Scotland facing further £200m a year cut to help Chancellor balance the books, warns think-tank

At the weekend, Mr Osborne signalled that, because of global economic pressures and predicted weaker revenue, he would have to find an additional £4bn in public spending cuts by 2020, if he is to meet his target of balancing Britain’s books by the time of the next General Election.

IPPR Scotland has number-crunched and found that the extra 0.5 per cent cut in UK spending could mean a total reduction to the Scottish Government's budget of £200m per year in real terms by 2019/20.

The think-tank’s analysis comes just a week after its report, “New powers, New Scotland?” in which it outlined the “£2bn question” facing the next Scottish Parliament and called on the political parties to outline how they would fill this spending gap in advance of May's Holyrood elections.

“If, as suggested, the Chancellor’s 0.5 per cent cut is applied equally to Scotland, that would mean the next Scottish Government could be facing yet more cuts worth £200m, on top of the £2bn funding gap facing Scotland. Benefits cuts that hit in Scotland, will only add to this further still,” declared Russell Gunson, director of IPPR Scotland.

He added: “These are cuts coming from UK decisions and we need to be clear about that. However, all political parties in Scotland need to outline in advance of May's elections the choices they’d make to find these spending cuts.”

John Swinney, in a letter to Mr Osborne ahead of today’s economic statement, set out the urgent action he believes the Treasury must take to help the oil and gas industry, including immediately reducing its overall tax burden, removing fiscal barriers to exploration and considering the provision of government loan guarantees.

Noting how the Scottish Government had been engaging with the industry, unions and the Oil and Gas Authority to address the challenges facing the sector, the Deputy First Minster said: “There is consensus across stakeholders that the loss of highly skilled workers and critical infrastructure could be realised if urgent action is not taken. UK Government inaction at this time could threaten the prosperity of the oil and gas industry.”

A call for action to help the oil and gas industry was also made by Kezia Dugdale, the Scottish Labour leader, who emphasised how the Chancellor had to “stop his race to cut to the bone”.

She said: “This has been the slowest economic recovery in over 100 years with ordinary family incomes squeezed and the most vulnerable in our society hit the hardest. We can’t go on with more of the same policies that risk the recovery and ask those with least to pay the most.”

With the EU referendum setting the backdrop to the Budget, it is thought Mr Osborne will use his Commons statement to present himself as a potential successor to David Cameron as Prime Minister and Conservative leader.

A key announcement that every state school in England will become an academy, free from local authority control, has already sparked an ideological clash with Jeremy Corbyn’s Labour Party and the teaching unions, who accused the Chancellor of "undoing over 50 years of comprehensive public education at a stroke".

All eyes will be focused on whether Mr Osborne opts to hike fuel duty for the first time in five years - raising £1bn for every 2p on a litre at the pumps - despite pressure from Conservative MPs to hold back. He has already buckled to backbench protests by ditching a mooted plan to reform tax relief on pensions

There is speculation he will nudge up insurance premium tax, while charity Scope said disabled people were "anxiously awaiting" today's economic statement amid concerns they could face further cuts to their benefits.

Already trailed ahead of the Budget is a £300 million package of investment in transport infrastructure in northern England - including a green light for the HS3 plan to improve east-west rail links - as well as £80 million to take forward planning for the £27 billion Crossrail 2 north-south train line through London.

Mr Osborne is also expected to confirm plans for a new £1.2bn fund to release brownfield land for 30,000 new starter homes south of the border as well as trials of driverless cars on British motorways.

Analysis by Russell Gunson, director of IPPR Scotland, a cross-party independent thinktank

There is one thing for sure about today’s budget. It will require political gymnastics beyond even those seen from this Chancellor before - an omnidirectional budget no less. And the political stakes of getting it wrong could be higher than ever. 

With elections in London, Wales, Northern Ireland, and of course the Scottish Parliament elections in May, there is an added element of politics to what is always as much a political as economic occasion. However, when the UK Chancellor stands up to present his budget he will also have the politics and importance of the EU referendum firmly in his mind too, with very different political calculations, pulling in different directions.

To win the EU referendum he will need voters in Scotland to vote strongly in favour of remaining, he will also need supporters of other parties across the UK, and increasingly he will need a strong turnout. Therefore, a budget that reaches out to the parts of the electorate that a UK Conservative Chancellor usually does not reach could be in order.

However, at the same time, and before then, the Chancellor will have in mind how to maximise his party’s chances in London’s mayoral elections, in the Welsh Assembly elections and of course Ruth Davidson and the Scottish Conservatives’ chances here in Scotland. This may point in him in a very different direction, less reaching out and more shoring up his own party’s support.

But most importantly of all, the strong currents of politics at play may come up against the strong pull in the opposite direction from the worsening economic outlook.

At December’s Autumn Statement, the Office of Budget Responsibility projections gave George Osborne enough latitude to reverse proposed cuts to tax credits. However, already those projections look optimistic and the Chancellor has made clear he is considering cuts of 0.5%, around £4b per year across the UK by 2019/20.

So what would further spending cuts mean for Scotland? IPPR Scotland estimate that the £4b shortfall across the UK, would mean a further £200m real terms cut to Scotland’s block grant per year by 2019/20. Equally, in addition, there may be cuts to benefits which would affect Scottish recipients.

IPPR Scotland’s report last week, New powers, new Scotland?, outlined the ‘£2b question’ facing the next Scottish Parliament, and potentially how the new powers could be used to meet the spending challenge. If George Osborne does announce spending and benefits cuts across the UK then in Scotland this will only add an incredibly tough challenge on top of what already looks like a tall order.

How George Osborne can look in all directions at the same time is unclear. Reaching out to voters in Scotland and voters from other political parties across the UK in advance of the EU referendum, maximising his party’s chances in May, while also keeping to his own economic rules seems an incredibly high tightrope to walk. It may come down to whether the Chancellor prioritises political or economic considerations. Either way, what is clear, is that how he proceeds later today has profound implications for the future of Scotland.