Scottish public services could face billions of pounds of cuts following UK Spending Review – IPPR Scotland

• Due to spending commitments already announced, including increased NHS, affordable housing and childcare spending, spending in other non-protected departments in Scotland (see note 1) could fall by 11.3% in real terms (cumulative) by the end of the Parliament – a real terms cut of £1.5 billion per year by 2019/20.

• Reversing these cuts entirely through an income tax rise would add around 3p to every income tax rate in Scotland.

Non-protected government departments in Scotland could see their budgets fall by over a tenth by the end of the Spending Review period, 2019/20, according to new analysis by IPPR Scotland, the new cross-party, progressive think-tank for Scotland.

The Chancellor George Osborne will announce the settlement for UK public spending in his Comprehensive Spending Review tomorrow (Wed), covering 2016/17 to 2019/20. These UK spending decisions will set Scotland’s block grant for the same period of time, as calculated through the Barnett formula, which sets Scottish budgets based on spending decisions in the rest of the UK.

To meet the UK government’s target to eliminate the deficit and deliver a surplus in 2019/20, IPPR have estimated that day-to-day spending across UK non-protected departments would have to fall by an average of 26.5 per cent (see note 2). IPPR Scotland modelled the impact this level of cut could have on the Scottish block grant overall and, in turn, on non-protected departments in Scotland.

IPPR Scotland have estimated that cuts in the UK, could leave Scotland facing a 2.6% cut in real terms (cumulative) by 2019/20. Resource budgets would fall by 4.3% in real-terms (cumulative) by 2019/20 with capital budgets increasing by 11.7% in real terms (cumulative) by 2019/20. This overall cut could be partially reduced by Scottish Business Rates income and using the Scottish Parliament’s current borrowing powers, leaving a 1.4% cut in real terms (cumulative) by 2019/20 (see Table 6 below).

However, the Scottish Government has made a number of commitments to protect areas of spending. The Scottish Government has made a commitment to protect NHS funding in real terms and to pass on all Barnett consequentials from increased NHS spending in England. The Scottish Government has also put a ‘funding floor’ in place for college funding, protecting it in cash terms.

Additionally, the Scottish Government has made commitments to build 50,000 affordable homes and provide 1,200 hours of childcare by the end of the parliament. IPPR Scotland also modelled protection of school funding in cash terms per pupil.

Given these protected departments in Scotland, IPPR Scotland has estimated that non-protected departments could see a cumulative real terms cut of 11.3% (£1.5b per year – see Table 2 and 4 below) by 2019/20. This could see the axe fall hard on areas such as justice, local government, the environment, care, employment and other parts of the education system.

In summary, IPPR Scotland estimate that cuts in the UK could have the following impact in Scotland (see note 3 for detailed figures):

• The overall Scottish Parliament budget could fall by 2.6% in real terms (cumulative) over four years.
• Non-protected departments (see note 3) could lose 11.3% of their budget cumulatively in real terms by the end of the Parliament, a cut of £1.5 billion in real terms by year four.
• Capital budgets would increase markedly in year three and by 11.7% over the four years but resource funding would fall by 4.3% in real terms over the four years. NHS spending would increase by 7.2%.
• The overall cut could be partially reduced to a 1.4% real terms (cumulative) cut by 2019/20, through projected income from Scottish Business Rates (NDRI) and by using the Scottish Parliament’s current capital borrowing powers.
• The biggest cuts to non-protected departments would arrive in years two and three of the settlement, between 2017-18 and 2018-19 (see Table 3 below).

Russell Gunson, Director of IPPR Scotland, said:

“These figures set out the scale of the cuts we could see in Scotland from next year, and in turn the choices Holyrood will have to make. We estimate that the Scottish budget as a whole is likely to drop in real terms. However, with announced increases in NHS funding and for affordable housing and childcare, we see that spending in unprotected departments in Scotland could drop significantly, seeing billions of pounds of spending cuts.

“Budget cuts are likely to be lower in Scotland overall than in the rest of the UK. However, the challenge is still an enormous one. Decisions will need to be made, either to find ways to raise revenue to lessen the cuts, or as to where the axe falls.

“The new powers from the Smith Commission may offer hope for later in the next parliament, as tax raising and borrowing powers come into effect, decoupling more of the budget in Scotland from the spending decisions of the UK Government. However, much depends on how these changes are implemented, and how the ongoing Scottish block grant is calculated, which is still very much up in the air.

