JEREMY PEAT
To state the blindingly obvious, a week on Wednesday is not the ideal date for Finance Minister Derek Mackay to be delivering his Scottish Budget. On 12th December he will rise to his feet just one day after the conclusion of the Brexit debate in the UK House of Commons, with a vote on the Prime Minister’s preferred option.
Unless something remarkable happens between then and now – not to be ruled out in these unpredictable days – Mrs May’s deal is set to be rejected. If, as expected by all the pundits, the deal is voted down, then there will be major uncertainties as to what happens next. There may have been amendments debated and voted upon regarding a variety of options – including a further referendum and a Norway-type deal. But any alternative outcome would require delay and re-negotiation. If urgent action is not taken, then the clear risk must be a hard exit at end March 2019
This would have immediate adverse repercussions for many businesses and for the UK and Scottish economies; and hence the public finances. Indeed the short term scenario modelling released last week by the Bank of England suggests that in their worst case scenario the UK economy could shrink by 8% (double the contraction post financial crisis in 2008) and not make up the lost ground until 2023.
In addition to this short term work from the BoE we have seen longer term scenario analysis from both Scottish and UK Governments. None of these should be taken as gospel but it does not require sophisticated econometric modelling to tell us that increased uncertainty and a heightened risk of a hard Brexit would result in market gyration, distinctly more down than up for both sterling and equities.
Beyond the short term volatility, induced by increased uncertainty, a hard Brexit and other plausible scenarios do suggest that the UK economic outlook will be for significantly slower growth of GDP and fiscal revenue than under the status quo; and the same applies to Scotland.
We should feel rather sorry for the folk at the Scottish Fiscal Commission. Their latest set of forecasts is due to be announced the morning before the afternoon of the Budget. These forecasts will, one can but assume, already be with Government and be being incorporated into Mr Mackay’s Budget arithmetic, in particular so far as the revenue forecasts are concerned. But how realistic can they possibly be as the whole Brexit mess unfolds? Upon which Brexit scenario will they be based?
In sum, all the key assumptions built into Mr Mackay’s carefully constructed Budget would be subject to re-consideration; but with no sensible basis for undertaking new modelling and forecasting until some realistic understanding emerges as to what might happen next. Businesses are being pressed to prepare contingency plans for a hard Brexit. The same must apply to our Government budget.
The funds in the ‘resource budget’, for Mr Mackay to divvy up among different categories of public expenditure, come from the Block Grant (received from the UK) and tax revenues – primarily income tax. The expected value of the Block Grant for the next several years was set out in the UK Chancellor’s Budget on 29th October. Consequent on the decisions in that Budget the block grant for Scotland was set to be £700 million higher in 2019/20 than previously estimated; Mr Hammond’s largesse spilled over to Scotland.
However, this upward shift is offset in part by a downward movement in the SFC’s estimate for Scottish income tax revenues. The degree of real terms uplift in the resource budget, on the basis of present estimates, will be limited. But at least, under assumptions applying at the time of the UK Budget, the move was up rather than down.
But now all bets are off. The latest papers from the UK and Scottish Governments suggest that GDP in the UK will, under any Brexit scenario, track lower over the next 10-15 years, as compared to the status quo. The ‘no deal’ Brexit scores worst – and that prospect may become more likely in the weeks ahead.
If these downside risks materialise, then there would be a further, and more pro-active, UK Spring Budget. This has been promised by Mr Hammond if measures are needed to manage the UK economy through a difficult period of adjustment. Goodness knows what the economic developments and Mr Hammond’s new Budget taken together will mean for either the Scottish block grant or estimates of Scottish tax revenues. It will be back to the drawing board for the UK Office for Budget Responsibility and Mr Hammond; and then likewise for the SFC and Mr Mackay.
Clearly, as night follows day, a new Scottish Budget would follow a new UK Budget.
So what to do? One option must be delay in the Scottish Budget, at least until we know if Mrs May’s deal is off the table and if there is any hint of some Plan B. It is surely not the time for major initiatives, especially any based upon a continuing positive resource budget environment.
There may need to be announcements on proposed allocations to the key elements of Scottish public expenditure. There will need to be announcements as to the proposed income tax rates and thresholds. But need there be much more? All will be debated at Holyrood over the coming weeks before final decisions are reached and that availability of time to ‘wait and see’ should be well used.
Jeremy Peat is a visiting professor at the University of Strathclyde.
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