John Swinney faces some difficult choices in next month’s Scottish Spending Review. It’s certainly going to be bad news for public services and those who rely on them.
The Spending Review will have to address the significant revenue cuts announced by the UK Government in the Chancellor’s June statement. As yesterday’s CPPR report highlighted, we are currently only 57% through the total cuts planned by the ConDem government. The remaining cuts will be unevenly spread over the coming years with the deepest cuts coming in the years 2016/17 and 2017/18. While that may suit the electoral cycle of the UK and Scottish governments, Scottish councils may be less happy at this phasing and plan accordingly. These cuts will also have a greater impact on revenue budgets, rather than capital allocations, as the UK government has masked capital funding cuts with greater borrowing allocations. Of course that borrowing still has to be financed and revenue cuts are likely to have greater staffing implications. The total cut is around £2.7bn over the next five years.
While the UK government has extended the cuts period by three years, the slow economic recovery does not give much confidence that this will be the end of the story. The scale and time period of the cuts does beg the question, as the CPPR paper does, of the viability of some Scottish Government polices, including the Council Tax freeze.
UK cuts are rarely spread evenly across departments and this can have implications, in fairness often positive, for the Barnett consequentials on the Scottish budget i.e. if cuts are mostly in reserved departments. However, the same is also true of the Scottish budget, which means that if the limited health budget protection continues then other budgets, primarily local government, take a greater hit.
The Scottish Spending Review will also set out the Scottish Government’s pay policy for the coming year. With revenue cuts of some £400m it is likely that they will continue to view public sector pay as an easier political target than other service cuts. The Office for Budget Responsibility has been forecasting pay increases of around 2.7 per cent in 2014, rising gradually to 4.0 per cent in 2016. Interestingly, that is the forecast the Treasury uses for pension purposes. However, yesterday’s Bank of England inflation report uses the somewhat more realistic assessment that regular pay growth will be around 1% this year. This means that real wages are set to continue falling - the longest pay squeeze in over a century. The BofE also pours some cold water on the ‘boom’ headlines of recent weeks, indicating that economic recovery will remain slow and that has a further impact on government budgets.
Ironically, the UK and Scottish government’s have a shared interest in kicking some of the most difficult revenue spending decisions into the medium term. However, the scale of these cuts means that continuing to salami slice services and expecting staff to pay the balance, is not even a medium term strategy.