Finance and Public Administration Committee: finance update

B. Covid-19 Allocations and Expenditure

1. Since the outset of the pandemic there has been significant interest in Covid-19 related expenditure, and the comparisons with the level of Covid-19 funding (Barnett Consequentials) which the Scottish Government has received. There are a number of points to note in any analysis:

• The timing of and scale of UK funding announcements. The Scottish Government may be given advanced notice of a certain level of funding being made available in relation to specific UK measures, but without the detail on whether this funding is Covid related or not. Final confirmation of funding levels and detail of the Barnett consequentials may vary and is often after the Scottish Ministers have made allocation decisions based on provisional figures. It is has often been necessary to provide rapid Scottish Government responses as the Covid pandemic has evolved and is not practical to await confirmation of the final detail of the consequential funding before doing so.
• Similarly there may be differences in initial funding allocations and final take up of that funding for individual measures announced by Scottish Ministers. This means that final Scottish Budget allocations may not reconcile with the initial funding announcement.
• Judgement on what is Covid-19 expenditure. In many cases, such as business support and some health expenditure, there is a clear (or clearer) distinction between Covid and Non Covid expenditure. Where discretionary funding is provided to Local Government, as just one example, the distinction is less clear.
• Covid funding may support on-going activities of an individual organisation, for example where it has been allocated to compensate for loss of income as a result of the pandemic.
• Formal Covid-19 allocations do not necessarily reflect all Covid-19 expenditure. As an example increased staff costs are generally classified as non-Covid despite these costs increasing for some core areas of Scottish Government and other public sector bodies as a direct result of the pandemic.
• As the pandemic moves from a direct response phase to a recovery phase the judgement on the distinction between Covid and non Covid expenditure will become increasingly blurred. In addition the UK Government have indicated that specific Covid-19 funding will cease in 2022-23.
• Covid-19 is not a formal budgetary or accounting classification. The Scottish Government has to balance its budget and remain within overall control aggregates, whilst ensuring that its Accounts are compliant with International Financial Reporting Standards (IFRS). Overall funding availability and budget limits must take precedence when budget allocations are finalised.

2. Despite these challenges and caveats this section seeks to provide the comparisons between Covid-19 allocations, Covid-19 Funding to date and an estimate of Covid-19 expenditure to December for financial year 2021-22.

B.1 Cumulative Covid-19 Consequentials and Budget Allocations

3. The 2021-22 UK Supplementary Estimate brings the Total Covid-19 funding received from the UK Government to just over £14.5 billion. Final confirmation of this position was received after the Spring Budget Revision was finalised.

4. The £707 million here includes £143 million of "Budget Cover transfers" in relation to Test and Trace/vaccination. The UK Government did not classify this as a Covid-19 Barnett Consequential but has been included in this Total for completeness.

5. This is the cumulative Total of Covid-19 funding received across financial years 2020-21 and 2021-22. £1.15 billion received at Supplementary Estimate 2020-21 (the amount over and above the £8.6 billion guaranteed) was deferred into 2021-22. The timeline of Scottish Government Covid-19 funding allocations is as follows.

6. The SBR brings Total Covid-19 funding allocations to over £14.8 billion, c£300 million more than the UK funding received (with the balance over and above the UK allocations made up from central reserves and reprioritisation). As indicated above there are some points to note in considering direct comparisons.

7. Firstly this is the "net funds deployed" . This shows the Total budget allocations used to support Covid-19 after some Covid funding has been redeployed on other Covid-19 measures. Examples would include support originally earmarked for health being redeployed for self-isolation grants and demand led transport and business support schemes being adjusted to reflect the most emergent needs.

8. Secondly, the £278 million of Capital and Financial Transactions in the Scottish budget were not specifically delineated between Covid-19 and Non Covid expenditure. Capital and Financial Transactions budget by their nature have to be managed in Totality and used to support the Capital Spending Review and to deliver the projects and programmes outlined in the Infrastructure Investment Plan. Nonetheless capital has been deployed to support Covid-19 measures, in areas such as ventilation, as shown in the latest Spring Budget Revision allocation.

9. Thirdly, there was a small element of Covid-19 resource funding (c£70 million), which indirectly ended up supporting the Non-Covid Budget following the UK Budget in March. This was as a result of the March UK Budget reducing Non-Covid funding which was allocated in the UK Spending Review of 2020, but adding greater volumes of Covid-19 funding.

10. However what this analysis does show is that, despite the complications with timing, classification and judgement, the Scottish Government has deployed all of the Covid-19 funding it has received over the course of the pandemic to directly support Covid-19 response measures.

B.2 Actual Covid-19 Expenditure

11. As indicated above, the focus for Scottish Government outturn and publication of actual expenditure is through the annual accounts process. The accounts are prepared on a Total funding basis under IFRS classifications. Nonetheless for the period 2020-21 the Scottish Government did provide an update on the outturn of Covid-19 expenditure, which was further clarified through responses to freedom of information requests. This analysis is summarised by portfolio at level 2 in Annex A.

