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Report on Scottish Government Budget 2021-22 Published in Scotland by the Scottish Parliamentary Corporate Body Published 23 February 2021 SP Paper 954 2nd Report, 2021 (Session 5) Finance and Constitution Committee Comataidh Ionmhais is Bun-reachd Report on Scottish Government Budget 2021-22 Published in Scotland by the Scottish Parliamentary Corporate Body. All documents are available on the Scottish For information on the Scottish Parliament contact Parliament website at: Public Information on: http://www.parliament.scot/abouttheparliament/ Telephone: 0131 348 5000 91279.aspx Textphone: 0800 092 7100 Email: [email protected] © Parliamentary copyright. Scottish Parliament Corporate Body The Scottish Parliament's copyright policy can be found on the website — www.parliament.scot Finance and Constitution Committee Report on Scottish Government Budget 2021-22 , 2nd Report, 2021 (Session 5) Contents Introduction ____________________________________________________________1 UK Economic and Fiscal Outlook __________________________________________2 Future trading relationship with the EU ______________________________________2 Borrowing_____________________________________________________________3 Scotland’s Economic and Fiscal Outlook ____________________________________5 Scotland-specific economic shock__________________________________________6 Future trading relationship with the EU ______________________________________7 Impact of Covid-19 on the Scottish Budget __________________________________9 Budget 2020-21 In-Year Revisions _________________________________________9 COVID-19 Funding in Budget 2021-22 _____________________________________10 Additional Fiscal Flexibilities _____________________________________________ 11 Underspends _________________________________________________________ 11 Scottish Income Tax ____________________________________________________15 Income Tax Revenue Forecasts __________________________________________15 Net Tax Position_______________________________________________________16 Employment and Earnings Forecasts ____________________________________18 Scotland’s Relative Tax Performance ______________________________________20 Distributional Issues____________________________________________________22 Managing Forecast Error ________________________________________________25 A Fair and Equal Economic Recovery______________________________________26 Differential Social and Economic Impact ____________________________________26 The Scottish Government’s Response in Budget 2021-22 ______________________28 The Scottish Government’s Response in its Medium Term Financial Strategy _______31 Capital and Infrastructure Investment ____________________________________31 Financial Transactions (FTs)__________________________________________31 Capital Borrowing Powers ___________________________________________32 Tax Policy __________________________________________________________33 Replacement of EU Structural Funds ______________________________________36 Scottish Parliamentary Corporate Body ____________________________________39 The Impact of Brexit____________________________________________________39 Members’ Staff Cost Provision____________________________________________40 Commissioners’ Pay ___________________________________________________40 Annexe A _____________________________________________________________41 Annexe B _____________________________________________________________43 Finance and Constitution Committee Report on Scottish Government Budget 2021-22 , 2nd Report, 2021 (Session 5) Finance and Constitution Committee To consider and report on the following (and any additional matter added under Rule 6.1.5A)— (a) any report or other document laid before the Parliament by members of the Scottish Government containing proposals for, or budgets of, public revenue or expenditure or proposals for the making of a Scottish rate resolution, taking into account any report or recommendations concerning such documents made to them by any other committee with power to consider such documents or any part of them; (b) any report made by a committee setting out proposals concerning public revenue or expenditure; (c) Budget Bills; and (d) any other matter relating to or affecting the revenue or expenditure of the Scottish Administration or other monies payable into or expenditure payable out of the Scottish Consolidated Fund. (e) Constitutional matters falling within the responsibility of the Cabinet Secretary for the Constitution, Europe and External Affairs. [email protected] 0131 348 5215 Finance and Constitution Committee Report on Scottish Government Budget 2021-22 , 2nd Report, 2021 (Session 5) Committee Membership Convener Deputy Convener Bruce Crawford Murdo Fraser Scottish National Party Scottish Conservative and