RSE Response to Scottish Budget 2022/23 and the Fiscal Framework

The RSE has responded to the Scottish Parliament Finance and Public Administration Committee inquiry on the Scottish Budget 2022/23 and the Fiscal Framework.

The response highlights that the Covid-19 pandemic will have long term impacts on the Scottish Budget as it has increased public debt to its highest peacetime level. With the pandemic still ongoing, several risks may impact the 2022/23 Scottish Budget; these include a fourth wave of the pandemic, high inflation, natural disasters due to adverse weather conditions, and falling tax receipts due to businesses failing or rising levels of unemployment.

The response notes that future Scottish Budgets will need to address the significant backlogs within the health and education sectors. Attention will need to be given to the social care sector. The level of spending in these sectors will restrict the Scottish Budget. It is unclear how much money will be available to spend on other priorities such as job creation, reducing inequality, and achieving net-zero.

The RSE has noted that the fiscal framework offers significant flexibilities and provisions to support the Scottish Budget in previous responses. In the lead up to the renegotiation of the fiscal framework, intergovernmental relations between the UK and Scottish Governments have deteriorated, with the Internal Market Act and funding initiatives such as the Shared Prosperity Fund, damaging relations further. The response welcomes the proposals to improve the intergovernmental framework and presents the RSE’s recommendations on how to improve intergovernmental relations.

Ray Perman FRSE gives an outline of the RSE response to the Scottish Parliament Finance and Public Administration Committee inquiry on the Scottish Budget 2022/23 and the Fiscal Framework

Paper summary

The pandemic has significantly altered spending priorities, leading to high levels of public spending to address challenges within the health care system and support the economy. The scale of public expenditure during the pandemic will increase UK public sector debt

to its highest peacetime level. This increased level of debt, combined with a probable decrease in tax receipts, will place significant pressure on the UK and Scottish budgets.

There are several risks that the Scottish Budget may need to address; notably, there is still a risk of a fourth wave of the pandemic, which, if it occurs, will lead to further increases in public spending. Other risks include high levels of inflation beyond 2%, impacts from adverse weather conditions due to climate change, falling tax receipts due to businesses failing and rising unemployment as furlough ends.

The pandemic has led to vast backlogs and challenges within the health care system; the backlog in appointments and diagnosis will need particular attention in the short term. However, equal or more attention may have to be given to the social care sector, as this is where the pandemic has exposed some of the greatest weaknesses. This will be a key spending priority for the Scottish Government, but it’s unclear what demands this will place on the Scottish Budget in the short-medium term. Another key spending priority will be education to ensure that any lost education resulting from the pandemic is addressed.

Despite the pressures that health and education will place on the Scottish Budget, the Scottish Government should not lose sight of its aspirations to recover by improving growth, achieving net-zero, and establishing an economy focused on wellbeing. Key aspects of a wellbeing economy are access to a high standard of employment which offers the minimum of a living wage, skills development, and low inequality. The RSE believes that a spending priority will be to support the economy through investing in early-stage companies (spinouts and start-ups), which are crucial to job creation, and aiming to fulfil the recommendations presented in the Social Renewal and Economic Recovery reports.

Our previous responses noted that the fiscal framework offers significant flexibilities and provisions to support the Scottish Budget. In the lead up to the renegotiation of the fiscal framework, the state of intergovernmental relations has declined. The RSE has previously recommended that intergovernmental relations be improved by creating an Independent Secretariat, which would help enhance the structure, formality and relationships of intergovernmental relations rather than create new mechanisms. A similar proposal has been put forward by the Dunlop Review and the joint review of intergovernmental relations by the UK Government and devolved administrations. The RSE is concerned that new initiatives from the UK Government, including the Shared Prosperity Fund, Levelling Up Fund, and Community Renewal Fund will bypass the devolved administrations. To ensure that such funds are as successful as possible, it will be crucially important that there is coordination and cooperation across the governments of the UK.