Welcome to the world of Scotland’s budget. The earnest hope – how long ago it seems now – was that with extra tax and spending powers Holyrood would be more in charge of our fiscal destiny. Budget measures would be more attuned to our needs, more transparent, easier to understand and altogether more accountable.
So much for the best laid plans of mice and men. Holyrood’s finance committee published its report last week on the draft budget. It said new powers combined with economic uncertainty caused by Brexit meant it was “critical” there was “complete transparency” over budgets.
But the report suggested that the budget was anything but transparent. Scotland, it concluded, faces “a much higher level of uncertainty and volatility” in its budgets due to new powers and Brexit.
Committee convener Bruce Crawford pointed to Holyrood’s new fiscal powers introducing “a significant level of complexity to the budget process. It is clear to us the increased dependence of the budget on relative economic performance combined with the complexity of the fiscal framework means there is now a much greater degree of volatility and uncertainty in the budget process”.
The draft budget was presented by Finance Secretary Derek Mackay on 15 December. It pledged a funding increase of £240 million for local services. But opposition parties said the amount of cash going direct to councils will be cut in real terms.
It confirmed there would be no change in income tax rates or bands – but would not replicate the UK Treasury’s tax cut for higher earners. As a result the 40 per cent income tax rate will start at £43,430 in Scotland compared with £45,000 elsewhere in the UK.
Members noted the “variety of sets of figures” being presented on local government and local services – sparking a political row. Opposition parties have pointed to the core council budget going down, but the government insists other funds going directly to schools and health and social care partnerships means the budget for “local services” is increasing.
But while budget papers show a new chunk of cash going directly from the government to local services such as schools and social care partnerships, they also show a decrease in the pot of money that goes direct to councils.
With confusion raging over the changes to presentation and different sets of numbers relating to the local government settlement, the finance committee has now called on the Scottish government to produce “detailed proposals” on making the state of local government finances more transparent.
Members also voiced disappointment that Chief Secretary to the Treasury David Gauke had declined to give evidence over the operation of the fiscal framework. The report also asked the Scottish Government for additional information on a range of topics, including estimates of tax revenues and “a full and comprehensive analysis of the use of borrowing powers”.
On reading this, the budget process suggests less an exercise in clarity than an episode of I’m Sorry I Haven’t A Clue.
Little wonder the Budget Bill is now in deadlock with the administration failing as yet to secure a majority at Holyrood. Opposition party leaders have warned “it’s not looking good” for a deal to be struck ahead of the Stage One vote on Thursday, and final votes on the tax and spending proposals are due at the end of February.
Now, in fairness to Mackay, he has had to contend, not only with the late delivery of UK Chancellor Philip Hammond’s Autumn Statement on 23 November which inevitably pushed back Holyrood’s budget date, but also the fast changing landscape of Brexit and its many consequentials – real and feared.
As matters have turned out, this has not had the calamitous effect on the economy many, including the SNP administration, had feared: the UK economy did not slow in the final quarter but grew by 0.6 per cent – the same pace as in the second and third quarters and faster than the 0.3 per cent recorded in the first quarter of 2016. And while household spending is facing a slowdown, the latest CBI manufacturing survey shows the orders balance now running substantially above its long-term average. This was fuelled by healthy domestic demand and a pick-up in export orders.
Meanwhile, discontent has erupted in the tourist sector. The draft budget proclaimed that the business rates poundage will be reduced by 3.7 per cent to 46.6p from 1 April and that 100,000 properties would be exempt under the small business bonus scheme: the 100 per cent relief threshold would be set at £15,000.
Yet the Scottish Chambers of Commerce claimed last week that planned business rates increases could cripple parts of Scotland’s hospitality industry. Some firms are facing rates rises of more than 100 per cent, after new rateable values were given to their properties.
Firms in the North East say they are being particularly badly hit as their property values were assessed while the region’s economy was booming. And the SCC says it is receiving consistent reports from across the country of negative impacts of the move on hotels, restaurants and the licensed trade.
Scottish property values were assessed in April 2015 – before the downturn in the oil price – for the 2017 revaluation. But since then hotel occupancy in the North East has dropped by up to 70 per cent.
Mackay is due to discuss the issue with business leaders in the region. But with the threatened imposition of a local tourist tax, there is a growing apprehension in the sector that it will not be able to invest to meet the uplift in North American tourist numbers and spending as a result of the 20 per cent fall in sterling. Not for the first time, business rate changes seem out of sync with business conditions on the ground. And sadly, as economist Tony Mackay notes, the Scottish economy has underperformed the UK economy in each of the last three years and this is likely to continue during the next three years – regardless of the impact of Brexit.