John Ferry

How long can the SNP ignore Scotland’s looming fiscal timebomb?

How long can the SNP ignore Scotland's looming fiscal timebomb?
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A new report from Holyrood's finance and public administration committee is unusually blunt in its assessment. But is the SNP up to the task of dealing with Scotland's looming fiscal time bomb? It seems unlikely. The Scottish government has given no signal of being serious about facing up to that challenge. Indeed, if anything, the ruling SNP-Green coalition has an incentive to make the budget situation worse. If so, Nicola Sturgeon can't say she wasn't warned.

In its report scrutinising the Scottish government's proposed budget for 2022/23, the committee says: 

'We consider that evidence showing that Scotland is lagging behind almost all other areas of the rest of the UK in key indicators of economic performance is deeply worrying.'

It continues: 

'We are particularly concerned to note the latest SFC (Scottish Fiscal Commission) Forecasts showing Scotland’s income tax receipts falling behind the Block Grant Adjustment, which we consider could, if they come to pass, put Scotland’s future fiscal sustainability at risk.'

The SNP-Green-dominated committee did not go so far as to criticise the government (this is Holyrood, not Westminster), but its willingness to be honest about future fiscal challenges the Scottish administration is likely to face was at least refreshing.

Why is Scotland's fiscal sustainability at risk? As I've said on Coffee House, the SFC expects future Scottish budgets to be lower as a direct result of income tax devolution, despite the Scottish government increasing that particular tax burden on Scots. The SFC predicts an income tax-related funding shortfall of over £400 million by 2026/27 on the back of Scottish employment and wages growing more slowly than in the rest of the UK.

On top of that, the SFC anticipates future budget pressures related to rising social security spending. A large swathe of welfare powers were devolved to Scotland following the 2014 referendum, with a new benefits agency, Social Security Scotland, set up to take over administration of relevant benefits from the UK Department for Work and Pensions (DWP). Full roll out of that new administration is expected in coming years (implementation of new powers was delayed at the request of the Scottish government, which has struggled to accept its new responsibilities).

Scottish social security spending in 2022/23 is forecast to be £4.1 billion, with the Scottish government administering around a fifth of that based on Scottish government policy. By 2026/27 this is expected to rise to £5.5 billion, with Social Security Scotland accountable for almost three-quarters of payments.

The Scottish government is introducing new benefits, like the Scottish Child Payment, and says it aims to increase take-up of benefit payments across the board. Meanwhile, Adult Disability Payment, which launches in 2022, will become the largest component of social security and will replace Personal Independence Payment.

Eligibility for ADP is not affected by income or employment status but is based rather on a disability or health condition. As the SFC notes in its December report on Scotland's economic and fiscal forecasts, that means spending on ADP is not related to economic performance and is instead primarily related to demographics:

'Older people are more likely to receive ADP and therefore a combination of an ageing population and increases in the state pension age mean we expect the number of people receiving ADP to increase over the next five years. Changes the Scottish Government is making to devolved social security have long-term spending implications, as once people are deemed to be eligible, they can continue to receive a payment for many years.'

As with the devolution of other powers, the budget implications for the largest welfare payments are worked out by adjusting Scotland's block grant based on spending on the original DWP payments. Any payments above the 'block grant adjustment (BGA)' must be met from the wider Scottish budget. Taken as a whole, the welfare changes expected in Scotland in coming years, as laudable as they arguably are, are set to have a dramatic impact on the Scottish budget.

As the SFC notes: 

'Combining completely new payments and payments with BGA funding, we expect that by 2026-27 spending on the Scottish government’s social security benefits will be £760 million more than the corresponding funding received, reducing the funding available for other parts of the Scottish Budget.'

The combination of welfare changes and disappointing income tax receipts points to an emerging systemic problem for Scotland. How can the devolved administration continue to fund, for example, its welfare ambitions without degrading provision elsewhere in areas like health and education?

For the SNP, the answer, of course, will be that they need more powers. For anti-devolutionists, the answer will be to reverse devolution and return to a less costly-to-administer centralised system. The other answer is to improve Scotland's economy within the current system; to grow the tax base and generate the prosperity needed to fund government ambitions.  

But rather than take abortive action, it would be entirely in keeping with its past behaviour for the SNP to spin a self-made systemic fiscal sustainability problem as yet another grievance to further their campaign to break up the UK – which is ironic, given secession would turn a fiscal sustainability challenge into a fiscal emergency.

Written byJohn Ferry

John Ferry is a contributing editor for the think tank These Islands and a former financial journalist

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