Bill Jamieson: Devolved milk and honey at risk of going sour

From April, the Scottish Government will be responsible for paying social security payments. Picture: Andrew Cowan/Scottish ParliamentFrom April, the Scottish Government will be responsible for paying social security payments. Picture: Andrew Cowan/Scottish Parliament
From April, the Scottish Government will be responsible for paying social security payments. Picture: Andrew Cowan/Scottish Parliament
A yawning Scottish Government funding gap growing to £1 billion over the next three years; relentless rises in benefit spending; tax increases and/or spending cuts on the horizon; and a lacklustre outlook for economic growth, unlikely to rise above 1 per cent until 2021.

Welcome to the latest projections from the Scottish Fiscal Commission. It is hard not to feel utterly numbed long before reaching the end of this massive 122-page dissection of our prospects – a bleak but necessary counter to the hopes of milk and honey that would flow from ever greater devolution. Instead, we have ever greater responsibility for our fiscal fate – and a future of tough decisions.

Three crumbs of comfort I can offer before setting out the key findings. First, forecasts are always proximate and constantly in need of revision.

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Second, the projections are not as bad as the dire warnings sounded by the UK Treasury and others over the past three years: there is no forecast of recession, or a slump in employment or a fall in average pay.

And third, the administration – for now – remains within its borrowing limits, and has time to take remedial action in the event of these being tested on a three-year horizon as the report warns.

For all the formidable detail and impressive forensic research that has gone into this document with its multitude of tables, bar charts and graphs, the whole is heavily overshadowed by the prolonged and impenetrable uncertainty over Brexit. And little wonder it is laden with qualifications. Three years on and we are no nearer to knowing what the departure terms will be (assuming we do depart), the effect on the exchange rate, the impact on business, the consequences for the economy or the political complexion of the government.

And as if this were not enough, the fiscal complications within Scotland itself make forecasting hazardous. The devolution of all remaining social security benefits from April 2020 means an increase in the size and range of the Scottish budget. Adjustments need to be made to account for the differences in the fiscal risks to which it is exposed.

Next year will be the first time social security has presented a significant fiscal risk with £3.5bn of spending devolved. The Scottish Government has committed to changing eligibility for some social security payments as well as changing how they are delivered. This is expected to further increase spending on social security.

Next year will thus mark the first time that new “reconciliations” are imposed, which means the Scottish government must tailor its £35bn a year public spending to keep this in line with devolved taxes being raised: less money will be available than previously thought.

If ever there was a vivid example of the admonition “Be careful of what you wish for, in case you end up getting it,” here it is. The SFC forecasts an income tax shortfall of £229 million next year. This black hole rises to £608m in 2021/22 and £188m the year after that.

What a dampener on an administration that has seldom paused to extol its spending ambitions, giveaways and boosts. Such forecasts need not be so scary were the related requirement accompanying these tax powers – a robust and rising economic growth rate – to be within sight. This would imply a commitment to achieve a rate of growth in GDP at least as high as the long-term average of around two per cent.

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But it has been running well short of that. And the SFC reckons that growth will not rise even above one per cent until 2021. It sees the economy expanding by just 0.8 per cent this year, down 0.4 per cent on original estimates, rising to only 0.9 per cent next year – another downward revision.

For this lacklustre performance, Brexit uncertainty is a notable contributor. Using Office for Budget Responsibility assumptions, it forecasts slower growth in Scottish international trade from the end of the transition period. And on business investment it expects ongoing Brexit uncertainty to lead to falling business investment in 2019 and 2020.

However, while it is convenient for Scottish ministers to dump the blame on Brexit (and, of course, on “Westminster austerity”) this does not tell the whole story. For example, it does not explain why the SFC forecasts for growth in Scotland are lower than for the UK as a whole: the OBR predicts 1.2 per cent for the UK this year, above the SFC forecast for Scotland of 0.8 per cent; 1.4 per cent next (Scotland: 0.9 per cent) and 1.6 per cent for 2021 (Scotland: 1.1 per cent).

Meanwhile, the SFC warns that resort to reserves or borrowing to cover the projected tax shortfall “will not cover all of the expected reconciliations”. For capital borrowing, the Scottish Government plans to borrow £450m in 2019-20 and £350m in 2020-21. This will mean they have borrowed 65 per cent of the total capital borrowing cap by the end of 2020-21, four years after the expansion in capital borrowing limits. If, from 2021-22 onwards, the administration borrowed £450m a year repaid over 25 years then the current cap of £3bn for capital borrowing would be reached in 2023-24.

Meanwhile, from April 2020 the Scottish Government becomes responsible for the payments for all the benefits being devolved. Social security spending is harder to control than other areas of spending. It will be determined by the number of eligible people who apply for the benefit, all of whom must be paid. The administration will have to meet this expenditure as it arises, even if it differs from the forecast used to set the budget initially.

In 2020-21 the SFC estimates £3.5bn will be spent by the administration on social security, not including any additional expenditure for policy changes that may be introduced. 
This forecast expenditure should, it says, be compared with the £447m forecast to be spent on social security in 2019-20.

Seldom in the past 20 years has the SNP paused in its relentless demand for “more powers”. But with these come not only obligations, but also the responsibility for pursuing a healthy rate of economic growth – and maintaining a credible fiscal policy amid cyclical fluctuations, demographic challenges and constant change. The SFC is a formidable and fully necessary reminder of this reality.