12. This analysis shows £8.78 billion of Covid-19 expenditure versus the £8.69 billion of (net) funds deployed through the budget allocations process in 2020-21. However there are a number of offsetting differences here for example the proportion of Capital expenditure shown as Covid-19 related is greater than the Capital funding allocated for Covid-19 purposes (partly as a result of differences between budgeting and accounting classifications). Equally the resource outturn is less than Covid-19 budget allocations as a result of lower demand led expenditure on Transport support schemes and re-profiling of Health funding into 2021-22.

13. The latter points on Health and Transport also help to explain the overall resource outturn position and the Scotland Reserve addition in respect of 2020-21, as the Minister for Public Finance explained in the Provisional Outturn statement in June 2021. The Scotland Reserve is discussed in more detail in section C below.

14. At this point in the financial year there remains scope for considerable volatility in the final outturn data for Covid expenditure for 2021-22. Nonetheless the Scottish Government estimates Covid expenditure for the period 1 April to 31 December has reached £3.05 billion. The three main portfolios incurring the majority of the Covid spend to December are:

• Social Justice Housing and Local Government with actuals of £1.26 billion; £726 million being business rates relief and £429 million to Local Government.
• Health actuals to date of £862 million. Figures reported are chiefly based on the allocations provided to Health Boards up until the end of December. There have been significant additional allocations provided since, reflecting the full year costs of a number of areas of Covid expenditure. This funding is provided on a non-repayable basis to all Boards, ensuring that all will deliver a balanced financial outturn. This is in line with the approach taken in 2020-21.
• Finance and Economy actuals of £524 million includes spend in Business Support of £507 million. The vast majority of this relates to the Business Support vehicles open at the start of the financial year. The majority of the Business Support package announced in December 2021 will be captured in quarter 4 expenditure of 2021/22.

15. The table below provides further details of actual Covid expenditure for the period 1 April to 31 December 2021. Please note figures provided are based on a strict interpretation of where expenditure can be clearly distinguished between Covid and non-Covid. This should therefore be seen as an interim (and conservative) estimate to date.

B.3 2021-22 Business Support

16. Following the announcement of £375 million of additional business support, the Spring Budget Revision provided the budget allocation in full to business (£295 million) and cultural sectors (£64 million). However the specific funding allocations to businesses have occurred in distinct tranches. The transport allocation of £16 million is not shown as an addition in the Spring Budget Revision as this was funded by offsetting savings elsewhere within the NZET portfolio.

17. The full £295 million allocated to COBRA at SBR has now been specifically allocated as follows:

• £66 million for hospitality businesses impacted by the cancellation of Christmas parties
• £32m for eligible hospitality and leisure businesses due to impact of physical distancing and caps on attendance
• £10m targeted support for hospitality businesses most affected by the requirement for table service
• £5m for nightclubs who are required to close
• up to £28m for the taxi and private hire sector
• £19m for close contact businesses such as hairdressers and beauticians
• £17m for food and drink supply chain businesses including wholesalers
• £1m for brewers
• £9m for the worst affected businesses in the tourism sector*
• up to £5m for the sport sector
• £3m for wedding sector supply chain businesses
• additional £16 million for culture and major events
• £7.5 million to support inbound tour operators
• £6.5 million to support the childcare sector
• £3.5 million for outbound travel agents
• £3 million for city centre recovery
• £3 million to help digitalise SMEs to increase competitiveness, productivity and drive growth (Digital Boost)
• £80m Covid Economic Recovery Fund (delivered by Local Authorities)
• A further £3m allocated to the city centre recovery fund
• A further £3.3m to the childcare sector
• A further £2.4m for the outbound travel sector

* This was funded by £6m from within the £375m business support allocation and £3m reprioritised from existing budget within Tourism

18. The first elements here were included in the Cabinet Secretary for Finance and Economy's letter to MSPs on 1^st February. A latter tranche of £39.5 million was announced during the opening statement of Stage 3 of the 2022-23 budget and based on consultation with affected sectors on how it can best be targeted, particularly in light of requests for funding to focus on recovery work and final allocations were announced on 21^st February ahead of the Strategic Framework Update. The above specific allocations Total greater than the £295m funding as underspend on some of the earlier funds announced, where business demand has been less than initially forecast, has been repurposed into later announcements.

19. The £64 million allocated to culture was already itemised in the Spring Budget Revision as follows:

• £41.5 million for Creative Scotland
• £9.8 million for visit Scotland,
• £9 million for major events,
• £2 million for National Performing Companies for Christmas losses
• £1.7 million Museums

20. This has been supplemented by a further £1 million for Major Events Sector. With Creative Scotland allocation including support for cinemas of £2.5 million.