Rachel Reeves’s Budget, announced on Wednesday this week, signalled a significant fiscal policy change. In it was a major shift in strategic direction on public investment, and a big early push on spending, especially on health and education.
Two points are worth noting regarding government spending compared to this year’s spring Budget plans under the previous Conservative government. First, the Chancellor listened to the advice of many economists who urged her to modify the fiscal rules to avoid a bias against public investment in the previous debt regulation. Certainly her change in the debt (investment) rule to focus on a broader measure of debt is similar to what International Monetary Fund economists have suggested for advanced economies to address the dual challenge of rebooting economic growth and the transition to net zero. Public investment is now planned to rise in real terms by 6.6 per cent in 2024-25 and 10 per cent in 2025-26. Conversely, under the Conservative government’s spring Budget plans, capital spending was due to fall in real terms next year.
Second, the Budget has given a big boost to day-to-day spending – but again like capital spending it’s much more tilted towards the first two years of this parliament. This has produced a major uplift, through the Barnett formula, to the block grant available to the Scottish government. The Barnett consequentials are very significant: £1.5bn extra for Scotland for this financial year and an additional £3.4bn for 2025-26, of which £2.8bn will be for day-to-day spending and £610 million for capital spending.
As a result, fiscal pressures on the Scottish government will be relieved. As the Scottish Fiscal Commission pointed out in August, the SNP administration was facing a real challenge in meeting its current year budget, largely because of its more generous public sector pay settlements than it had planned for last December. More than that, the SFC also forecast social security spending in Scotland to be higher than the block grant adjustment – meaning the Scottish government has had to resultantly activate emergency spending controls. So the generous settlement for next year should also help the Scottish government as it presents the Scottish budget on 4 December to Holyrood. As a minority government it will make their negotiations with other parties easier than if they had faced a tighter spending envelope.
But there remain some stark choices facing Scotland in terms of its fiscal policy. Like the UK government, the SNP administration will have a real challenge in managing the very large increase in its spending envelope next year. Contrary to popular belief, it is always very difficult for a big surge in budgets to be spent effectively and efficiently.
The real danger is of course that the additional money will not be spent well, unless it comes with a requirement to improve the productivity of our public services and improve delivery and outcomes. This is especially the case in areas such as health and social care where there are systemic challenges in delivery. Public services that operate at above full capacity usually do not work efficiently. Capital spending which is rushed may end up being wasted in projects which are ineffective in increasing the capacity of the NHS and the social care system.
It is also imperative that Scotland grows its economy. The post-2016 tax devolution arrangements mean that Scotland shares some of the risks with the UK exchequer of fluctuating taxation revenues. Hence the resources available to fund public services in Scotland in part depend on the ability of the Scottish government to grow the economy. The front-loaded 2024 UK Budget provides a real opportunity to direct spending to areas (e.g. skills, innovation and economic development) which could boost future economic growth. Given that it’s highly likely that the forthcoming 2025 UK spending review might top up future budgets, this could be preferable to simply echoing the UK allocation to health and social care in the Scottish fiscal statement.
There is also the issue that Scotland’s productivity is lower than the UK average – and this is a gap that must be closed over time. And, as the Fiscal Commission highlights, Scotland faces adverse demographic trends compared to the rest of the UK, which will constrain growth. The Scottish government and parliament should consider the multiple factors at play here and develop policies to improve these trends. If, as the Office for Budget Responsibility (OBR) forecasts, there is a significant uplift in UK growth in years 6-10 after the current budget, Scotland needs to keep pace with the rest of the UK economy. Meanwhile with major English city regions moving to integrated settlements, Scotland needs to consider what devolution should look like north of the border – and how it can drive growth.
As part of the country’s forthcoming budget debate, all of Scotland’s political parties must think beyond the next financial year. The underlying theme of the UK Budget was whether it could reboot economic growth. It would be a great pity if the Scottish budget debate does not focus on the long-term health of the economy. Ultimately that is what will pay for our public services.
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