Fraser of Allander's Scotland's Budget Report 2019

Scotland’s Budget outlook more positive but uncertainty remains

The latest Scotland’s Budget Report 2019 has been published (November 12) by the Fraser of Allander Institute, the independent economic research unit at the University of Strathclyde Business School.

The new analysis shows that the Scottish Government’s resource budget in the past three years has evolved more healthily than was anticipated at the start of the parliamentary term in 2016, due to both UK government spending increases and Scottish government tax decisions.

Following announcements of further spending increases this year – and via the Barnett Formula – the outlook for Scotland’s resource block grant from Westminster has improved even further this year and next.  Real terms increases of around 2% per annum are anticipated for the next two years, the first time period of consistent real terms increases since the start of the ‘austerity’ period.

But two issues, both relating to devolved income tax, will offset some of this increase:

  • The block grant in each of the next two years will be reduced to take account of the fact that Scottish income tax revenues in 2017/18 and 2018/19 turned out to be lower than forecast. The Scottish Government will be required to repay £200m in 2020/21 and potentially as much as £600m in 2021/22.
  • On the basis of the latest official forecasts, Scottish income tax revenues are on track to be disappointing relative to the rest of the UK.  As a result, despite the block grant from Westminster growing by 2.1% in 2020/21, the resources available to the Scottish Government may still only grow by less than 1% in real terms.

All this comes at a time of heightened political and economic uncertainty. Financial responsibility for £3.5bn of social security spending will transfer to the Scottish budget in April 2020, bringing new pressures and risks.

The outlook for the Scottish budget has improved over the last few years, but uncertainties remain about the level of resources Derek Mackay will have to spend next year, according to the report.

The FAI published its annual Scotland’s Budget Report yestarday at an event in Edinburgh at the National Museum of Scotland.

Alongside the FAI analysis, Paul Johnson, Director of the Institute for Fiscal Studies, Andy King from the Office for Budget Responsibility and Caroline Gardner, Scotland’s Auditor General, also spoke at the event. All discussed the current fiscal environment which is made all the more uncertain by the General Election and the flurry of announcements by all political parties on future spending commitments.

David Eiser, the Head of Fiscal Analysis at the Fraser of Allander Institute, said, “In recent weeks, UK politicians have been falling over themselves to announce new spending increases which – via the Barnett Formula - will boost the Scottish Budget this year and next.

“The outlook that Mr MacKay faces in 2020/21 is therefore much more positive than first thought. However, the risks from tax devolution are beginning to feed through to the Scottish Budget. As a result, some of this boost to spending will be offset by weaker devolved tax revenues – both relative to forecast and the UK as a whole.”

The report also outlines how Scottish government spending has evolved in this parliament, with the health budget increasing over 5% in real terms since 2016/17. Local Government has seen the biggest negative impact with real terms spending cuts of 2% since 2016/17.

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Download the full Scotland's Budget Report 2019.

 

Published: 13 November 2019



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