By stewartb – a long read

In recent times leading, broadly centrist, London-based think tanks and others have been arguing that the fiscal practices of Westminster/Whitehall governments have long been dysfunctional. Their damning consensus raises a crucial question: how do ‘dependent’ governments in Belfast, Cardiff and Edinburgh – constrained to operate within devolved settlements – manage their nations’ public finances and the resourcing of devolved public services in an optimal manner to meet national needs and wants?

The relevance of this is brought to mind by the recent Audit Scotland report on the state of Scotland’s public finances in which the Auditor General is critical of the Scottish Government and makes demands for change.

Source: Audit Scotland (November, 2024) Fiscal sustainability and reform in Scotland (https://audit.scot/uploads/2024-11/nr_241121_fiscal_sustainability_and_reform.pdf ) 

Here are extracts from ‘key messages’ in the Audit Scotland report:

From para 1: ‘The Scottish Government continues to take short-term decisions,reacting to events rather than making fundamental changes to how public money is spent.This approach has so far been effective in balancing the budget, but risks disrupting services at short notice and restricting progress towards better long-term outcomes for people.’ (with my emphasis)

From para 12: ‘Since the Scotland Acts of 2012 and 2016, the Scottish budget has become increasingly complex and faces a variety of spending and funding pressures. The Scottish Government must manage its financial position closely. This includes planning for the changes that will affect the budget across current and future years, alongside responding to unexpected events.’

The Auditor General’s criticisms and requirements of the Scottish Government more generally prompt a number of comments and questions:

• to what extent is the Scottish Government  – and the governments in Belfast and Cardiff – dependent on and impacted by Westminster governments’ approach to public spending and public service resourcing?
• Is it only Scotland’s fiscal context that has been and remains uncertain? To what degree is prevailing uncertainty caused by Westminster? Relative to fiscal powers that bear on the whole UK, including Scotland, the Scottish Government has very limited agency over taxation.
• Is there is a distinction to be made between: (i) the charge made by the Auditor General against the Scottish Government of being ‘not sufficiently transparent’; and (ii) the reality of not having enough information and certainty from Westminster governments over what they intend? Is ‘medium term certainty’ a characteristic of Westminster government’s fiscal plans? (Spoiler – see later for references to credible sources that argue no, there is anything but certainty!)
• Is the Scottish Government’s budgeting process more ‘complex’ – and more uncertain – precisely because it has less agency than a government of a ‘normal’ independent nation-state?

Shying away from context?

The Audit Scotland report fails almost entirely to provide context. Whilst critical of the status of medium term strategic management of Scotland’s public finances, it fails to acknowledge the reality that faces a government with limited devolved powers.

Although in its Exhibit 2 the Audit Scotland report does make pertinent observations, they are understated. Perhaps by reading between lines we can glimpse a description of a ‘UK fiscal environment’ that really does suggest the Auditor General’s demands on the Scottish Government may be unrealistic.

• The report states: ’Changes to UK Government funding must be managed throughout the financial year’ – in effect the Scottish Government is constantly managing under uncertainty that derives from among other things, within-year ‘changes’ arising from Westminster!
• The report also notes: ’Lack of a UK Government spending review means the Scottish Government does not know what funding it will receive over the medium term’ – yet despite this starkest of admissions, the Auditor General is critical of the Scottish Government for taking short term decisions!

Confirming Westminster’s influence – but obliquely?

The Audit Scotland report notes in para 21: ‘The Block Grant from the UK Government was equivalent to almost 80 per cent of Scottish Government resource funding when the 2024/25 Budget was set (excluding Block Grant Adjustments for tax and social security). This means that the UK fiscal outlook has a significant impact on Scottish Government funding.’

From para 23: ‘Budget decisions the UK Government makes in areas of tax and spending that are devolved to the Scottish Parliament directly affect the funding available to the Scottish budget. The Scottish Government must manage the impact of these decisions, especially if they exacerbate its existing medium-to long-term fiscal position.’

