Budget 2021/22: Supporting the COVID-19 Recovery - Analysis of Consultation Responses

4. Fiscal Framework

4.1 What particular fiscal challenges have been highlighted as a result of the COVID-19 emergency?

Of the 64 respondents to the consultation, only a subset of 40 responded to this question. This may indicate a somewhat limited awareness of the fiscal challenges faced by Scotland, including those related to the Fiscal Framework. Indeed, several of the issues raised by respondents regarding fiscal challenges were based around tax issues rather than the Fiscal Framework. The Institute of Chartered Accountants of Scotland drew attention to this overarching concern, noting that:

“In order to build trust in government, and to meet stewardship duties and demonstrate accountability for decisions, there needs to be clarity and an understanding of governance structures in the wider population. This is difficult in relation to the Fiscal Framework, which few people understand.”

4.1.1 Public Debt and Tax Receipts

While these are two separate issues, rising public debt levels and decreasing tax receipts, they are very closely intertwined as noted by the respondents that responded to this question. When these topics were raised, the main focus was on Income Tax and rising unemployment levels negatively impacting Scottish Government revenues.

Due to increased spending on health and the economy as a result of COVID-19, rising expenditure and increasing unemployment was noted as an issue by several respondents. For example, an individual noted:

“The biggest fiscal challenge is unemployment leading to lower income tax returns and higher spending on welfare.”

In addition, the Royal Society of Edinburgh commented:

“A need for increased spending on the health sector, significant rise in unemployment … and any action to redress the significant inequalities that have been highlighted over the course of the crisis, will add further fiscal strain.”

4.1.2 Fiscal independence

A number of respondents recommended greater fiscal autonomy for the Scottish Government from the UK Government. For these respondents the Fiscal Framework should be revised due to the rigidity of the current agreement or there should be full independence for Scotland. Within these responses the suitability of UK Government policy for the Scottish context was questioned, for example, an individual commented:

“The UK Furlough scheme was pointless for the business I work for. Work was still there, but just less of it and being a small business, it wasn't possible to actually furlough any workers. Matching similar scheme in other countries, where partial furloughing was allowed, would have greatly helped my business through the lockdown. Having this devolved to Holyrood, may have allowed a more dynamic scheme to suit businesses like mine.”

There were contrasting views with some believing that more fiscal independence could lead to an increase in debt levels in Scotland, with one response from an individual noting:

“If Scotland had more powers it would have more risk and the impact of this is very difficult to calculate. We have a fiscal deficit and it’s difficult to see how more powers would reduce that.”

In addition, some respondents were of the opinion that either the current level of fiscal devolution should remain or some powers should be handed back to the UK Government.

4.1.3 The Operation of the Fiscal Framework

A viewpoint was expressed that the Fiscal Framework is not operating as intended. For example, respondents noted situations where the economic shock has disproportionate effect on the Scottish economy, and where a case can be made for more mitigation and recovery support to increase resilience in Scotland and support a strong recovery. Other respondents noted that the status quo can lead to a delay in the Scottish Government receiving funds, which slows down the delivery of COVID-related support packages.

4.1.4 Borrowing powers

Respondents highlighted that the current borrowing restrictions imposed by the Fiscal Framework were an issue. These restrictions were viewed as having a detrimental impact on the Scottish Government’s ability to deliver adequate COVID-support packages. This included both support packages similar to the Coronavirus Job Retention Scheme and schemes to encourage spending to stimulate the Scottish economy. For Deloitte, COVID-19 has highlighted:

“the limited powers and flexibility of the Scottish Government to borrow, or use mechanisms such as transferring capital budget to resource (to support additional public services spending), or deferring tax forecast reconciliations or spreading them over a longer period (to enhance spending power in the short term).”

Again, it should also be noted that some respondents believed there were no issues with the Fiscal Framework in its current guise. For example:

“The process of Devolution has allowed the Scottish Government to respond to the Covid-19 crisis within Scotland with additional resources, knowledge and finance from UK Government. This demonstrates that Devolution is working.” Coltart Earley Architecture

4.1.5 Other challenges

A number of other fiscal issues were highlighted by respondents, including:

• The perceived lack of communication from the UK Government to the devolved nations.
• A lack of transparency relating to COVID contracts issued by the UK Government.
• The fiscal impacts of the coronavirus support programmes and how funding announced by the UK Government has translated into funds for the Scottish Government via the block grant.
• Calls for greater transparency about Scottish Government spending, with some calling for a particular focus on increasing transparency relating to support schemes for businesses.

4.2 What changes, if any, should be made to the scope of devolved fiscal powers under the Fiscal Framework?

4.2.1 Borrowing powers

Borrowing powers was the key theme to emerge from responses to this question. There was strong support from respondents that increased borrowing limits are needed to allow the Scottish Government to support the economy, especially given the need to respond to the COVID-19 pandemic. For example, one response from an individual noted that:

“The limits on the types of funding that the Scottish Government is able to spend should be lifted e.g. capital spending. This would allow necessary flexibility for the Scottish Government when it comes to public spending which is more necessary than ever given the current recession”

A number of respondents also commented that the Fiscal Framework is too restrictive, with many noting that the limitations of the current borrowing powers are hindering the Scottish Government response to COVID-19, as well as the ability of the Scottish Government to support the economy long term, with one response from an individual stating:

“The current fiscal framework is too restrictive, it is detrimental to our economy, hampers state support for businesses, and negatively impacts programmes which combat inequality and poverty.”

