmetic, 2019/20 will be the year we see steps towards genuine reform of local taxation.

“Austerity may be ending, but the Scottish Government will still face challenging decisions on revenue raising and the distribution of expenditure.”

Download the Scottish Budget Report 2018



Published: 8 November 2018

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