Paul Brewer: Finance secretary keeps big cards close to his chest

When you reminisce about the past, it is often easy to look back with rose-tinted spectacles. But for the Scottish devolved parliament, the last decade has undoubtedly been rosy as they enjoyed a 5 per cent annual growth in budget allocation from Westminster between 2000-1 and 2009-10.

But now reality is hitting home - and the impact is hard. The brakes have gone on over the past financial year and the country is now seeing the first play of the Scottish Government's hand on how it will significantly reduce expenditure in the year ahead. And this represents the beginning of a five-year expenditure reduction programme, so there will be much more pain to come.

In this challenging environment, and perhaps with one eye on the elections next May, the Scottish Government has chosen - unlike the Welsh assembly - to shy away from longer-term plans.

The recent Comprehensive Spending Review squeeze on capital expenditure is particularly aggressive but in the absence of a programme that is fully allocated, the Scottish Budget still leaves room to continue existing commitments, notwithstanding the 800 million reduction. Strategic planning for investment is difficult in the face of such substantial budget cuts but is needed to ensure that limited resources are directed to the right priorities.

This all cries out for a longer-term plan both for revenue and capital spending.

The future shape of local services and the structures for delivery across local government, primary health care and the emergency services is at the forefront of the structural debate but played only a small cameo role, with the transfer of 70m from the NHS to a change fund in social care. Local government was presented with a carrot and stick, being asked to agree to a number of key policies such as the council tax freeze and free social care while committing to delivery of the current single outcome agreements in order to benefit from a 2.6 per cent budget reduction rather than a hefty 6.4 per cent. It is hard to envisage much appetite for the stick.

The finance secretary founded his Budget on the Scottish Government's purpose of delivering sustainable economic growth and once again we heard a call for full fiscal autonomy in order to deliver all of the policy levers on the economy. The First Minister has rejected the coalition's proposals for further fiscal powers but these are currently the only option on the table.

So given the limitation of the economic levers available, how did this shape up as a Budget for the Scottish economy?

Three features stand out. The affordability of the social contract, which focuses on social welfare measures such as free personal care and prescriptions, has faced challenge both from Audit Scotland and the Independent Budget Review.While it must be paid for through savings elsewhere, in the short term it does, purely from an economic viewpoint, keep money in household pockets which should in turn be spent directly in the economy.

The desire to retain jobs in the public sector has also raised some questions about how the required savings can be achieved. The desire to have a no compulsory redundancy policy, assuming flexible working practices can be agreed, must be demonstrated to be realistic.

The announcement of a 2.5 billion package of capital investment should be welcome news to a fragile construction sector but a closer examination suggests that little of this will flow through directly in 2011-12 while these new projects progress through planning and procurement. The 800m capital budget reduction from the Comprehensive Spending Review will have a significant effect, notwithstanding the two largest capital investment projects, the Forth Replacement Crossing and the new Southern General hospital, progressing to delivery.

So against a backdrop of a significant spending challenge, we are left with a mixed bag - and that is perhaps to be expected from a pre-election Budget. The government has kept a focus on its big policy commitments and has spread the pain right across its portfolio. It has given a welcome commitment to continue investment in the face of severe capital budget cuts. However, the big cards on the future shape of the public sector over a protracted period of spending reduction have been kept well hidden.

• Paul Brewer, partner and head of public sector at PwC in Scotland.