What to watch out for in this year’s Scottish budget

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This year will see the first pre-Christmas budget since 2018, triggering a busy period of parliamentary scrutiny on either side of Christmas.

Cabinet Secretary for Finance and Economics Kate Forbes is coming to Parliament with gifts this year.

Not only will it present the Scottish Government’s spending and taxation plans for the next year, but it will also publish an Expenditure Review Framework document, a Medium Term Financial Strategy (MTFS) and policy papers on public sector wages, equality and a climate assessment.

The Scottish Tax Commission (SFC) is also set to release its economic and fiscal forecast, setting out forecasts for decentralized tax revenue, social security spending and economic growth.

Ross Burnside, a senior researcher in the Financial Review Unit at the Scottish Parliament’s Information Center, selected some of the key things to look for during Forbes’ statement on Thursday.

The size of the overall expenditure envelope

The UK’s Autumn Budget and Spending Review in October showed the unadjusted Scottish block grant from the Treasury until 2024-25.

This showed that the Scottish budget is expected to grow quite significantly next year – by almost 8% after adjusting for inflation – before leveling off in subsequent years.

This rush in spending during the spending review period is perhaps understandable as we come out of the shock of the pandemic.

However, the block grant from the Treasury only tells part of the story as to the size of the Scottish budget, as the block grant is now adjusted to take into account the devolution of tax and social security powers via the Scotland Act 2016 .

These Global Grant Adjustments (BGAs) are based on forecasts from the Office for Budget Responsibility (OBR) and deduct resources from the Scottish Budget for devolved tax revenue foregone by the UK Government.

The fiscal forecasts devolved to the SFC are then added to the budget.

The key thing to watch in terms of the size of the Scottish budget will be the extent to which SFC forecasts exceed BGAs. If the SFC’s fiscal forecast exceeds the BGA, the Scottish budget is doing better than it would have been without the newly delegated powers.

Given that Scottish taxpayers pay more income tax overall than south of the border, it seems likely that the SFC forecast will exceed the BGA. However, the Scottish government has also introduced changes in social security benefits which will affect the net position.

Economic outlook

It is likely that the SFC’s forecast will be much more optimistic than in August, in large part due to the openness of the economy and the roll-out of the vaccination program.

However, significant economic risks loom on the horizon, first and foremost the new Omicron variant – although the SFC has “shut down” its forecasts before its recent detection.

This means that the economic outlook will not contain any judgments from the SFC as to a possible economic impact of the new variant taking root in the UK.

Another risk to the economy comes from rising inflation, which the OBR expects to increase to 4.4% next year, a position that has worsened since the release of these forecasts, and which many – including the Bank of England – believe it will hit 5% next year.

Rising inflation means that a rise in interest rates cannot be ruled out.

Although the Bank of England voted 7-2 for no change at its last meeting, markets still expect rates to rise. If that were to happen, it could fuel public spending via the increased costs to the UK government resulting from their large borrowing to fight the pandemic.

This would mean less is available for public spending, with potential effects on Scotland’s budget, depending on how the UK government responds to any increase in borrowing costs.

Fiscal policy decisions

Some policy decisions have already been announced in advance, such as the Scottish Child Payment doubling to £ 20 in April, at an estimated additional cost of around £ 90million in 2022-2023.

But it remains to be seen whether the Scottish government will replicate the policies announced in the UK budget.

Chancellor Rishi Sunak announced changes to commercial rates, including a freeze on the pound rate used to bill a property’s commercial rates and cutting the rate bill in half for the majority of retail properties , Hospitality and Leisure in England in 2022-23, up to a cash limit of £ 110,000.

It will be up to Forbes to decide whether it wants to replicate these policies and keep what it claims to be “the UK’s most generous non-domestic tariff regime.”

Financing of local communities

In terms of local government budgets, one of the key issues of recent times has been the lack of any certainty of multi-year funding, with negative implications for third sector organizations.

The Scottish government has cited the UK government’s lack of multi-year spending reviews as the main obstacle in place to enforcing regulations beyond the next fiscal year.

With the publication by Westminster of a three-year spending review in October, including Scottish Treasury spending limits until 2024-25, that hurdle has been removed.

The Scottish government has said there will be no Scottish spending review at this stage, but a consultation framework document.

The Green Party has called for greater financial security for local government during budget debates in recent years. With two green ministers now in place, the budget documentation might at least provide indicative multi-year allocations to local authorities.

The timetable for parliamentary scrutiny

With the deal between the SNP and the Greens providing a majority in parliament, the budget is more or less certain to pass.

It is not clear whether the usual bilateral meetings between the cabinet secretary and the various party finance spokespersons will take place.

The times for the various plenary debates on the budget and the vote on the tax rate resolution have not yet been formally agreed, but it is likely that a debate on the pre-budget committee reports will take place at the end of January, followed by quickly through the debate on stage 1 on the finance bill.

This is when PSMs and committees have the opportunity to submit alternative revenue and expenditure proposals through reasoned amendments to the motion on the general principles of the bill.

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