Coronavirus (COVID-19): UK fiscal path – a new approach

Summary

COVID-19 has presented Scotland and the UK, as much of the world, with a twin health and economic crisis with a disproportionate impact on the most vulnerable in society. The Scottish Government does not have the full suite of fiscal powers to respond to the economic challenges we are facing. As such, either the UK Government must take steps to respond to these challenges, or provide the Scottish Government with the powers and responsibilities to deliver the response the people of Scotland need.

The purpose of this paper is to set out how the Scottish Government believes the UK Government should navigate the UK economy through what is expected to be the deepest economic recession in living memory. It requires a new approach.

The paper sets out ten principles we believe the UK Government should follow to manage the UK's public finances and ensure the strongest possible economic recovery for all the UK countries whilst reducing inequalities. All of these refer to areas where responsibility remains reserved to the UK Government and that the Scottish Government cannot implement without further powers.

Both the UK and Scottish Governments have provided unprecedented support to help protect jobs and enable businesses to survive. As we move into the recovery phase from the pandemic, government has a key role to play in ensuring the economic recovery helps us build a society that is fairer and greener. As demand from the private sector has weakened, now is the time for the public sector to lead the way in stimulating the economic recovery.

The UK Government's overall fiscal stance is still a key factor determining the Scottish Government budget. A large proportion of the budget is still determined by the block grant received from the UK Government via the Barnett formula. In addition, the Scottish Government has virtually no borrowing powers to support additional spending on day-to-day public services.

As we emerge from the greatest economic shock of our lifetime, it is essential that fiscal rules do not constrain the fiscal policy response, thereby weakening the economic recovery and doing more harm to the long term fiscal position. Instead, we require a bold and radical new approach from the UK Government, with fresh thinking on how to aid the recovery and deliver a fairer and greener economy that puts wellbeing at its core, while ensuring sustainable public finances.

Internationally, the focus of the fiscal response is beginning to shift from immediate emergency assistance to fiscal policies to kick-start the economy. The crisis is inevitably leading to an increase in public debt. This debt will need to be managed over a long period and in ways that aid, rather than hinder, economic recovery. Businesses and households will need the support of the banking and financial system to recover from the crisis.