Scotland's Fiscal Outlook: the Scottish Government's five-year financial strategy

Annex C: Illustration of Alternative UK Government Spending Paths

C1. This section discusses the path for UK fiscal policy (as announced in the UK Government's Spring Statement 2018) and illustrates alternatives that would keep the public finances on a sustainable path, while also allowing for an increase in investment in public services above the levels currently planned by the UK Government.

Alternative Spending Paths

C2. As an illustration, two alternative paths for public spending are set out below:

1. Use the fiscal space available within the existing fiscal rules in full. Under current UK Government plans there is a degree of flexibility to increase spending while remaining on track to meet the Chancellor's fiscal mandate to reduce the structural deficit below 2 per cent of GDP and have net debt falling as a share of GDP in 2020‑21.

2. Balance the current budget in 2021-22. This means that public sector receipts are sufficient to fund day to day spending on public services, but that limited borrowing is still undertaken to support capital investment, reflecting the fact that such expenditure will both produce an asset which will generate benefits for future generations and increase the country's productive capacity.

C3. Using the available fiscal space in full (Example 1) could free up around £60 billion over the next five years, relative to the UK Government's current plans, while remaining on course to meet the UK Government's 2020-21 fiscal targets.

Table C.1 – Example 1 – Additional Funding Under Current Fiscal Mandate

C4. Example 2 could release up to £86 billion over the next five years, relative to the UK Government's current plans, with Scotland's share of this estimated at almost £7 billion over the same period.

Table C.2 – Example 2 – Additional Funding under Balanced Current Budget in 2021-22

C5. The UK Government's recent commitment to increase NHS pay, which is not yet incorporated above, shows that there is scope for fiscal policy to be eased within the existing fiscal rules.

Implications for public finances

C6. Charts C.1 and C.2 illustrate the potential path for the UK public finances under the current UK Government's plans compared to the alternative spending plans detailed above.

C7. Under the two examples outlined above, the deficit does not exceed the pre-crisis average of 2.4 per cent and debt, as a share of GDP, starts falling from 2020-21 onwards.

Chart C1: Impact of Alternative Spending Paths on Deficit

Chart C.2 – Impact of Alternative Spending Paths on Debt

Constructing the alternative spending paths

C8. The UK Government's plans for borrowing and debt, as published in the Spring Statement 2018 ( OBR Economic and Fiscal Outlook ( EFO), Table 4.40), have been used as the baseline for the analysis. In addition, the following assumptions were made:

• under Example 1, we assume that the UK Government utilises the headroom of £15.4 billion in full in 2020-21 and the deficit is reduced more gradually to its target of 2.0 per cent in that year. Beyond this point, an illustrative path for public spending is chosen which ensures that debt falls as a share of GDP;
• under Example 2, we assume that the current budget is in balance in 2021-22, allowing for an extra £27 billion of borrowing in that year, with the deficit falling gradually to achieve this target. Beyond this point, an illustrative path for public spending is chosen which ensures that debt falls as a share of GDP; and
• the analysis incorporates the impact that alternative fiscal paths would have on public sector debt interest costs. This is taken into account in the analysis by multiplying the additional cumulative borrowing in each year by the market gilt rate ( EFO, Table 4.1). The spending figures presented in Tables C.1 and C.2 are therefore net of the change in debt servicing costs.