Fiscal Update - August 2024
28th August 2024
This Fiscal Update sets out the economic and fiscal developments since December 2023 and the effects of Scottish and UK Government announcements on the 2024‑25 and 2025‑26 Scottish Budgets. The following are extracts from the report and a link to the full report is at the bottom of this page.
1.1 Since our December 2023 publication the pressure on the Scottish Government's finances has increased. The Scottish Government is now facing a challenge in balancing its budget. The extent of these challenges was evidenced in mid-August when
emergency controls were put in place to restrict spending in 2024-25. The 2024-25 position was tight when the Budget was set in December 2023, since then pressure over public sector pay has grown.
1.2 Decisions by the Scottish Government have played a role in these budget pressures. As well as previous public sector pay deals in Scotland being higher than in the rest of the UK, other policy commitments made by the Scottish Government such as the council tax freeze in 2024-25 and the ongoing effect of its social security reforms have contributed to the growing pressure on the Scottish Budget.
1.3 There have also been announcements by the new UK Government which will affect how much funding the Scottish Government receives, although much of the detail will not be
clear until the UK Budget on 30 October 2024.
1.4 These announcements will set the scene for the next Scottish Budget. In this Fiscal Update we summarise the developments to date, highlighting where these may have implications for the Scottish Budget. This work aims to support the Scottish Parliament
in its pre-Budget scrutiny process.
Timeline of changes affecting the Scottish Budget
1.5 Since the Scottish Fiscal Commission published its last forecasts in December 2023 there has been a change of Scottish First Minister and the election of a new UK Government. The Scottish Government's planned Medium-Term Financial Strategy
(MTFS) was postponed from its original date in May following the resignation of the previous First Minister, and subsequently cancelled because of the pre-election period for the UK general election. We usually publish updated forecasts in May alongside the
MTFS but as that did not take place, we have not updated our forecasts since December 2023. Therefore, we are publishing this Fiscal Update to set out the economic and fiscal developments since December 2023. We also explore how these, and other upcoming events will affect the 2024-25 and 2025-26 Scottish Budgets.
1.6 Since December 2023 there have been no significant confirmed changes in the Scottish Government's funding, but the pressure on spending has increased with public sector pay offers in Scotland now coming in higher than the pay policy published in May 2024.
There is significant uncertainty on the level of funding the Scottish Government will receive from the UK Government ahead of the UK Budget.
1.7 The Scottish Government's funding position will become clearer over the next few months. The UK Government will set out its spending plans and announce any planned changes to UK taxes for 2024-25 and 2025-26 in the UK Budget on 30 October. As there is a new government, there is potential for some significant changes to the tax and spending plans set out by the previous UK Government. These are likely to result in changes to Scottish Government funding. The Office for Budget Responsibility (OBR) will produce updated forecasts of UK Government tax revenues and spending alongside the UK Budget. These will affect the Block Grant Adjustments (BGAs) for devolved taxes and social security.
1.8 There are several other events which will take place before the UK Budget, including a Scottish Government statement to Parliament on the fiscal position as well as the Programme for Government in early September. Later in September, the Scottish
Government is expected to present its Autumn Budget Revision (ABR) to the Scottish Parliament, outlining how the 2024-25 Budget has changed as a result of changes in UK Government funding from the March UK Budget and underspends from 2023-24 carried
forward to 2024-25 through the Scotland Reserve. The ABR may also reflect the emergency spending controls put in place in August, but the Scottish Government could wait until the Spring Budget Revision in January 2025 to confirm the implications.
1.9 After the UK Budget, we will begin the process of updating our economic and fiscal forecasts as the Scottish Government develops its tax and spending policies in preparation for the Scottish Budget. The Scottish Budget will confirm the Scottish Government's tax and spending plans. We will publish updated economic and fiscal
forecasts alongside it.
1.10 When the 2025-26 Scottish Budget is published we will have a more complete picture of the funding and spending position. Nevertheless we can highlight important fiscal developments, the emerging economic context, and significant moments when further
information will become available in the coming weeks and months.
UK Government announcements and Scottish Government response
UK Spending Audit
1.11 The UK Government's Spending Audit, published at the end of July 2024, was accompanied by several announcements which will affect the Scottish Government's funding. Public Sector Pay.
1.12 The Audit included commitments on public sector pay. The recommendations of the independent Pay Review Bodies were adopted in full for 2024-25. These covered NHS England staff, teachers, armed forces, police, prison officers and Civil Servants. While the vast majority of these pay deals do not apply in Scotland, there are still implications for the Scottish Government's funding. Most pay awards are in the range of 5 to 6 per cent in 2024-25, considerably higher than the 2 per cent assumption included in the
2021 UK Spending Review. While announcements have not been made on UK public sector pay in 2025-26, the higher pay awards in 2024-25 will result in higher levels of pay in 2025-26 than were previously expected.
1.13 The implications of this higher spending on public sector pay for departmental budgets in 2024-25, and therefore on the level of Block Grant funding, is currently unclear. The UK Government has indicated that departments will receive some additional funding but
will also be expected to absorb some of the increased costs from within their current budgets. The extent to which this is additional money and the extent to which it is offset by reductions in other areas of devolved spending will become clearer in the UK Budget.