And the Scotland’s government is negatively impacted even by basic processes! From para 24: ‘The timing of UK budgetary information is another pressure the Scottish Government must manage:

• ‘The funding that the Scottish Government receives from the UK Government is not finalised until near the end of the financial year once the UK Supplementary Estimates are known, usually in February. This means that the Scottish Government has to manage the potential impacts of changes to its funding throughout the entirety of the financial year.’
• And repeating the point about spending reviews:’The last UK Government spending review was in 2021. This means that it is unclear what funding the Scottish Government will receive beyond 2025/26. This has impacted on the ability of the Scottish Government to plan its budgets several years in advance.’

The Scottish Government operates in a far from satisfactory context which the Auditor General appears on the one hand to recognise but then fails fully to take into account when making negative statements and demands change from the Scottish Government practices. All to the delight of Unionist opponents of the Scottish Government of course. The elephant in the room – the evident negative consequences of being in the Union – is avoided!

‘Dependent’ governments in NI, Scotland and Wales have THIS  to deal with!

What follows is a remarkable set of criticisms from a wide range of supposedly authoritative sources on Westminster/Whitehall’s management of the UK’s public finances. As you read, keep in mind the criticisms of and the demands made on the present Scottish Government in the Audit Scotland (ex cathedra) report.

Source: Hoddinott, S et al (November 8, 2024) Austerity postponed? The impact of Labour’s first budget on public services – Rachel Reeves’ budget will see spending increase faster than demand for every public service bar police until 2025/26. Institute for Government.

‘The outgoing Conservative government left public services in a precarious state. Waiting lists in the NHS are stubbornly high, councils are on the verge of bankruptcy, backlogs in the criminal courts are at record levels and prisons are at bursting point. The spending plans inherited by Labour would likely have left most services performing worse at the next election in 2028/29 than they were at the 2019 election – and substantially worse than in 2010.‘

On Labour’s current plans: ’Spending is heavily front-loaded. Current plans beyond 2025/26 once again imply cuts to unprotected departments, which will make it difficult for some services – local government and the criminal justice system in particular – to improve before the next election.’

Source: Johnson, Paul (October 31, 2024) There are big risks lurking in this budget. Institute for Fiscal Studies.

‘… the most remarkable thing about this budget was just how front-loaded the spending commitments are. Loads of extra money this year and next. But after 2025-26 we have day-to-day public service spending rising by a miserable 1.3 per cent a year. That may not even be enough to avoid cuts to some departmental budgets. Of course, spending will start off higher but, frankly, I would be astonished if these plans are kept to.

‘This looks horribly like a repeat of the silly games played by the last government. Make it look like the fiscal numbers add up by being generous this year and pencilling in implausibly tight spending plans later on.’

Source: Financial Times (March 11, 2024) Time to fix Britain’s fiscal fiction – The UK’s spending rules and procedures are not working.

The FT article argues that Britain’s fiscal rules need to be better designed. They need to ensure sustainable public finances and they should support long-term growth. The FT states: ‘They need to be hard to game, and they ought to be long-lasting. Regular fiddling undermines their credibility. Since 1985, the average lifespan of a UK fiscal rule has been below four years — the shortest across the OECD, according to the Institute for Government’.

Source: Begg, I (October 25, 2024) Reforming the fiscal framework – ten lessons from elsewhere from elsewhere for Rachel Reeves. UK in a Changing Europe

‘Spending reviews are crucial for the medium- and long-term planning of the public finances, but they tend not to be systematic in the UK where they rely on an ad hoc decision by the Chancellor.’

‘The UK has too many fiscal ‘events’ (Institute for Government) and is too prone to short-term fixes. Although the OBR produces regular reports on the long-term fiscal outlook, the government should look at how Denmark and Sweden incorporate long-term influences, such as ageing, in strategic fiscal plans.’

Source: Macikene U. Et al (July 31, 2024) How Local Authorities are thinking differently under unprecedented financial pressures. New Local

Based on research by the International Public Policy Observatory (IPPO) into local government in England: there is this:  ‘Inadequate and unstable short-term funding cycles – Councils exist on a “hand to mouth funding model”, characterised by lack of sufficiency overall and uncertainty from year to year. Annual funding cycles create perverse incentives to salami-slice budgets incrementally, limiting the ability to plan over the longer term for example through investing in early help provision that would have payback periods over multiple years. Overall funding pressure means councils’ capacity is increasingly stretched – there is limited “headroom” to shift out of a short term reactive footing.’

