Scotland Finance

Budget 2015: spending commitments see local government bearing pain


Photo Credit: BauHausDH via Compfight cc

David Eiser (University of Stirling and Centre on Constitutional Change) covers today’s budget. What’s changed, what’s stayed the same, and what does it all mean for Scottish local government?

This was an unusual budget, coming much later in the year than we are used to (as a result of the UK Government’s Spending Review last month), and just a few months before the Scottish elections in May. As a result, the budget sets out spending priorities for 2016/17 only, but not beyond.

For local authorities the government’s spending commitments elsewhere and the continuation of the Council Tax freeze for a ninth consecutive year mean more tough times ahead. And COSLA’s President condemned the plans.

Funding for local government will decline by over 8% (7% in real terms). The total allocation including receipts from non domestic rates to local government in 2015/16 was £10,756.7 million. In 2016/17 it will be £10,152.3 million.

The Budget was billed as a ‘Scottish alternative to austerity’. The UK Conservative Government was criticised for its ‘ideological obsession with austerity’, and Mr. Swinney said he would not let the poorest bear the biggest burden of spending commitments.

As a result, a number of spending protections were announced. The Scottish Government will continue to fund the reversal of some UK-Government welfare cuts, including the ‘bedroom tax’ and the cut to Council Tax Reduction.

The government’s commitment to flagship universal policies was maintained. Free concessionary travel, free prescriptions, free tuition will continue. Access to free childcare will be increased to 1,140 hours per year over the course of the next parliament.

As expected, the health budget will see the most significant increase in funding of around 4% in real terms between 2015/16 and 2016/17. But the Deputy First Minister was keen to point out that funding increases alone will not be enough to meet the pressure of population ageing, and the need for service reform and innovation – a theme of the budget – was stressed. The police budget will be protected in nominal terms (but fall slightly in real terms).

Given the wider context to this budget – the Scottish Government’s grant from Westminster is frozen in real terms between 2015/16 and 2016/17 – how would these commitments be funded?

This was the first budget to set a Scottish Rate of Income Tax (SRIT). As of April 2016, each income tax band in Scotland will be reduced by 10p. If the Scottish Government sets the SRIT at 10p, then income tax rates in Scotland will be no different from those in the rest of the UK, and the Scottish Government will retain the revenue raised from the 10p band. But the Scottish Government could if it wanted set a SRIT at less, or more than, 10p. If it had set a SRIT of 11p for example, then income tax rates in Scotland would be 21p on the basic rate, 41p on the upper rate, and 46p on the additional rate, and the Scottish Government would retain whatever additional revenues were raised.

As anticipated, Mr. Swinney chose not to deviate from UK rates. He set the SRIT at 10p, meaning that income tax rates in Scotland will continue to be 20p, 40p and 45p on the basic, upper and additional rates. His argument was that any increase in the SRIT would hit poorer individuals harder.

This is perhaps not strictly accurate – those earning under £10,000 per year pay no income tax at all – but an increase in the SRIT would certainly hit low to middle-income earners, and so would have been a daring political move with an election in May. Mr. Swinney hinted that what he would like to do would have been to increase tax rates on higher earners only – but the power to do this will not be devolved to the Scottish Parliament until 2017/18 at the earliest.

The Land and Buildings Transactions Tax (LBTT), the replacement for Stamp Duty in Scotland which was introduced in the 2015 Budget, remains largely unchanged. But Mr Swinney followed the policy announced by George Osborne in the Autumn Statement, and has imposed a 3% premium on LBTT rates for buyers of second homes and buy-to-let properties. This might be symbolic of a commitment to equality, but it will not raise substantial revenue.

The Deputy First Minister welcomed the work of the Commission on Local Taxation that reported earlier this week, and announced that the Government would set out its plans for the reform of Council Tax in the New Year. He also said that the Government would begin consultation with local authorities about the possibility of assigning some proportion of income tax revenues raised locally to local government budgets. But in the interim – and also not coming as a surprise given the forthcoming elections in May –Mr. Swinney announced that Council Tax would again be frozen in 2016/17.

Mr. Swinney did not follow Chancellor George Osborne’s Spending Review announcement of allowing local authorities to raise Council Tax if the proceeds were spent on adult social care. He announced that £250 million of funding would be re-allocated from the health budget to local government for funding of social care, as part of the move towards an integrated approach.

The Deputy First Minister also announced a review of Non-Domestic Rates in the next parliament. In the immediate term, he announced an increase in the large business supplement, expected to raise £130 million, while reliefs for small businesses are retained.

The combination of a significant increase in health spending, together with a real terms freeze in the grant from Westminster, and with virtually no changes to tax rates in Scotland, it is inevitable that some areas of government will suffer. For all the announcements about education, spending on Higher Education student support will fall by over 10% next year, and funding for the Scottish Further and Higher Education Council will fall in real terms.

More generally, there was an emphasis on public service reform throughout the Budget statement, following the principles of the Christie Commission. There will be an emphasis on sharing and integration of services, continued moves towards digital public services, and a continued emphasis on preventative policy.

So, a Scottish approach to austerity is one that offers a real terms increase in health spending and an ongoing commitment to various flagship policies. But, with health spending accounting for such a significant share of the Scottish budget, and with no desire for tax increases before next May’s election, the inevitable result is a continuation of real terms funding cuts across most of the rest of the public sector.