Looking forward to Scotland's budget means looking back to the UK Budget because Scottish decisions are hemmed in by the UK Budget. The devolved settlement means Finance Secretary Shona Robison can only change a limited range of taxes and cannot change corporation tax, inheritance tax or VAT in Scotland.
The UK Chancellor announced the UK Budget on 31 October and said she was providing devolved governments across the UK with the largest real-terms funding settlement since devolution.
So, Scotland is set to receive a further £3.4bn under the Barnett formula which governs funding changes. Since the late 1970s, this has aimed to give each nation within the UK the same 'pounds-per-person' change in government funding each year.
However, the Chancellor also warned in July of a £22bn 'black hole' in UK public finances. The Scottish Government, under Finance Secretary Shona Robison, warned in September that Scotland faces huge financial pressures.
Government budgeting is made up of two things – revenue and capital spending. That additional £3.4bn of UK public spending is made up of revenue and capital allocations.
Capital spending is for investment in infrastructure such as roads and buildings and is set out in the Scottish Infrastructure Investment Plan. Tough choices are called for. Budget pressures have meant delays to some critical infrastructure projects, including major transport and health projects. In mid-July, the Finance Secretary informed the Scottish Parliament that a “refresh” of the Scottish Infrastructure Investment Plan also would be delayed until after capital allocations in the Chancellor's October budget were known. The Scottish Budget on 4 December should tell us more about Scottish public investment plans.
As for the revenue spend in the Scottish budget, this is used for annually recurring costs such as public sector salaries. There are choices for the Scottish Government here, too, in how to use increased revenue funding, again in light of ongoing budget pressures.
Part of the picture is the need to fund public sector pay deals. However, many other demands are made of revenue spending, including payments to contractors under procurement contracts.
From April 2025, public sector budgets will be impacted by UK tax changes being made to employer National Insurance Contributions (NICs). As employers, Scottish public sector bodies will need to pay Employers’ NICs at an increased rate of 15%, from April 2025 (up £1.2%). Also from next April, these NICs will need to be paid for employees earning over £5,000 per year. Currently, that threshold is £9,100, so those NICs are set to rise.
As recompense, Scotland is reported to be in line for additional UK Treasury funding of between £295m and £330m, although the Scottish Government has said £500m is needed.
There are wider impacts for public services, however. Voluntary organisations are involved in public service delivery and the Scottish Council for Voluntary Organisations has indicated Employer NICs will cost the sector in Scotland £75m.
In 2021-22, the Scottish Government estimated procurement contract spend of more than £16bn on goods, services and works in support of public services, also supported around 130,000 full-time equivalent jobs. Under most procurement contracts, the service providers, suppliers and contractors need to manage NICs and other employee costs themselves. If contract payments can't be raised to cover higher employer NICs for those 130,000 jobs, then employers would manage their higher costs in other ways.
There are other tensions. For example, the private sector operates alongside public sector providers in some sectors such as the care and leisure sectors. From April next year, a local authority funded care home may be recompensed for higher employer NICs which a private (or voluntary) sector provider would need to recover by increasing prices or in other ways.
One thing seems certain: the Scottish Budget being announced on 4 December could be very significant for very many in the public sector, for businesses and the voluntary sector. Those involved in public procurement activity across Scotland and the procurement supply chain will be watching closely too.
Looking forward to Scotland's budget means looking back to the UK Budget because Scottish decisions are hemmed in by the UK Budget.