“It’s clear that Scotland is likely to be facing cuts overall, and significant cuts to unprotected departments. It will now be down to the Scottish Parliament as to which spending areas will be hardest hit, how much of these cuts are passed on or whether tax revenue can be increased to lessen the blow.”

Contact:
Russel Gunson – 07905 330195 r.gunson@ippr.org
Danny Wright – 07887 422789 d.wright@ippr.org

Notes to Editors

1. Protected departments in Scotland

We have assumed the following protections for Scotland:

NHS: The Scottish Government have announced that the budget of NHS Scotland will rise in real terms, and all Barnett allocations for health as a result of the UK government’s planned £8bn increase in health spending will also be passed on to the NHS in Scotland. This will see spending on the NHS in Scotland rise in real terms from £9.6bn in 2019-20 to £10.3bn in 2019-20, a 7 per cent increase

Childcare: the First Minister has announced an expansion of free childcare in the next parliament, which will see funding for childcare in Scotland nearly double from £439m in cash terms to £817m in 2019-20, an 86 per cent real-terms increase
Schools: We have assumed the Scottish Government follow the UK government’s proposed method of a flat cash per pupil settlement for primary and secondary school. This would see the schools budget in Scotland fall in real terms by 5 per cent by 2019-20, from £3.7bn to £3.5bn

Colleges: the Scottish Government have also announced a flat cash protection for the overall resource college budget in Scotland through its college floor. This implies £530m per year in cash terms.
Housing: the Scottish Government have announced that they would build 50,000 affordable homes over the upcoming parliament. Based on existing patterns of grant-funding for housing, this will require £622m per year in capital funding from the Scottish Government.

2. Modelling

We have used Scottish Government budget figures for baseline department spending. The Scottish Government’s Draft Budget document provides a list of departmental spending in Annex D: http://www.gov.scot/Resource/0046/00462296.pdf

The UK government’s target to eliminate the deficit and deliver a surplus in 2019/20, its manifesto commitment to find the majority of savings through spending cuts as opposed to tax increases, and its stated plan to shield the NHS, 5–16 education, defence and international aid from cuts, mean that other departments will have to bear the brunt of reduced spending. In order to achieve the government’s planned surplus of £10 billion in 2019/20, compared to 2015/16 in these unprotected departments:

• overall spending in the UK will have to fall in real terms by 16.4 per cent • capital spending will rise by 18.2 per cent in real terms • day-to-day spending in non-protected departments will have to fall in real terms by 26.5 per cent.

We have calculated what these cuts mean for Scotland, through Barnett consequentials which set the Scottish Parliament’s block grant, by assuming that capital and day-to-day unprotected departments all face the same average cut, and that the UK government's stated protections for the NHS, 5-16 education, defence and international aid go ahead. We then apply the Barnett formula for each UK department to reach an allocation for Scotland over the spending review period.

3. Detailed figures - Modelling the effect in Scotland, of 26.5% cuts to UK non-protected departments

Table 1 – Scotland spending lines in cash terms over time

* ‘Total Spend’ includes RDEL, CDEL, Capital borrowing, Non-domestic Rates Income (NDRI – Business Rates)
** ‘R-Spend’ refers to spending on resource. This refers to RDEL and NDRI.

Table 2 – Scotland spending lines in real-terms (2015/16 prices) over time

Real terms % change 2015-16 2016-17 2017-18 2018-19 2019-20* ‘Total Spend’ includes RDEL, CDEL, Capital borrowing, Non-domestic Rates Income (NDRI – Business Rates)
** ‘R-Spend’ refers to spending on resource. This refers to RDEL and NDRI.

Table 3 – Scotland spending lines in real-terms percentage change, year-to-year, over time

* ‘Total Spend’ includes RDEL, CDEL, Capital borrowing, Non-domestic Rates Income (NDRI – Business Rates)
** ‘R-Spend’ refers to spending on resource. This refers to RDEL and NDRI.

Table 4 – Scotland spending lines by cumulative real-terms percentage change over time

* ‘Total Spend’ includes RDEL, CDEL, Capital borrowing, Non-domestic Rates Income (NDRI – Business Rates)
** ‘R-Spend’ refers to spending on resource. This refers to RDEL and NDRI.

Table 5 – Spending lines outlining RDEL (Resource DEL), CDEL (Capital DEL), NDRI (Business rates) and current Capital borrowing powers.

Table 6 - Spending lines in real terms cumulative percentage change for RDEL, CDEL, NDRI (Business rates) and current Capital borrowing powers.

* ‘total Spending envelope’ does not include AME spending other than NDRI (Business Rates)