How tough choices will shape the Scottish Budget

Finance Secretary Shona Robison will this week present her final Budget before stepping down from her ministerial job and from the Scottish Parliament.

She will also set out a review of spending until the end of the decade, and a revised list of priorities for capital spending on construction and other long-term projects.

It’s not an easy task, and it is made more difficult when an election follows soon after the legislation has to be passed.

It’s tight. The Scottish Fiscal Commission says Holyrood spending projections are unsustainable, and something has to give. Audit Scotland has warned of a £4.7bn gap within three years.

Looking at the budget for the year beginning this April, it doesn’t look as difficult as it did.

Chancellor Rachel Reeves had to adjust her spending plans in the face of political pressure to increase welfare spending, and Holyrood sees a proportionate gain.

A complex bit of annual budget arithmetic comes from forecast error.

This is because the Scottish Fiscal Commission, independently, has to make a judgement each year on the relative performance of tax raising by the UK Treasury and by the Scottish Government. That’s invariably wrong, in different directions and to different extents, and it has to be reconciled in subsequent years.

The reconciliation this year sees Holyrood come out ahead of previous expectations.

The day-to-day budget is still tight, but the Fraser of Allander Institute is not ringing alarm bells yet.

On capital spending, however, it is. The current pipeline of construction projects was expected to cost £8.1bn next year alone – yet only £7.1bn is available.

Hard decisions will have to be made – and they’ll be all the harder this close to an election.

Holyrood has control over almost every aspect of income tax in Scotland, with the exception of the starting rate.

It does not cover savings or dividend income. Nor can it set National Insurance rates, or align them with Scottish tax rates.

There is a promise from John Swinney’s administration not to change the rates or the number of bands in this budget.

It could, however, alter the thresholds at which people move up bands. The higher rate – which is charged at 42p on every additional pound of income – that’s double the rate for each extra pound just below that threshold.

By the time a Scottish income tax payer is earning £50,000 per year, they are paying £1,500 more than someone earning the same amount south of the Border.

But it’s important to the SNP to be able to claim that most people in Scotland pay less tax than they would in England. That claim is hotly contested, and the evidence is finely balanced. The difference currently means a saving over an equivalent English earner of up to £28.27 for the full year.

A Scot with earned income this year above £30,300 should be paying more income tax than someone earning the same in England, according to the Chartered Institute of Taxation.

Shona Robison may choose to tinker with thresholds, to appeal to mid-range earners.

But, in common with Rachel Reeves, at the higher end the Scottish government depends on more people being drawn into higher tax bands, paying more per additional pound earned.

It’s hard to find any public service that’s not finding budgets are tight.

Low economic growth rates provide limited uplift in tax revenue, public sector productivity has gone backwards, and a rising share of taxpayers’ money goes into paying for debt interest and increasing expenditure on defence.

Choices made at Westminster have put up payroll tax for public sector employers as well as private firms, along with the statutory minimum wage.

The health service has the first claim on any finance secretary. Long-term demographic shifts mean more older people making more demands on the system, for ever more expensive treatments.

Spending watchdogs have repeatedly warned that the NHS in Scotland is on an unsustainable financial footing and reforms are necessary now.

The other big pressure comes from public sector pay.

Lower price inflation and higher unemployment helps to temper pay claims. But as resident doctors are showing, public sector workers are unionised and willing to use leverage to achieve higher pay.

There was a multi-year public sector pay policy set out just over a year ago. Deals struck with NHS and prison staff unions, as well as rail workers, have broken through those limits. The Scottish Parliament information centre, SPICe, has calculated the cost of additional inflation-proofing within those deals.

It’s been a busy time for those who make their living trying to influence the finance secretary. Knowing things are tight, many have stepped up their efforts.

Local authorities are among them, asking for at least as big an increase as inflation on general and capital grants from Holyrood. They’re joined by homelessness charities and housebuilders in calling for reinstatement of the housing budget after a damaging cut last financial year.

When the election comes, councils’ joint body Cosla will have many more demands of party manifestos.

The release of funds from a commitment to mitigate the two-child benefit cap – no longer necessary after it was removed by Westminster – has put about £150m into play. Campaigners against child poverty want to safeguard that for their cause.

Colleges and universities believe they’ve got a strong case following sharp reductions in funding per student over the past five years.

Their case is helped by the crisis afflicting Dundee University and evidence that much of further education is heading deep into the red and facing possible closures.

Business groups have been lobbying ferociously. Their big ask is that economic growth is given a higher priority.

The CBI Scotland employers organisation is one of those wanting to see less divergence from Westminster on income tax, which has meant higher bills in Scotland for higher earners. It also wants to see improved childcare provision for younger kids and a better focus for skills training.

Business rates are causing particular concern to hospitality and retail sectors. Revaluation is on course to make bills soar, and they’re not getting a rebate equivalent to the one in England. Not yet anyway.

They’re paid for out of the capital budget, for building and installing things that last beyond one financial year. Fraser of Allander economists say the funds available fall £1bn short of the £8.1bn expectation set out last year.

Shona Robison’s way of handling that is publication on Holyrood’s budget day of a long-awaited Infrastructure Delivery Pipeline and Infrastructure Strategy, previously known as the Infrastructure Investment Plan.

That rebranding hints at a programme that will be stronger on stretched timelines than on imminent delivery.

Among the projects already delayed are NHS National Treatment Centres, and upgrading of the A9 road between Perth and Inverness and the A96 between Inverness and Aberdeen.

Other projects in the pipeline or wanting a place in it include ferries, colleges, a £1.3bn hospital in Monklands, an eye hospital in Edinburgh, rail electrification and prisons.

Shona Robison does not have a majority of SNP MSPs to get this budget passed as legislation. She requires opposition parties to vote with her, or at least not to oppose her.

In the past, the SNP has relied on Tories, Lib Dems and Greens. It may look to at least one of them again.

But this looks trickier than usual, only weeks from a Holyrood election, where parties wish to emphasise their differences.

One lesson learned from last year is not to load into the draft budget a range of measures intended to appeal to other parties. It’s more effective to leave them to negotiation, so that those opposition parties can claim to have made the difference.

Opposition parties are setting out their demands – some credible and feasible, others crafted for rejection. Greens want widened access to free bus travel. Conservatives want lower tax bills with lower welfare spending.

Lib Dems have been arguing for a pause to business rates revaluation and more support for island communities affected by ferry disruption.

All that positioning may count for nothing if Labour abstains, which it has indicated it will do. That denies smaller parties any leverage over the budget, and it could help Labour look serious about inheriting this budget, as Anas Sarwar hopes to do, after May’s election.