‘There is strong agreement that shifting towards multi-year funding settlements, which the new Government has committed to, is seen as a crucial first step to break free from this cycle of short-termism.’

Source: Bartrum, O. (February 23, 2024) Fiscal fantasies reveal deep problems in the UK’s fiscal framework – A flawed set of loose fiscal rules are no substitute for a fiscal strategy. Institute for Government.

‘Government should set out longer-term spending plans on a more regular basis and slow down the pace of fiscal decision-making by having only one fiscal event a year to reduce incentives for gimmickry (Rachel Reeves recently made a welcome commitment to this).’ (my emphasis)

The IfG article also concludes: ’Neither of the UK’s main political parties has a clear fiscal strategy. Both use a flawed set of loose fiscal rules to fill the vacuum. But a broken framework allows them to meet those rules through fantasies. This nonsensical approach to fiscal policy-making will not enable us to tackle the urgent issues that need addressing in public finances and public services: it’s time for change.’

Source: Hoddinott, S (October 30, 2023) Short-term policy making has trapped public services in a ‘doom loop’ – Chronic short-termism is harming service performance in key public services. Institute for Government

On Westminster policies: ‘Policy makers have repeatedly prioritised short-term issues in public services at the expense of difficult decisions that would benefit services in the long run. Public services, and the public they serve, are now experiencing the consequences of that short-term thinking.

‘Nowhere is this more evident than in capital spending. The UK government has underinvested in public services’ capital for decades, prioritising day-to-day spending over investment that would now be contributing to higher service productivity. But even by the low standard of previous governments, the 2010s were particularly bad. No department we cover in Performance Tracker exceeded 2007/08 capital spending in the years between 2011/12 and 2017/18. The result is crumbling schools, NHS computers that don’t turn on, and not enough prison cells to house prisoners.’

‘It isn’t just spending where short-termism reigns. Government policy making is erratic and unpredictable. In the last few years, the government has: announced and then delayed adult social care reform; put NHS integrated care systems (ICSs) on a statutory footing before cutting their management budgets by 30% eight months later; and launched a schools white paper in March 2022 before dropping the subsequent Schools Bill in December that year. This uncertainty makes it impossible for public service leaders to plan or implement performance-enhancing reforms.’

‘For years, the government has prioritised short-term decisions and pushed problems into the future. The result is a ‘doom loop’ where perpetual crises in public services put more pressure on staff and focus government attention on getting through the next news cycle, rather than prudent longer term thinking.’

Source: Pope, T and Hourston, P. (March 16, 2022) Fiscal rules in the UK since 1997  – Fiscal rules are restrictions on fiscal policy set by a government to constrain its own decisions on spending and taxes. Institute for Government.

‘The first fiscal rules in the UK were adopted by the New Labour government in 1997. Those rules applied for over a decade, but since then the UK’s rules have changed more regularly. The current iteration of fiscal rules (set in November 2022) is the ninth set the UK has had. These nine sets of rules between them comprised 26 different rules in total, ..’

‘All the sets of rules that have existed since 2008 have been abandoned because at least one could not be met – only eight of the 22 rules before the current set were met or on course to be met when they were abandoned …’

End note

In Audit Scotland’s accompany publication entitled ‘Easy read summary – How the Scottish Government spends money and how this needs to change’,  we find this:

‘Money decisions made by the UK Government also affect the amount of money the Scottish Government can spend’ and ‘The Scottish Government needs to have ways to deal with this.’ And it has to continue to ‘deal with’ all the characteristics of Westminster/Whitehall governments outlined above too?

Given the analyses of Westminster/Whitehall practices is it any wonder that by necessity: ’The Scottish Government has made short term decisions to make sure the amount of money spent is the same as the amount of money that is available’.

Is Scotland’s Auditor General unaware of this relevant context or just unwilling to call a spade a spade for fear of upsetting Unionists?