However, the UK Government may wait until the publication of the Supplementary Estimates in February 2025 to confirm the final effect on departments budgets and on the Scottish Government's Block Grant.
1.14 Pay negotiations are ongoing across the Scottish public sector and are taking place before the Scottish Government has certainty on the level of funding it will have in 2024-25. The Scottish Government has already announced additional spending commitments to support pay offers above planned levels. The offers of 4.27 per cent for local authority workers and 5.5 per cent for nurses and NHS workers are both higher than the 3 per cent set out in the Government's pay policy published in May.2,3,4 This is
likely to create pressure for other pay awards to be higher than the Scottish Government had planned for. The Scottish Government is also likely to be under pressure to at least match UK pay awards, which, as indicated, are in the range of 5 to 6 per cent in 2024-25 for areas covered by the Pay Review Bodies.
1.15 The Scottish Government has estimated that in 2023-24 pay accounted for over £25 billion of resource expenditure across the devolved public sector, including local government.5 This is over half of the resource budget.6 Increases in public sector pay
therefore have a significant effect on the Scottish Government's spending. In our December 2023 report we noted that the Scottish Government had "not set a formal guideline for public sector pay for 2024-25" and that "the average public sector pay award in 2023-24 was 6.5 per cent, 3 percentage points higher than the Scottish
Government had estimated in May 2023".7 If a Budget is set based on pay assumptions which are lower than those that materialise, this creates challenges with in-year management of the Budget, requiring the Government to reduce its planned spending
on services. The recent emergency spending controls the Scottish Government has put in place for 2024-25 are the result of those challenges.
1.16 Over the last few years the Scottish Government has generally increased public sector pay by a higher percentage than was the case in England. This has the consequence that subsequent pay awards are more costly. For example, if teachers in Scotland are more highly paid than in England, then an equivalent percentage rise in teacher salaries will be more costly to implement in Scotland. This further contributes to the pressures of public sector pay on the budget.
1.17 The decisions made on public sector pay, and how those are agreed with the unions, will determine the pressures on the Scottish Budget. As public sector pay is already higher in Scotland than in England, matching or exceeding in percentage terms the pay
increases given in England would result in greater pressure on the Scottish Budget. If pay awards in Scotland were lower in percentage terms than those in England this would reduce the pressure on the Scottish Budget./b]
[b]Tax and social security announcements
1.18 The UK Government Spending Audit also included new policy announcements in areas that have been devolved to the Scottish Parliament. These policies will affect the Scottish Government's funding. The Scottish Government is having to make decisions
on the equivalent devolved policies.
1.19 The most notable announcement from the UK Government was on Winter Fuel Payment (WFP). The UK Government has announced that from this autumn it will only be paid to
older people receiving means-tested benefits rather than all people over the state pension age. This will decrease spending on WFP in England and Wales. The Scottish Government receives funding through a Block Grant Adjustment for WFP, it is estimated
this will decrease by between £140 million and £160 million in 2024-25 as a result.
1.20 This is the first instance of a significant UK Government social security policy change taking place in-year with an effect on BGA funding. In response the Scottish Government has announced that eligibility for Pension Age Winter Heating Payment (PAWHP), the replacement for WFP in Scotland, will also be restricted to older people in receipt of means-tested benefits.8 This is expected to reduce spending on PAWHP by between £140 million and £160 million. As the reduction in spending will be aligned with the reduction BGA funding, we do not expect there to be a net effect on the Scottish Government budget for 2024-25. However, as the UK Government policy change was announced after the 2024-25 Scottish Budget was set, the Scottish Government could defer the in-year adjustment to account for the reduction to the BGA until the final BGA can be calculated with outturn spending data and a reconciliation applied to a future Scottish Budget.
1.21 The application of Value Added Tax (VAT) to private schools across the UK from January 2025 will not have a direct effect on the Scottish Government's funding as VAT is a reserved tax and the UK Government will receive the additional revenue. However, applying business rates to private schools in England from April 2025 will affect Scottish Government funding.
1.22 An increase in revenue from private schools paying business rates (known as Non-Domestic Rates in Scotland) in England would increase tax revenues for the UK and local government in England. The UK Government could decide to allow local government to keep the additional revenues, or it could reduce grant funding from central government to local government in England. If this happened it would reduce spending by the Ministry of Housing, Communities and Local Government, and therefore the Block Grant, as that department is fully devolved in Scotland.
1.23 There will be indirect effects on the Scottish Budget from the changes to VAT and business rates for private schools as the Labour manifesto committed to using the extra revenue to fund higher spending on education. As education is fully devolved, an
increase in education spending in England will result in increased funding for the Scottish Government.
1.24 The Scottish Government has already removed eligibility for charities relief from Non-Domestic Rates for private schools, so does not have the option of replicating the business rates policy to raise revenue, but it will likely still benefit from an increase in
spending on education in England.
[url=https://fiscalcommission.scot/wp-content/uploads/2024/08/Fiscal-Update-%E2%80%93-August-2024.pdf]Read the full report HERE[/url]
Pdf 51 Pages.
