finance

Scottish Government funding 30% higher per person than equivalent English funding


Scottish Government funding per person is almost 30% higher than the English equivalent, according to the Institute for Fiscal Studies (IFS).

The economic research group stated this was mostly due to the Barnett Formula mechanism used by the Treasury to automatically adjust the amount of public expenditure allocated to the other nations within the UK.

A new IFS report also found that the Scottish Government had used temporary coronavirus funding to pay for some permanent policies.

Excluding these pandemic top-ups, real-terms funding for the Scottish Government’s day-to-day spending in 2021-22 is still set to be 2% lower per person than in 2010-11.

However, this fall is smaller than the fall seen in England over the same period, because of slower population growth and a flaw in the Barnett Formula until 2015-16 that meant Scotland escaped most of its share of cuts to local government funding.

The Scottish Government now has more than £1.30 per person to spend on public services for every £1 of comparable spending per person in England.

Almost all of this gap – 28.9p out of the overall 30.6p – is explained by relatively high levels of funding from the UK government via the Barnett Formula.

Net revenues from the Scottish Government’s devolved taxes, on the other hand, make only a marginal contribution.

The first Scottish Election Briefing Note by IFS researchers, funded by the Scottish Policy Foundation, explained that this is partly because the Scottish Government’s tax reforms have been modest.

It is also because Scotland’s underlying income tax base has performed relatively poorly compared to the rest of the UK since the devolution of income tax powers, reflecting slightly weaker economic growth.

This has offset almost three-quarters of the revenues raised by the income tax reforms.

So, while the Scottish Government’s income tax reforms are estimated to raise around £456m, the latest forecasts suggest it will receive just £117m more in funding this year as a result of the devolution of income tax.

Had income tax not been raised revenues would have fallen relative to a world without devolution, the report noted.

Other key findings include the fact that Scottish Government resource funding fell by 6% in real-terms between 2010-11 and 2017-18, as the Barnett Formula passed on cuts to UK Government spending in England.

Since then, increases in spending in England mean the Scottish Government’s funding has also been increasing. Nevertheless, ‘core’ non-Covid-19 funding is still set to be only 3% higher above 2010-11 levels in the coming year – a fall of around 2% per person, after accounting for population growth.

The Scottish Government has been provided with £9.5bn of funding on top of its core funding to help address the crisis in 2020-21 and is set to receive a further £3.3bn in 2021-22.

Additional flexibility over how much can be carried forwards and a special ‘funding guarantee’ mean that the Scottish Government will almost certainly receive more funding per person to address Covid-19 over these two years than is spent in England.

The Scottish Government plans to use part of its temporary coronavirus funding to fund a number of more permanent policies – including an expansion of free school meals and bus passes, extra funding for councils and NHS mental health services.

However, from 2022-23, the money for these policies will likely have to be found from within the Scottish Government’s ‘core’ funding.

The IFS stated that this core funding is likely to be tight. In particular, the overall spending envelope pencilled in by the UK Government in its March budget imply spending £14bn less on unprotected budgets in 2022-23 than was planned before the crisis.

NHS and schools spending rises in England mean that the Barnett Formula should still deliver a small increase in core funding in 2022-23 for Holyrood, but if it channels this money to the NHS and schools too – without additional funding from Westminster in its upcoming Spending Review or increases in Scottish taxes – spending on some services will likely need to be reduced in real-terms.

Funding for capital investment saw bigger falls during the early 2010s, but larger subsequent increases and borrowing by the Scottish Government mean it is set to be at least 16% higher in real-terms this year than in 2010-11.

However, the Scottish Government’s current borrowing limit could be reached in the next few years, meaning it will either have to cut back investment, or pay back existing borrowing more quickly out of its resource funding to enable it to continue borrowing for new investment.

David Phillips, IFS associate director and author of the report, said: “The relatively weak performance of the Scottish economy means that the net revenues received from income tax have only increased slightly, despite tax increases in Scotland.

“They would have fallen relative to a world without tax devolution had those tax rises not been implemented, reminding us that devolution brings risks as well as opportunities.”

He added: “Likely tight spending plans in Westminster could mean the next Holyrood administration will have to consider tax increases or cuts to some services – not least to pay for long-term policies on free school meals, public transport, council tax and mental health services, that this year will be paid for using temporary Covid-19 funding.”

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