Scottish public sector in £8bn budget shortfall

An artist's impression of the Glasgow 2014 velodrome. Picture: PA

Publishing it, the public spending watchdog Audit Scotland called on the Scottish Government to overhaul its financial reporting arrangements before Holyrood is handed new tax and borrowing powers in the next few years.

The growing cost of pensions, as well as increased borrowing and use of public-private partnerships (PPPs) – despite an SNP pledge to cut them – accounts for the gulf between the £86bn of assets against liabilities of £94bn in 2011-12.

The gap represents £1,500 for every man, woman and child north of the Border.

The Edinburgh Royal Infirmary. Picture: Danny Lawson

The watchdog says the shortfall may not pose an “immediate risk”, but it “may not be affordable in the long term” if it continues to grow. Scotland is set to enter a “new era of fiscal responsibility” as MSPs assume income tax raising powers when the Scotland Act is introduced in 2016, according to Auditor General Caroline Gardner.

But the current financial reporting must be tightened up to ensure it is more “comprehensive and transparent” – and can explain any shortfall between the expected tax take and the amount actually raised.

Taxpayers in Scotland may also have to bear the cost of major “bail-outs” – such as next year’s Commonwealth Games – and ministers should now set out a “comprehensive assessment” of where this risk lies.

The report covers the devolved public sector in Scotland, including the NHS and local councils, but not areas like the armed forces which are reserved to Westminster.

The financial meltdown, which saw economies around the world saved from collapse by taxpayer-funded bail-outs of banks and financial institutions, has cast a fresh light on government balance books, according to the Auditor General.

She said: “The global financial crisis highlighted the importance of having a thorough understanding of a government’s assets and liabilities and of the key risks to a government’s financial position.

“The Scottish Government needs to further develop its financial reporting in discussion with the Scottish Parliament. This report is a contribution to that process. It illustrates key issues and suggests areas for consideration, such as the forecasting of tax receipts and the long-term consequences of funding assets from borrowing.”

But the report warns there is no current “published picture of the assets and liabilities of the devolved Scottish public sector as a whole.”

The assets of £86bn are mainly property like schools hospitals, council houses and roads.

About two-thirds of the liabilities are the £66bn cost of pensions, but the growing use of borrowing or private cash to fund public buildings is also creating longer-term liabilities.

The role which the Scottish Government would be forced to take on as “funder of last resort” for bodies which hit financial problems also needs to be clearly set out, according to the watchdog.

As well as the Commonwealth Games, the taxpayer is liable for more than £1bn to cover damage or loss of paintings in Scotland’s art galleries and objects in museums.

“A comprehensive assessment of these risks would aid decision-making and provide the Scottish Parliament with confidence that these risks are being monitored,” it adds.

The tax-raising powers coming to Scotland will see income tax effectively cut by 10p, with MSPs then responsible for raising it back up to the required level in line with need through the Scottish rate of income tax.

But Scottish Government ministers now need to work more closely with Westminster, including the Treasury and HMRC, as well as the Office For Budget responsibility, to ensure the new tax is correctly “collected and accounted for”.

The report adds: “The Scottish Government will also need to consider its financial reporting arrangements so that it can monitor and explain clearly the reasons for any variances between actual and forecast amounts raised and the effect of this on the funding available in subsequent financial years.”

But a spokesman for the Scottish Government said the report made it clear that the ministers had a “strong track record” in managing the public finances.

“The Scottish Government is committed to maintaining the highest standards of financial reporting: our accounts are prepared according to national and international standards and have had clean external audit opinions for the last seven years.

“While the report recognises recent developments in financial reporting and the strong platform from which further development can take place, we would challenge the claim that there is not a comprehensive picture of public spending.”

Tory finance spokesman Gavin Brown said: “This report highlights just how much additional competence and disclosure will be required from the Scottish Government once these powers go live in 2015. The SNP has a poor track record in this regard thus far.”

John McLaren: Greater understanding is needed in some areas

THE Audit Scotland report opens up a new flank in trying to improve our understanding of Scotland’s accounts by looking at the assets and liabilities position of the devolved Scottish public sector.

The finding that liabilities are currently estimated to outweigh assets should not be of great concern at present. For a start the methods by which such assets and liabilities are valued is very much an art rather than a science. For example, if Scottish councils were to value local roads at depreciated replacement cost rather the historical cost then the value of these could increase from £5 billion to £55bn and mean that total assets were now valued higher than total liabilities.

This gives you some idea of the valuation “tricks” that can be gotten up to. While it is good to understand the scale, nature and timing of future liabilities (or assets), at present the financial implications stemming from such liabilities are primarily covered by the UK government.

However, the further Scotland moves away from the existing position, whether through the Scotland Act, Devo-Max or independence, then the greater will be our need to understand them and plan accordingly.

Understandably, as the politics would be a nightmare, the Audit Scotland report stops short of looking at these less UK dependent positions. So it does not consider issues like Scotland’s share of UK debt, the cost of decommissioning in the North Sea, the value of UK overseas assets etc.

There are, though, some areas where greater urgency in understanding the financial implications, even under the current devolved settlement, are important, for example over the ever-increasing use of private finance. The annual PPP charges relating to these, and which must come out of the Scottish Government’s annual budget, are estimated to continue to rise to 2024-25, while the Scottish Budget may not. It is important that the financial implications of existing, as well as any new, such projects need to be more transparently understood and managed.

• Professor John McLaren is an economist with the Centre for Public Policy for Regions