A tough year for Scotland’s finances

Tipped by some as a potential future first minister and popular within the SNP, the shock resignation of finance secretary Derek Mackay the night before the Scottish budget would undoubtedly have been the one standout event of the year within the finance portfolio, albeit not a positive one, were it not for all that has happened since with coronavirus.

An upset at any time, Mackay’s sudden downfall after it emerged he had been sending inappropriate messages to a teenager left his then junior ministerial colleague Kate Forbes with just hours to prepare, not only to deliver the budget speech but also to defend it from cross-questioning by opposition parties.

She was widely considered to have done a good job on the budget speech and was given the role permanently in a reshuffle that saw the economy separated from finance under Fiona Hyslop and Ben Macpherson moved sideways to become the minister for public finance and migration.

Forbes has gone on to steer the country’s finances through the coronavirus crisis, but that was not the only challenge in what has been a particularly tough year all round for finance.

Getting to the point of setting a budget at all had been more difficult than usual, with the UK Government delaying its budget from November to 11 March, the same day by which Scottish councils legally have to have finalised their budgets.

This left the Scottish Government with no choice but to set its budget (delayed from December) in February without knowing for sure what it would be receiving from the UK Government.

Announcing the February date, Mackay said: “The UK Government’s approach to the Scottish budget has been completely unacceptable and has shown a disregard for devolution and a lack of fiscal responsibility.

“The timing of the UK budget made it impossible for us to publish our own budget after the UK Government’s without drastically restricting the time for parliamentary scrutiny.”

It is still unclear why exactly the UK budget was so badly delayed, but it curtailed the normal period of budget scrutiny in Scotland.

As it was, the Scottish Greens agreed to back Scottish Government spending plans on the condition ministers provided up to £80m a year for young people across Scotland to get free bus travel from 2021, alongside an extra £95m for local authorities, £18m more for Police Scotland and £45m for low-carbon projects, of which £25m would go towards energy efficiency and tackling fuel poverty, £15m to councils for active travel and £5m on improving rail services.

But the was well below what councils were asking for.

According to COSLA, the local government settlement in the draft budget fell short to the tune of £300m for revenue and £130m in capital in real terms just to be level with the previous year, with £95m more revenue funding needed to cover new Scottish Government commitments plus over £200m for inflation.

The Greens’ deal got them the £95m but not the inflation or the capital funding.

Of course, all that changed again due to coronavirus.

Although £155m was allocated to councils through Barnett consequentials from UK Government funding and the Scottish Government has also promised additional funding, including £135m towards safe return to schools and teacher recruitment, councils are still facing extra costs that they are having to find money for.

COSLA estimates that even with the additional funding there will be a budget gap of over £500m in 2020-21, not including the costs of safe return to schools.

It has not been plain sailing for Scottish Government finances either. At the end of May Forbes revised the budget, allocating £4.01bn to the coronavirus emergency.

Most of the extra spending has been funded by a £3.5bn increase in the block grant Scotland receives from the UK Government, which is made up of Scotland’s share of UK COVID-19 spending as well as £112m of Barnett consequentials from the UK budget.

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Funding also came direct to businesses and individuals in Scotland from the UK Government’s furlough scheme and support for the self-employed.

But there was controversy when the Scottish Government decided to allocate business support in a different way to the UK Government.

Some of the extra £4.01bn of Scottish Government spending commitments is being offset by re-allocating £255m of planned expenditure from other parts of the budget and by an extra £972m of income from non-domestic rates, leaving a net increase of £2.78bn in the Scottish Government’s 2020-21 budget, up from £49.25bn to £52.03bn.

Forbes has called for the UK Government to create a £80bn stimulus package as well as a temporary extension of devolved financial powers to allow her to spend money in different ways, using capital underspend to supplement resource overspend, and borrow up to £500m more a year so that economic stimulus can be prioritised over debt reduction.

Some, but not all, of the Scottish Government’s wish list was included in Chancellor Rishi Sunak’s ‘Plan for Jobs’ mini-budget in July, which included a £2bn ‘kickstart scheme’ to create six-month work placements for young people aged 16-24, a reduction in VAT to five per cent for tourism and hospitality businesses and a £1,000 job retention bonus for employers who bring back employees from furlough and keep then on until January.

But the Office for Budget Responsibility has estimated that the £30bn plan will only cost £20bn, of which £8-10bn is not new spend but money that has been moved across from other planned projects – as is the whole of the £5.5bn infrastructure ‘new deal’ previously announced by the Prime Minister – so the Scottish Government will only see around £21m from it in Barnett consequentials.

The Institute for Fiscal Studies (IFS) criticised the lack of clarity.

IFS associate director David Phillips said: “While such reallocations may be perfectly sensible … official policy documents should be clear what is happening and where spending is expected to be lower than previously planned.

“Without such transparency, there is unnecessary confusion about the scale of fiscal support being provided to the economy.”

Forbes called it an “opportunity missed”.

She said: “It falls well short of delivering what is needed to boost the economy and protect jobs.

“There is no new capital spend, no extension to the furlough scheme for hard-hit sectors and no further support for households in financial difficulty. A half price meal out does not help those struggling to put food on the table.”

And with the UK economy having shrunk by nearly 20 per cent from March to May, many Scottish companies considering laying off staff and tax revenue undoubtedly having plummeted this year, there will be more tough times ahead financially.

While the worst could be past now health-wise, the financial challenges have probably only just begun.