The economic blame game: Are Scotland's fiscal woes really all Westminster's fault?

There was no shortage of SNP politicking in the run up to Chancellor Jeremy Hunt’s Autumn Statement last week.

As Hunt warned of “eye-watering” tax rises that we now know equate to £25bn and spending cuts that will total £30bn, Scotland’s ruling party issued line after line proclaiming that Scotland is “paying the price for catastrophic Tory policies” and that “Tory incompetence is hitting families in the pocket”.

First Minister Nicola Sturgeon even took to the pages of The Financial Times to declare in an op-ed that it is against the backdrop of Westminster’s economic stewardship that the Scottish Government is “renewing its case for independence”.

It is certainly true that the short-lived Liz Truss government was disastrous for the UK as a whole, with her Chancellor Kwasi Kwarteng’s mini-Budget wreaking havoc on an already fragile economy. 

But Scotland’s own finance minister, Kate Forbes, was warning long before the Truss era – long before inflation reached its current 41-year high of 11.1 per cent and long before nurses, teachers and ambulance drivers were among those voting to strike – that difficult times lay ahead. When she delivered her four-year spending review in May, Forbes, who is now on maternity leave, said many real-terms cuts would have to be made, with funding for the police, fire service and justice department set to be frozen while the public sector wage bill would be held steady in the medium term at 2022-23 levels. 

Her temporary replacement, Deputy First Minster John Swinney, has announced more than £1bn of cuts since, with money slashed from a raft of departmental budgets to fund pay deals that have so far been rejected as too small. In spite of Hunt saying an additional £1.5bn in consequentials will come to Scotland over the next two years, more cuts are expected to be announced when Swinney unveils his budget for the coming year on 15 December.

Like Sturgeon, Forbes and Swinney hold Westminster responsible for all the Scottish Government’s economic woes and the latter gave short shrift to the notion Hunt’s extra cash is any kind of boon for Scotland.

Mairi Spowage, director of the University of Strathclyde’s Fraser of Allander Institute, says it is not inaccurate for the Scottish Government to take such a stance given that its budget is “still largely determined by the Barnett block grant”, though she adds that “the difference between that and the revenues raised is important”. Quantifying that is no easy task, though. The Scottish Government has made some use of its own tax-raising powers since 2018, but Spowage says that making sense of where it gets its money from – and how it spends it – is proving difficult.

“We’re trying to analyse all the budgetary announcements coming out but we’re having difficulty trying to understand how everything hangs together,” she says. “They are saying they’re being transparent about where they get the money from but people like us who are analysing it are a bit confused.”

Finance minister Kate Forbes and her maternity stand-in John Swinney have both said their fiscal plans are determined by Westminster

Philip Whyte, director of economic think tank IPPR Scotland, agrees that there is some truth in Holyrood’s claim that Westminster is to blame for its constrained budgets, noting that in the current situation “absolutely the first finger needs to be pointed at the UK Government” for peddling the idea that there is a £55bn ‘fiscal black hole’ that its tax rises and spending cuts must urgently close. While there is a significant gap – worsened by soaring inflation – between the government’s income and expenditure projections, the £55bn figure is based on uncertain economic forecasts and a debt target that could easily be changed. Going this far, this fast is a purely political choice, and one that has a knock-on effect on Scotland’s spending power due to the block grant it receives.

But the Christie Commission, which examined how public services in Scotland could and should be delivered, warned a decade ago that the Scottish Government was spending beyond its means, with Whyte stressing that the administration has had ample time before now to put itself in a stronger position from a revenue-raising point of view.

“We have seen attempts to take a more progressive approach to tax and that’s good, but there’s a question about whether it can go further – we could have seen more innovative uses of the tax powers it has,” Whyte says. “I would hope we’re reaching a point where there’s a recognition that it’s time for council tax to go and that it’s done in a way that means those on the lowest incomes are not being penalised. Local taxes in terms of wealth taxes could have been looked at too. The current economic circumstances show that if you keep the status quo and tinker around the margins you’re not tapping into your full potential.”

The major problem Scotland is facing at this particular moment is that the public sector in the country is huge, accounting for around a fifth of the workforce, meaning funding unbudgeted pay deals in the absence of additional cash requires that tinkering to happen at an already-stretched spending level. The savings Swinney announced in September include slashing £42.7m from the education budget, taking £33m of ringfenced rural funding that will be “returned in future years”, and cutting the amount government spends on concessionary travel by £37.6m.

This month the government went further still, finding £400m of savings in health and social care, with GP services, mental health provision and the Scottish Trauma Network all impacted. 

The government has warned strike-ready workers that there is no money left to be found and no more cuts it can make. Spowage says that whether that actually proves to be true or not is moot considering the alternative is a winter of discontent during which all frontline services are crippled. But reprioritising cash commitments on a short-term basis is a far from satisfactory solution to a problem that the Auditor General for Scotland, Stephen Boyle, stresses was brewing long before the current economic crisis took hold. 

Noting that soaring inflation has forced the Scottish Government to make short-term decisions it hadn’t bargained for in the current financial year while Hunt’s decisions last week will largely determine what it is able to set out for the next financial year, Boyle says the Holyrood administration would have been far more prepared for the storm if it had better managed its spending and implemented the much-needed public sector reforms Campbell Christie recommended in 2011.

“The Scottish Government, like all governments, has to deal with the immediate challenges that external events bring,” he says. “But to improve lives and protect services in the long run, these challenges cannot distract from the need for broad reform of the public sector. Balancing short and long-term demands is always a difficult task, but the significant financial pressures on Scotland’s public bodies have been growing for several years, and there is now an urgent case for reform of how services are delivered.”  

In a briefing paper published last week, Audit Scotland said that reforming public services “means changing how services are delivered to people in a way that more effectively meets both their needs and the government’s policy aspirations”. Despite the government showing good intentions in the wake of the Christie report, Boyle says Audit Scotland’s work “consistently shows a major implementation gap between policy ambitions and delivery on the ground”.

The Scottish Government shouldn’t start from the position of having to do all things for all people only to roll back on them, because that just means everything goes underfunded.”

For Whyte, having been forced to so publicly reprioritise so much in-year funding over the last few months – something that under normal circumstances gets done on a smaller scale and behind closed doors – the Scottish Government must use the time between now and December to make bold plans to ensure that doesn’t happen again. Not only would that protect it from accusations of fiscal mismanagement, it would help close that implementation gap too.

“There is an opportunity now to really focus on what the big challenges and big priorities that are facing Scotland are,” he says. “I don’t think any government wants to make a big budget announcement in December and then 10 months later have to roll back from that. There’s a risk that this focuses minds to take too cautious an approach, so some kind of medium has to be found. My hope is that it focuses minds on the big challenges of net zero and child poverty and social services, that they say ‘what is the scale of the resources required to tackle these issues’ and start [making other funding decisions] from there. They shouldn’t start from the position of having to do all things for all people only to roll back on them, because that just means everything goes underfunded.”

With rising taxes and swingeing spending cuts, Hunt has set the scene for the Scottish Government’s budget on 15 December, but it is up to the Holyrood administration to decide what it wants to deliver in the longer term. Times are tough and the Chancellor’s announcement certainly hasn’t made things any easier, but blaming Westminster for all Scotland’s economic problems doesn’t really wash – nor is it the rallying cry some nationalists want to believe it is.