The road not taken – yet

Caroline_twitter_400pxAuditor General Caroline Gardner on Scotland’s new financial powers and the opportunities and pitfalls that lie ahead.

The Scottish Budget Bill passed its Stage 1 hurdle last week, with support from the Greens and two Lib Dem MSPs. There’s been lots of coverage of the deal that’s been reached – extra cash for councils, low-carbon capital investment and lower-paid public sector workers, plus backing for ferry services in the northern isles – amounting to £170 million. There’s no doubt that it’s an important milestone for the Government, but in some ways the debate has missed the bigger questions.

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The Scottish Parliament is taking on significant new financial powers that will fundamentally change Scotland’s public finances. There are new powers over borrowing and reserves; control over most income tax; and responsibility for 10 social security benefits, worth around £3 billion a year, plus the power to top up reserved benefits and create new ones. The new powers bring both opportunities and risks which will need to be managed. The Government is responding to this shift by establishing a Scottish Exchequer to oversee its economic and fiscal policy. But there’s more to be done.

Just how much of an increased impact will Scotland’s economic performance now have on the government’s budget options? What might the picture look like in two or three years time? How does Parliament ensure the new powers are used effectively?
The challenge of implementing and using the new financial powers is substantial.

Parliament’s Finance and Constitution Committee published its budget report on 26 January, and it’s an excellent illustration of some of the issues. The Committee highlights the extent to which the Scottish budget will depend much more directly on the relative performance of the Scottish economy in future, as well as the complex system for adjusting the block grant to reflect the tax revenues raised in Scotland.

For example, if the amount of income tax raised in the new financial year, 2018-19, is higher or lower than forecast, the difference won’t be reconciled within the block grant until the final outturn data is available in 2021-22. At that point, the Scottish Government will have to manage the difference (and there’s bound to be one) within its budget. If there’s a shortfall the Government has three options under the Fiscal Framework: use its new revenue borrowing powers; use any funds it has saved in the new Scotland Reserve between now and then; or adjust its spending plans up or down.

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At the same time, the Government also has new powers to borrow for capital spending, with an annual limit of £450 million and an overall limit of £3 billion. It intends to use its new borrowing powers in full to finance infrastructure investment, alongside continuing investment financed through the revenue budget by means of public private partnerships. All of that investment will represent fixed commitments on the revenue budget in future years.

Those two examples give a flavour of how much more complex and volatile the Scottish budget will be in future. That’s why the Finance and Constitution Committee set up the Budget Process Review Group, along with the Government, to have a fundamental look at how Parliament’s budget process needs to develop if the new powers are to be used effectively; and it’s why the Committee has used its report to stress the importance of implementing the Group’s recommendations.

I was privileged to be a member of the Group, and I fully support its recommendations. I’ve no doubt that they will take time to implement in full, given the scale of the change required. In my most recent report on the Scottish Government’s Consolidated Accounts for 2016-17, I highlighted three priorities for action by the Government:

  • a public sector consolidated account for the whole public sector to outline total assets, liabilities, borrowing and investments. This would allow Parliament and the public to see overall what the Government and other public bodies own and what they owe – things like public sector property, plant and equipment; pension liabilities for the NHS, teachers and police officers; and local government borrowing
  • a medium-term financial strategy to outline high-level financial plans for the next five years. This would set out the Government’s expectations and broad financial plans for at least the next five years. It would capture an overview of the financial implications of existing policy, and give MSPs and the public an insight into the public finances across each parliamentary session
  •  the policies and principles for borrowing and reserves, including the conditions under which it will use capital and revenue borrowing; how it will demonstrate its decisions are affordable and sustainable; and what limits or targets it intends to use to ensure there is scope to deal with unexpected economic events.

If these changes are implemented well, they’ll give Parliament and Government the best chance of using the new financial powers effectively to stimulate Scotland’s economy, making robust, well-informed and sustainable financial decisions, and managing the major new risks and opportunities involved. They also offer the chance to put in place a world class approach to public financial management and scrutiny here in Scotland, a prize that matters to all of us.

 

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