Emergency Budget Review 2022 - inflation implications laid bare

5th November 2022

There has been lots of crossing out in the Financial Scrutiny Unit's fiscal diary of late, with previously planned UK and Scottish fiscal events being postponed during a period of well-publicised economic instability.

In a letter to the Finance and Public Administration Committee of 7 September, the Deputy First Minister (DFM) stated his intention to publish the Emergency Budget Review (EBR) within two weeks of the UK "mini-Budget". Following the market turbulence arising after that UK fiscal statement, the Scottish EBR was scheduled for the week of 24 October. Further delay came when the new Prime Minister and Chancellor agreed to move the UK Fiscal Statement scheduled for 31 October to 17 November and upgrade it to an Autumn Statement.

However, speaking to the Chamber yesterday, the DFM said that "while I would have preferred to see the OBR forecasts and the outcome of the UK Autumn Statement prior to publishing this review, I have concluded that we could wait no longer".

The EBR publication followed on from an earlier announcement to Parliament on 7 September, which earmarked a list of in-year savings totalling £560 million to fund improved pay deals and cost of living interventions. It is really important to note that the EBR is concerned only with in-year changes - so for the current financial year 2022-23. The budget for next year (2023-24) will follow in December.

So, what did we learn yesterday?
Yesterday's announcement essentially added to the savings already identified to tackle the budgetary challenges brought about by rising inflation in 2022-23. A total of £615 million was added to the September savings, taking the total level of in-year movements to nearly £1.2 billion. The levels of in-year movements between previously planned budget lines in this EBR have never been seen on this scale since the establishment of the Scottish Parliament in 1999.

The Deputy First Minister noted in his statement that:

in all of my experience, now and during my previous tenure as Finance Secretary, there has never been a time of greater pressure on the public finances. Inflation means that our annual budget today is worth £1.7 billion less than when it was published last December. At the same time, demand for government support and intervention is understandably increasing.

What's the difference between "resource reprioritisation" and "resource savings"?
The EBR presents in-year savings as either “resource reprioritisation” or “resource savings”. What is the difference?

Well, essentially, resource reprioritisation means the portfolio in question retains that resource for something else within that portfolio. For example, the Health and Social Care reprioritisation of £400m will stay in that portfolio to fund improved health service staff pay deals. So, the health and social care budget stays the same, it is just spent differently.

A “resource saving” means the portfolio loses some of its funding, which is redirected towards another priority outwith that portfolio. It remains to be seen whether portfolios where savings are being allocated to other priorities will see that money returned to them in subsequent financial years.

The vast majority of the savings identified yesterday were in the Health and Social Care portfolio. The £400 million in “reprioritisation” will be utilised to fund a pay increase averaging 7% for the majority of NHS staff.

A range of budget lines within Health and Social Care have lost resource to fund this reprioritisation, despite health and social care budgets being under considerable pressure. Covid spend will be reduced this year by £116 million and there will be £70 million saved by re-profiling areas of Social Care spend and spending on the development of the National Care Service. Primary care spending (which includes GPs, dentists, pharmacists and opticians) is being reduced by £65 million, while mental health funding will also be scaled back by £38 million this year.

According to the EBR, the funding for the development of the National Care Service is being re-phased relative to the estimates set out in the Financial Memorandum for the Bill. This is reportedly due to revisions to the planned recruitment profile and data and digital investment. The Financial Memorandum for the Bill is currently being considered by the Parliament's Finance and Public Administration Committee and has come in for considerable criticism.

Reprioritisations by portfolio are presented on page 19 of the EBR.

The EBR has always primarily been about finding in-year savings this financial year (2022-23) to support cost of living interventions and improved pay deals for public sector workers. Increasing the paybill “baseline” for this year, however, in an already finite public spending environment, will have implications for future budgets. The public sector paybill is currently £22 billion, so every 1% increase represents additional spending of over £200 million.

Pay proposals and costs
One of the main reasons for needing to find savings within the budget envelope is to allow for more generous public sector pay deals than had previously been planned. With significantly higher inflation than had been expected at the time that the budget for the current financial year was published (December 2021), the Scottish Government is under extreme pressure to fund more generous pay deals for public sector staff, including nurses, police, teachers and other local government staff. The pay deals currently being negotiated are for the current financial year (2022-23), so will be backdated to April 2022 when agreed, with major implications for spending this year.

The EBR sets out the scale of these extra demands. On the basis of current pay offers, the costs over and beyond what had been planned at the time of the December 2021 budget total £714 million. And note that several of the pay deals have yet to be agreed, including that for NHS staff, which has the largest cost implications. So if more generous deals are agreed compared to those currently on the table, the costs could rise further still.

In the context of a fixed budget, savings have to be found in order to fund these pay deals.

Accompanying publications
Alongside the EBR, there were some additional publications, including an interim report from the expert panel set up to advise the review. They recommended a need for clear and consistent policy making and a continued focus on economic resilience and opportunities to improve productivity and growth.

There was also an Equality and Fairness evidence summary published. This discussed how the cost crisis and impacts from inflation were affecting equality and fairness within Scotland, and specifically acknowledged that people with protected characteristics will be harder hit from spending reductions (largely from reprofiling health and social care spend and the reductions in employability spending).

Inflation challenges are here to stay
Challenges from inflation will be with us for some time to come. The increasing pay bill and pay awards for 2022-23 are not a one-off. They present challenges to subsequent budgets as these increases are baselined into future pay negotiations. As a result, the stated Scottish Government policy of freezing the pay bill at “around 2022-23 levels” over the Spending Review period (as set out in May) will be challenging to achieve without a significant reduction in public sector headcount.

Whether those 2022-23 spending areas that are now being reduced will have those reductions made up in subsequent budgets is also unclear. The EBR states that some of the areas where savings have been made will be re-profiled into subsequent years. For example, it is stated that many of the capital savings will be reprofiled into later years. On the resource side, the £2 million in the Communities budget for expenditure on child poverty will be “re-profiled and “spent in future financial years to achieve child poverty targets”.

Given the squeeze being brought to bear on spending from recent dramatic rises in inflation, it is likely that many of the budgets where savings have been realised will never see that money again.

The Scottish Government will now be working hard on their initial tax and spending proposals for the next financial year (2023-24). These will be presented to Parliament, alongside latest Scottish Fiscal Commission forecasts, on 15 December 2022.

Authors
Ross Burnside and Nicola Hudson, Financial Scrutiny Unit, SPICe.
Source - https://spice-spotlight.scot/2022/11/03/emergency-budget-review-2022-inflation-implications-laid-bare/