Managing both Budget and pandemic brings challenges

The Scottish Fiscal Commission says today that managing the Scottish public finances will be very difficult again in the coming financial year. Their latest economic and fiscal forecasts also show the effects of COVID will be felt for a long time.

The Scottish Government is implementing public health measures to control COVID and at the same time introducing policies to reduce the ensuing economic harm to people and businesses. The funding available to the Scottish Government continues to change: additional COVID funding rose from £3.5 billion in April to £8.6 billion in December. It is now clear the pandemic will continue into the next financial year and  the UK Budget in March is likely to include additional UK spending on COVID. More funding later in the financial year remains a possibility.  Any further increases in UK Government spending on COVID in devolved areas, such as health, in 2021 will feed through to the Scottish Government.

All of this makes it harder for the Scottish Government to balance its budget. Increases in funding are welcome and important, but the later they happen in the budget year, the harder it is for the Scottish Government to spend them effectively.

The Commission forecasts the latest lockdown will reduce economic activity in the first quarter of 2021 by 5 per cent. The effect on GDP is expected to be less than in the first lockdown because more sectors of the economy, like construction and manufacturing, are staying open.

The OBR’s November 2020 forecasts were made before the current lockdown was announced and so took a more optimistic view of the UK economy than the Commission’s forecasts for Scotland published today. As a result the criteria for a “Scotland-specific economic shock” are met, giving the Scottish Government additional borrowing powers for the next three years.

The Commission expects that as the vaccination roll-out continues and public health restrictions are lifted the Scottish economy will begin to recover, with GDP growing by 2 per cent over 2021 as a whole and by 7 per cent in 2022. However, Scottish GDP is not forecast to return to its pre‑COVID level until 2024.

The Commission’s chair, Dame Susan Rice, said:

“The last year has been difficult for us all, and I’m afraid it’s clear the coming year will continue to be tough. With rising unemployment, the pain has also not been shared equally. But we do see the economy gradually recovering as the restrictions are relaxed.

It’s not an easy time to set a budget as there’s a lot of uncertainty about the pandemic and its impact. Unlike the UK Government, the Scottish Government has to balance its budget each year. This makes managing the Scottish public finances really hard when the funding from the UK Government is likely to vary greatly through the year.”

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Notes for Editors

1. The Commission’s Report Scotland’s Economic and Fiscal Forecasts – January 2021 is available now, along with a one page graphic of key figures and a summary document. We have also published a Fiscal Update that discusses budget management over the remainder of the 2020‑21 financial year. Background information is also available including spreadsheets with data for tables and charts. 

2. The main report contains our official economic, tax and social security forecasts along with policy costings for the changes in tax and social security proposed in the Government’s budget. Our forecasts are just one component of the Scottish Budget; the report also discusses how the Scottish Budget is set and the effect of the devolution of tax and social security benefits. Within this context we provide our assessment of the reasonableness of the Government’s borrowing plans.

3. The Commission’s forecasts have for the first time triggered a “Scotland specific economic shock” which releases an extra £300 million of resource borrowing against forecast errors and also allows the Government to withdraw any available funding from their reserves. The shock arises as a result of differences in the information about the January 2021 lockdown that was available when the Commission made its forecast but not available to the OBR when it made its UK forecast in November 2020.

4. On 24 December 2020, the UK and EU agreed a post-Brexit trade and security deal. Our previous forecast assumed that such a deal would be reached and there are no additional Brexit impacts in this forecast. During January 2021 there have been significant border problems affecting fisheries exports, trade between Northern Ireland and Great Britain, and other trade. We expect many of these problems to be short lived, but the inevitable fact that Brexit increases border frictions is why we reduced growth in international trade in our earlier forecasts.

5. The Scottish Fiscal Commission is the independent fiscal institution for Scotland, established by the Scottish Fiscal Commission (2016) Act. Our statutory duty is to provide the independent and official forecasts of Scottish GDP, devolved tax revenue and devolved social security spending for the Scottish Government to use in its budget and financial planning. The Commission’s forecasts will also assist the Parliament’s scrutiny of the Scottish Budget and Budget Bill.

6. The Commission’s forecasting remit is specified by the Act and in secondary legislation. A full list of what we forecast is given in the ‘explainers’ section of our website.

7. Our forecasts represent the collective view of the Scottish Fiscal Commission, comprising the Commissioners: Professor Francis Breedon, Professor Alasdair Smith, Professor David Ulph, and the Chair, Dame Susan Rice.

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