Holyrood budget process will change

Donald-Drysdale By Donald Drysdale for ICAS

4 July 2017

Donald Drysdale studies the final report of Scotland’s Budget Process Review Group and finds that significant changes are likely to follow.

Scotland’s budget process

Soon after the Scottish Parliament returns from recess on 4 September, the minority SNP administration and the Finance and Constitution Committee are expected to make joint recommendations to the Parliament for a new budget process designed to accommodate all the financial and social security powers that are now devolved from Westminster.

This follows from the publication on 30 June of the Final Report of the Budget Process Review Group.  This Group was established in 2016 to carry out a fundamental review of the Scottish Parliament’s budget process, and the report sets out its findings and recommendations.

The Group consists of Scottish Parliament and Scottish Government officials and eight independent experts.  In its report, it has called on the Scottish Government to adopt a more strategic approach to financial planning by publishing, each spring, a Medium-Term Financial Strategy for Scotland’s public finances, and each autumn, a Fiscal Framework Outturn Report setting out data for Scottish tax revenues.

Core budget objectives

The Group has recommended that Holyrood’s budget process should have four core objectives, namely:

  • greater influence on the formulation of the Scottish Government’s budget proposals;
  • improved transparency and greater public understanding and awareness of the budget;
  • more effective responsiveness to new fiscal and wider policy challenges; and
  • better outputs and outcomes as measured against benchmarks and stated objectives.

The Group recognises that the new powers arising from Scotland Act 2012 and Scotland Act 2016 are fundamentally changing the management of Scotland’s public finances.  There is also significantly increased complexity in the interaction between the UK budget cycle and the Scottish budget cycle.

From 2017/18 approximately 40% of the money the Scottish Government spends will come from tax raised in Scotland.  Around 15% of social security spending, an estimated £2.8 billion, is also being devolved.  As the new powers are introduced, Scotland’s budget will become increasingly complex and subject to greater uncertainty and volatility.

The report highlights weaknesses within the existing budget process.  The current process does not take sufficient account of the interaction of the UK budget timetable with the Scottish budget timetable.  Furthermore, the influence of the Scottish Parliament on the formulation of the budget has been limited.

Budget timetable

The Group considers that publishing the Scottish Budget before the UK Budget would be counter-productive owing to the likely levels of uncertainty.  It therefore recommends that the Scottish Budget is normally published no more than three working weeks after the UK Budget – presumably each autumn if Philip Hammond has his way.  It also wants to see more time built into the budget cycle for ongoing parliamentary scrutiny of the budget proposals at Holyrood.

There hasn’t been a Scottish spending review since 2011.  The Group recommends that the Scottish Government should carry out an annual spending review, linked to the equivalent UK spending review, to help prioritise overall expenditure and inform proposals for multi-year budgets.  As part of this review the Scottish Government should also publish a framework document setting out the economic and political context, the criteria which will govern the assessment of budgets and the process and timetable for the review.

The framework document should be published prior to the Holyrood summer recess to allow sufficient time for parliamentary scrutiny and input into the spending review.  Holyrood committees should undertake a constructive dialogue with the Government, public bodies, and stakeholders once the framework document is published, in order to influence the outcome of the spending review.

Budget methodology

In an approach that will require cultural as well as procedural change, the Group has outlined a revised framework for the budget process, including:

  • a ‘full year approach’ in which Holyrood committees have the flexibility to incorporate budget scrutiny including public engagement into their work prior to the publication of firm and detailed spending proposals; 
  • a ‘continuous cycle’ of scrutiny, with an emphasis on developing an understanding of the impact of budgetary decisions (including budgetary trends) over a number of years;
  • a focus on outcomes, with an emphasis on what budgets have achieved and aim to achieve over the long term, including scrutiny of equalities outcomes;
  • budget scrutiny based on fiscal responsibility, with a greater longer term outlook on prioritisation and addressing fiscal constraints and the increasing demand for public services; and
  • a greater focus of scrutiny on the interdependent nature of many of the policies which the budget is seeking to deliver.

The fiscal framework

The fiscal framework agreed between Westminster and Holyrood governs the operation of the tax and welfare powers devolved to the Scottish Parliament.  It creates the need for a series of reconciliations between tax revenue forecasts to inform the Scottish Budget and subsequent outturn figures.

The Scottish Government should publish a Fiscal Framework Outturn Report each autumn, including outturn data for the previous financial year.  This would comprise audited final data for the fully devolved taxes and HMRC’s estimated outturn data for Scottish income tax receipts.  It would also include block grant adjustments, movements on the Scottish Reserve, and details of Scottish Government borrowing.

The annual Fiscal Framework Outturn Report should be published in September to allow Holyrood committees to consider its contents prior to the publication of their pre-budget reports.

The Group also recommends that after each UK Spring Statement and at least four weeks before the Holyrood summer recess, the Scottish Government should publish a Medium-Term Financial Strategy setting out its expectations and broad financial plans and projections for at least the next five years.  This would help explain the financial implications of existing policy, so these could be understood in formulating detailed budget proposals later in the budget cycle, and would enable a medium-term perspective on the public finances to be maintained throughout each parliamentary session.

Key inputs to the Medium-Term Financial Strategy would be the revenue and expenditure forecasts produced by the UK Office for Budget Responsibility at the time of the UK Spring Statement and subsequent forecasts by Scotland’s equivalent body, the Scottish Fiscal Commission. Initially the Strategy would include forecast revenue and demand-led expenditure estimates; broad financial plans for the next five years; clear policies and principles for using, managing and controlling the new financial powers; and scenario plans based on economic forecasts and financial information.

Conclusion

As soon as Hammond announced on 8 March that the UK Budget would be shifted from spring to autumn, it was inevitable that Holyrood’s budget processes and timing would have to be re-thought.  But the need for review had already been recognised previously owing to increased devolution of tax and welfare powers from Westminster.

It is hoped that the Scottish Government and Scottish Parliament will heed this report and implement its recommendations.

Article supplied by Taxing Words Ltd

Topics

  • Tax

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