Unionist Party Alasdair Allan Tom Arthur Scottish National Party Scottish National Party Jackie Baillie Alexander Burnett Scottish Labour Scottish Conservative and Unionist Party Patrick Harvie Dean Lockhart Scottish Green Party Scottish Conservative and Unionist Party Fulton MacGregor John Mason Scottish National Party Scottish National Party Anas Sarwar Scottish Labour Finance and Constitution Committee Report on Scottish Government Budget 2021-22 , 2nd Report, 2021 (Session 5) Introduction 1. This report sets out the views of the Finance and Constitution Committee (“the Committee”) on the Scottish Government’s Budget 2021-22 and its Medium Term Financial Strategy (MTFS). It follows our pre-budget report which was published in December. The Committee thanks all those who provided written and oral evidence and our Adviser. 2. The Committee recognises that both the 2021-22 Budget and the MTFS have been published in highly challenging circumstances, given the continuing economic and fiscal uncertainty. The Cabinet Secretary for Finance ("The Cabinet Secretary") told the Parliament that the “exceptional circumstances require an exceptional response” and that Budget 2021-22 “provides for continuity in our urgent work to control the virus and to protect our economy and national health service while the vaccine is delivered as quickly and safely as possible.” 1 3. The publication of the UK Budget on 3 March means that the size of the Scottish Budget could change significantly. The Cabinet Secretary told the Parliament that there is a need to “persevere with a budget that is based on a partial settlement while we are left waiting until the UK budget to see the full hand that is being dealt to us.” 2 4. The Committee welcomes the agreement of the Cabinet Secretary to move Stages 2 and 3 of the Budget Bill to after the UK Budget. This will allow the Committee and the Parliament an opportunity to consider the impact of the UK Budget during scrutiny of Budget 2021-22. 5. The Committee notes that this is the second consecutive year in which the Scottish Budget has been published prior to the UK Budget. The Committee recognises that this was due to the UK General Election in December 2019 and then the exceptional circumstances arising from COVID-19. In both cases this has resulted in a truncated period for parliamentary scrutiny which makes detailed consideration of the Budget very challenging. The interconnectedness of the UK Budget and the Scottish Budget exacerbates this challenge. 6. The Committee recommends, therefore, that our successor committee should work with its counterpart committees in Wales, Northern Ireland and the House of Commons with a view to impressing on HM Treasury the benefits of better alignment between the devolved budget processes and UK fiscal events. The forthcoming review of the Fiscal Framework also provides an opportunity to address this issue. 1 Finance and Constitution Committee Report on Scottish Government Budget 2021-22 , 2nd Report, 2021 (Session 5) UK Economic and Fiscal Outlook 7. In our pre-budget report the Committee considered the Office of Budget Responsibility’s (OBR) economic and fiscal outlook (EFO) which was published in November 2020. At that point in the current crisis the OBR expected UK economic growth to fall by 11% in 2020 which is the largest fall in over 300 years although outturn data suggests the actual fall was 9.9%. In response the UK Government deficit was expected to reach nearly £400 billion which is the highest deficit since 1944-45 and the highest outside of wartime. 8. Since then the economic and fiscal impact of the crisis has continued to rapidly evolve. The OBR publish a monthly commentary on the public sector finances based on Office of National Statistics (ONS) data. The latest commentary on the December 2020 data stated that “the pace of government borrowing picked up further in December to reach £34.1 billion, the highest monthly total since May.” This means that year-to-date borrowing now stands at £270.8 billion, “far exceeding the pre-virus annual record set at the peak of the financial crisis (£158 billion).” 3 9. The Committee heard from the OBR on 27 January. While the OBR’s next set of forecasts will not be published until 3 March they were able to provide us with a sense of how events have unfolded relative to their November forecast. They told us that there continues to be “an extraordinary degree of uncertainty about the economic and fiscal outlook” and that this originates from two sources— • The path of the pandemic; • Future trading relationship with the EU. 10. The OBR told us that the emergence of a more infectious and virulent strain of the virus and subsequent national lockdown since their November forecasts has been largely negative for the UK’s economic prospects. However, the
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