Respondents proposed a range of permanent further borrowing powers, including:

• Removing capital borrowing limits and allowing Scottish Government access to extensive resource borrowing powers.
• Borrowing interest free from HM Treasury with a limit of 8% of GDP.
• Borrowing directly from the public in the form of national savings, as is the case in Japan.
• In times of emergency Scottish Government should have the same access to borrowing as UK Government.
• Capital monies should be able to be used for resource spending.
• Scottish Government should have greater access to the National Loans Fund (initially during COVID-19, but this should also be considered for the long term).

There was strong support for powers to respond to COVID-19 as well as support for greater fiscal autonomy on a more permanent basis, however, some respondents noted that if powers are to be increased long term there needs to be a discussion on borrowing policy, with clear rules and rationale outlined by the Scottish Government. A number of respondents questioned what the cost of any further borrowing would be. The Royal Society of Edinburgh noted in their response that there should be transparency around the use of any further powers:

“A much more constructive and informed conversation is required on the rationale for borrowing, what the money would be spent on, what limits there should be to this borrowing, and the period of time over which it would be repaid.”

A small number of respondents were opposed to the Scottish Government being granted any further powers, noting that the current arrangements were sufficient, or that the current arrangements were too generous.

A small number of responses suggested more fundamental changes, including:

• Scottish Government should also have autonomy over setting up and funding new public sector agencies.
• The block grant should be removed and Scottish Government should retain all taxes raised in Scotland.
• Ability to implement a Scotland-wide Universal Basic Income scheme to help safeguard people who lose their job, or to support areas where there are local lockdowns.

4.2.2 Fiscal Framework Review/Implementation

A small number of respondents raised the issue of the Fiscal Framework Review. These responses noted that the Review should consider issues including:

• How the Fiscal Framework operated during the COVID-19 pandemic and whether UK Government funding has fully translated into the equivalent funds for the Scottish Government.
• Whether the Fiscal Framework provides sufficient flexibility for the Scottish Government to deal with the volatility from the Fiscal Framework.

The Institute of Chartered Accountants of Scotland also noted in their response that if there is a desire to continue with VAT assignment, a full analysis of the potential consequences should be undertaken to inform decision making.

4.3 What fiscal rules should the Scottish Government follow?

When discussing the fiscal rules which the Scottish Government should follow, consultation responses focused on COVID-19 related factors, borrowing conditions and broader considerations.

4.3.1 Responding to COVID-19

There was support amongst respondents for the Scottish Government being granted greater fiscal powers to respond to COVID-19, as well as a smaller number of respondents calling for further or full fiscal powers more generally.

A number of respondents were in favour of borrowing but only where there is a clear case for investment, suggesting a focus on capital, rather than resource, borrowing. For example, one response from an individual suggested:

“Any projects for which debt is issued must have a clear investment rational (this doesn't have to be financial) and be beneficial to the country and its future.”

Multiple respondents focused on how the borrowing will be repaid, noting that this should be clearly outlined. The Low Income Tax Reform Group suggested that an examination of how the Fiscal Framework operated during COVID-19 should be undertaken:

“There should be an examination of the fiscal impacts of the support programmes and how UK government funding in response to COVID-19 has translated into funds for the Scottish Government via the block grant and whether the Fiscal Framework has operated effectively and appropriately.”

4.3.2 Borrowing conditions

A range of respondents suggested that although further borrowing is needed, this should be subject to limitations. For example, one response from an individual stated:

“More flexibility on borrowing should be in place to allow for economic growth to support Scotland through this tough time. But in comparison, capping that spending is important to prevent the country from owing more than what we have to give back.”

Consultation respondents also suggested a number of specific conditions. These included a deficit reduction condition; self-imposed borrowing limits to prevent overspending, with spending capped at a set amount to prevent overspending; and running a balanced budget by taking a strategic approach to infrastructure.

4.3.3 Broader considerations

Multiple responses noted the need for any new fiscal rules to take into consideration the environmental impact of fiscal policy, with one response noting that the Scottish Government should follow the ‘four capitals’ approach set out by the Advisory Group on Economic Recovery^[12]. The National Trust for Scotland outlined this in their response:

“The Scottish Government should commit to the environment being at the heart of fiscal decision making. Environmental considerations, guided by the Scottish Government’s commitment to tackle the twin threats of climate change and the biodiversity crisis, should help underpin all fiscal decisions.”

One response from an organisation suggested that when considering any new fiscal rules the Smith Commission principles should be considered:

“While any specific fiscal rules would clearly be a political decision, an important guiding principle could be the Smith Commission recommendation that Scottish borrowing powers should be subject to fiscal rules agreed by the Scottish and UK Governments based on clear economic principles, supporting evidence and thorough assessment of the relevant economic situation.”

The Royal Society of Edinburgh suggested that the issue of future fiscal rules should be considered during the Fiscal Framework Review. Responses also included a small number of suggestions for more fundamental changes, including a move towards taxing wealth, as oppose to income, and the introduction of a new currency, central bank, and building credibility on bond markets.