Devolution ‘could lead to Scottish public spending squeeze’

14 Sep 16

Scottish public spending could face a severe squeeze over the next few years as the transfer of fiscal powers leaves the public finances markedly more dependent on the uncertain performance of the Scottish economy, according to a respected economic forecaster.

In the first of what will be an annual report ahead of Scottish budgets, Strathclyde University’s Fraser of Allander Institute says that its worst case scenario points to cuts of cuts across the Scottish budget of around 6% – £1.6bn – by 2020-21 It predicts that Holyrood funding for local authorities would fall in those circumstances by around £1bn.

Scotland’s economic output, it says, is “fragile”. Growth over the past year was just 0.6% compared with the UK’s 1.7%, largely due to the effects of the oil price slump. Scotland’s resource budget is already 5% down on 2010-11, and capital spend down 12%.

“Prospects now look much more challenging than they did at the Scottish elections in May 2016,” the report adds. “The uncertainty over the impact of Brexit will likely lead to a deterioration in the fiscal positions of both the UK and Scotland.”

Former Scottish Office economist Andrew Goudie, who chairs the institute, writes in the foreword: “Urgent action is needed to grow our economy, not just in the light of the current Brexit uncertainty and the downturn in Scotland’s oil and gas sector, but also to face up to the longer term challenges of an ageing population, rising inequality, technological change and rapid globalisation.

“Ambitious programmes of reform are vital if we are to ensure continued access to high-quality public services with much fewer resources.”

The institute, which provides well-respected Scottish economic commentary, says that the full current programme of fiscal devolution will leave Holyrood ultimately responsible for funding around half the current Scottish budget from tax revenues, as the Barnett Formula is adjusted to reduce Scotland’s block grant from Westminster.

“Scotland’s economic performance – or more accurately, Scotland’s relative performance – will have a greater bearing on the spending plans of Holyrood than ever before,” it says. But it adds that the Scottish Government will equally be able to make more policy choices than ever before, especially once limited devolution of social security policy has taken place.

“New arrangements for managing economic risks, delivering the annual budget scrutiny process and determining intergovernmental relations between the UK and Scottish Governments will all be needed,” Goudie says. “Fiscal devolution on this scale is largely unprecedented internationally and certainly within the UK.

“Delivering these new powers in ‘normal’ times would be challenging enough. But … they are being delivered at a time of significant fiscal challenge and economic uncertainty,” Goudie adds.

He appeals to civic Scotland, from business to the media, to enter into “thoughtful and constructive debate” about the challenges ahead.

Scottish finance secretary Derek Mackay called the report “helpful” and urged UK chancellor Philipp Hammond to end austerity and back continued British membership of the European single market.

But both the Scottish Conservatives’ Murdo Fraser and Labour’s Alex Rowley said the report showed that it was no longer sufficient for Scottish National Party leaders to blame Scotland’s economic ills on Westminster.

 

  • Keith Aitken
    Keith Aitken

    covers Scottish affairs for Public Finance from Edinburgh. He was formerly economics editor and chief leader writer on The Scotsman and now has a busy freelance career as a writer, broadcaster and event chair.

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