Spring Statement risks hitting Scottish Budget and forcing SNP Government to review taxes, think-tank warns

The statement will come on March 26

The looming Spring Statement risks reducing the Scottish Budget and resulting in less support for the disabled, a prominent think-tank has warned.

Chancellor Rachel Reeves will deliver her Spring Statement on March 26, where increased borrowing costs and weak growth are likely to require spending cuts to meet her commitments on managing public finances.

Chancellor of the Exchequer Rachel Reeves during a visit Babcock in Rosyth. Picture: Mike Boyd/PA Wire | PA

The Scotsman has spoken to think-tanks, pollsters and a research institute about the financial outlook and what the crunch spending package might mean for Scotland.

It comes after a week in which backbench Labour MPs in and out of Downing Street raised concerns that proposals to reform the welfare system would harm vulnerable people claiming benefits.

Casey Smith, a researcher with IPPR Scotland, suggested this move would impact not just the Scottish Budget, but Scotland as a whole, due to the higher caseload of recipients of disability and incapacity benefits north of the Border.

He said: “There is a significant risk that proposed changes to the UK government’s spending plans could end up reducing the Scottish Budget.

“The expected £5 billion annual reduction in welfare spending on disability benefits will prove particularly difficult for Scotland. A real-terms freeze in the value of personal independence payments (PIP) will mean reduced support for people with disabilities.

“The equivalent to PIP in Scotland is a devolved benefit known as adult disability payment (ADP). Any freeze in PIP in the rest of the UK will lead to reduction in block grant for Scotland. Therefore, if the Scottish Government wishes to continue to provide ADP recipients with inflation proofed income, it will need to find the resources from elsewhere in the Scottish Budget or by raising devolved taxes.

“By supporting people who need help to receive the payment, the Scottish Government's approach to ADP aims to be less adversarial than the current PIP process. This means the case load is relatively higher and the gap is likely to grow if the UK government shifts to a more stringent assessment process for PIP.

“Scotland already has a higher case load of recipients of disability and incapacity benefits through Universal Credit than the rest of the UK. And, with a more rapidly ageing population, it is likely that demand in Scotland will grow faster than England and Wales at a time when the UK government is cutting spending on welfare. This will mean Scotland needs to dedicate a rising share of its own taxes to maintain benefits at their current value into the future.”

Official figures on Friday showed gross domestic product fell by 0.1 per cent in January amid a sharp decline in the manufacturing sector, surprising economists who had forecast a slight increase.

Ben Zaranko, associate director at the Institute for Fiscal Studies, said any Chancellor would be forced into tough decisions in this economic climate. But he argued Ms Reeves had also created her own problems.

“The starting point here is that Rachel Reeves has boxed herself in and left herself facing an unpleasant set of choices, which she promised not to break,” he said. “Precisely how she navigates that will then impact what happens in Scotland,.

“She came in and set herself a new set of borrowing and debt targets, and set them as hard numerical targets and put a great deal of store in meeting them, but left only a fine margin against those targets. She gave herself a headroom of £10 billion in the context of a state that spends £1.3 trillion a year. That’s not very much.

“It was always the case that if the world economy worsened a little bit, she would be pushed from being a little in the black to slightly in the red.”

There are concerns of a return to austerity

Discussing the impact on Scotland, Mr Zaranko said it would depend on the measures announced.

He said: “If she were to increase incomes taxes, Scotland would face a choice to follow suit. So one thing she might do is extend the freeze to various tax thresholds for two years, and raise about £10bn. That would not pose an immediate choice for Scotland, but further down the line [it would].

“She could reduce the generosity of the overall pot now. She would not have to specify right away where the cuts would fall. That would worsen the spending outlook for Scotland.

“If she cuts back on local government or justice or education, that is much more relevant to the Scottish Government going forwards.”

However, Mr Zaranko insisted whoever won the election would have faced these difficult decisions.

He said: “It’s a difficult time to be a Chancellor. The economy is broadly stagnating, but she hasn’t helped things by setting out promises that are mutually incompatible .No spending cuts, nor return to austerity, won’t come back with another tax rises. Promised fiscal rules that are non-negotiable. She also promised that this spring forecast was supposed to be a non-event.”

Polling expert Mark Diffley, founder and director of The Diffley Partnership, told The Scotsman one of the underlying challenges for the Chancellor’s Spring Statement was recognising that making tough decisions now hoping they helped out later was not of assistance to Scottish Labour.

He said: “The UK party and the UK government stated strategy is to try and deal with the challenging economic and fiscal situation which it inherited in the early years of its term and hope that economic performance and the performance of public services improve in time for the next general election.

“The issue that Scottish Labour has is that it’s working to an entirely different timetable. This strategy doesn’t work for the party in Scotland, it doesn’t have the luxury of time for conditions to improve. “

Mr Diffley claimed the big question for Scottish Labour was what the UK government can do to re-energise them, in terms of both policy and narrative.

He said: “The Spring Statement is an opportunity to do that, but it is going to be delivered in an atmosphere of uncertainty and economic challenge.

“Winter fuel, employers’ National Insurance, two-child benefit cap, all of these have helped to dampen support for Labour. The key question is what can the Chancellor do to reverse that situation? Are there boosts to jobs in key industries like defence? Energy? Or in GB Energy, which was seen by Labour in Scotland as a key plank as hope for their success, but has not really energised them just yet.

“What can it do for energy, what can it do for defence, if that’s going to be a focus of public spending? What can it do to show economic growth?”

A UK Government spokesperson said: “We do not comment on speculation ahead of Spring Forecast. “Millions of people have been trapped out of work, which is why we’re bringing forward changes to the welfare system.

“This builds on the biggest employment reforms in a generation through the Plan for Change. Our £240 million Get Britain Working Plan will also see an overhaul to Jobcentres so they focus on skills and careers.”