IFS - The overall funding outlook
This chapter looks at the Scottish government's funding outlook in the short term (2022–23 and 2023–24), medium term (2024–25 to 2027–28) and beyond.
The Scottish Government’s overall budget depends both on funding from the UK government, which is determined largely via the Barnett formula, and on its own devolved revenues, borrowing and reserves, which are governed by the Fiscal Framework. This chapter of the report looks at the funding outlook in the short term (2022–23 and 2023–24), medium term (2024–25 to 2027–28) and beyond, drawing on Scottish Government and Scottish Fiscal Commission (SFC) figures.
1. The funding available to the Scottish Government in 2023–24 for day-to-day non-benefits spending is around £1.5 billion higher than forecast in May 2022 at the time of the Resource Spending Review. Of this, just over £0.8 billion reflects higher funding from the UK government via the Barnett formula, and another £0.8 billion reflects a forecast improvement in net revenues from devolved taxes, only a small part of which is due to new tax raising measures. This cash-terms increase is partially, but not fully, offset by higher forecast inflation.
2. The Scottish Budget for 2023–24 shows day-to-day non-benefits spending increasing by 1.6% in real terms, on average, compared to what was originally budgeted to be spent this year, which is more generous than the 1% fall expected at the time of the Resource Spending Review. However, these comparisons exclude in-year top-ups to the funding available to the Scottish Government this year, which SFC forecasts suggest amount to around £1.1 billion. Taking account of this additional funding would suggest the amount available for non-benefits spending will actually fall by 1.6% next year compared to this, or 0.8% after adjusting for major one-off costs such as council tax rebates. The Scottish Government formally allocated some of this additional funding in the Autumn Budget Revision in November 2022, but the SFC’s forecasts suggest there may be another £400–600 million available for allocation in the Spring Budget revision in February 2023.
3. Medium-term funding projections by the Scottish Government suggest an improved outlook for the next four years compared to what was expected at the time of the Resource Spending Review in May 2022. However, the outlook remains difficult, with funding for day-to-day non-benefit spending set to be almost 2% lower in 2027–28 than in 2022–23. This is despite forecasts for a significant increase in net revenues from Scotland’s devolved income tax revenues over the next few years: if this did not materialise, the reduction could be closer to 5% over the same period. This reflects several factors including planned spending restraint by the UK government, significant forecast growth in Scotland’s devolved benefit spending as a result of policy reforms (reducing the amount available for public services), and the plan to draw down reserves fully this year (boosting funding this year, and thereby depressing growth in spending going forwards).
4. These cuts to overall funding would imply difficult trade-offs for the Scottish Government as it allocates funding between different services. For example, if health spending were increased by 2.9% a year in real terms each year between 2023–24 and 2027–28 (the increase planned for 2023–24 and roughly in line with estimates of what might be needed in the long term) and spending on the net zero, energy and transport portfolio were increased by 4% a year (slightly less than planned, on average, in the Resource Spending Review), the amount available for all other service areas would fall by around 6% between 2023–24 and 2024–25, and by 13% by 2027–28. Without the forecast improvement in the net income tax position, the implied falls would be almost 10% and 19%, respectively, for those two years.
5. The Scottish Government’s medium-term projections were purposefully cautious, and based on the indicative spending totals set out by the UK government in the Autumn Statement, a reasonable central projection for 2027–28 would be for funding to be around 1% higher in that year than projected by the Scottish Government. This would be a useful sum of money but would not significantly ameliorate the difficult trade-offs the Scottish Government would face. The indicative spending totals pencilled in by the UK government would imply difficult trade-offs between public services in England too, and it would not be surprising if they were revised up in future UK Budgets or Spending Reviews. This would provide additional funding for the Scottish Government, but uncertainty about UK government spending decisions beyond 2024–25 and constraints on Scottish Government borrowing mean it is not unreasonable to make long-term plans on a cautious basis.
6. The long-term funding outlook beyond 2027–28 will also be largely determined by UK government spending decisions and the performance of Scotland’s devolved tax revenues relative to equivalent revenues in the rest of the UK (rUK). The Barnett formula determines how much the Scottish Government’s budget increases when UK government spending in England increases. It provides Scotland with a population-share of the change in spending planned for England, which means the same cash per-person increase in Scotland as in England before considering the impact of differential population growth. Because spending is currently higher per-person in Scotland than England, the same cash per-person increase represents a smaller percentage increase in Scotland. When cash spending per person grows in England, this reduces the percentage by which spending in Scotland exceeds that in England, making it more difficult for the Scottish Government to maintain higher levels of service provision than in England, such as free personal care and free university education, and to meet rising spending pressures.
7. The speed of this ‘Barnett squeeze’ depends on the rate of growth in spending in England (both real-terms growth and to offset inflation), and the rate of population growth in Scotland relative to England. Using long-term projections for inflation and GDP growth from the Office for Budget Responsibility – assuming public spending is held constant as a share of GDP – and taking into account population projections from the Office for National Statistics, we project Scottish Government funding would increase by an average of 1.2% per year in real terms over the 30 years between 2027–28 and 2057–58. This compares to an average of 1.4% per year in England over the same period, with bigger gaps in earlier years and smaller gaps in later years. Under this scenario, spending per person in Scotland would fall from 124% of English levels in 2027–28, to 121.4% in 2032–33, and to 115% in 2057–58.
8. Faster real-terms spending growth in England to meet the rising costs of health and social care (which are expected to grow faster than GDP) would result in bigger absolute increases in funding for the Scottish Government, making it easier for it to meet these costs itself. However, it would increase the Barnett squeeze on funding levels relative to England – although funding per person in Scotland would remain higher than in England. Boosting Scottish population growth would reduce both the relative and absolute levels of funding per person received via the Barnett formula, potentially making it more difficult to meet these rising costs. This is because the Barnett formula only partially accounts for population growth when allocating funding.
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