Ten months since the first Covid restrictions, society remains firmly locked down, with economic activity still 7 per cent below pre-pandemic levels – well below what we would normally think of as being the trough of a deep recession.
In this context, Kate Forbes delivered a sober budget statement, refreshingly devoid of buzzwords.
The SFC’s economic forecasts had a predictable air of gloom. Unemployment is forecast to top out at over 7 per cent in 2021, and economic activity will not recovery its pre-pandemic levels until 2024.
The budget’s main policy measures had a distinct air of predictability. The health portfolio will see some of the largest budget increases, both in terms of core health services and suppressing Covid.
Elsewhere there will be a strong emphasis on the economic recovery, with funding increases for business support and skills and employment initiatives.
But that this was a pre-election budget was also clear, with several tax cuts featuring.
The government reduced the non-domestic rates ‘poundage’, enabling it to say that businesses in Scotland face lower NDR rates than counterparts in England, a policy that cost £63 million.
There will be a strong onus too on local authorities to freeze council tax in 2021/22. Financial support will be provided to those who do so, costing the government £90m, equivalent to the revenue that would have been raised from a 3 per cent rise.
The biggest surprise on tax came from the Government’s announcement that rates relief for businesses in the tourism, retail and hospitality sector will be extended for the first three months of 2021/22.
It seems inevitable the UK Government will similarly extend the relief in England in due course. But it was a surprise that the Scottish Government felt able to strike out on this course before the UK Government’s position had been confirmed.
The policy is costly (£180m) and the UK Government decision, once it is confirmed, will unlock additional resources for the Scottish budget.
As anticipated, Ms Forbes used her budget statement to highlight the challenges she has faced in setting a Scottish budget, knowing the outlook for the Scottish block grant is very likely to change following the UK Budget in March.
The severity of the issue was somewhat over-egged, but the Cabinet Secretary’s solution was sensible.
The Scottish Government has baked in an assumption that its Covid-related resources will increase by a further £500m when Rishi Sunak lays out the UK Budget in March. Under the circumstances, this seems a prudent strategy.
More than ever before, the budget produced yesterday can be considered very much the starting point for what will become an emerging picture.
Amendments may emerge during the Scottish parliamentary process as the government seeks to navigate the budget through the legislative process.
More significantly, further change can be anticipated following the UK Budget on March 3 and subsequently throughout the year as policy responds to the evolution of the pandemic.
- David Eiser is the head of fiscal analysis at the Fraser of Allander Institute.