'Volatility And Uncertainty' In Budget Process Exacerbated By Brexit

27 January 2017, 07:11

scottish parliament

The impact of Brexit on the economy will exacerbate the "volatility and uncertainty'' in Scotland's budget process now more tax raising powers have been devolved to Holyrood, MSPs have warned.

The Scottish Parliament's Finance Committee stressed the new arrangements - which allow ministers in Edinburgh to set income tax rates and bands for the first time this year - did not necessarily mean there would be more money to spend.

Scotland's block grant from Westminster would be reduced each year, as cash raised from some taxes would now go to Holyrood instead of the Treasury in London.

But MSPs on the committee said there needed to be "complete transparency'' on how these fiscal framework arrangements worked.

The committee said it was "disappointed'' that Chief Secretary to the Treasury David Gauke had failed to come and give evidence to the committee on this.

"The committee believes it is vital that we have the opportunity to hear from an HM Treasury minister on the operation of the fiscal framework as part of the annual budget process,'' it said.

"The Committee will continue to pursue this matter with HM Treasury.''

With new tax powers coming into effect, the 2017/18 draft budget was an "historic'' one, the committee said.

Its report stated: "This is the first time that any Scottish Parliament will set the rates and bands for income tax in Scotland.

"It is also the first budget that will operate within the context of the fiscal framework.

"This is complex and potentially introduces a much higher level of uncertainty and volatility to the budget process.

"This would have been challenging enough during a period of economic stability.

"But the added uncertainty arising from Brexit significantly increases the challenge faced by both the Scottish Parliament and the Scottish Government in agreeing the budget for 2017/18.''

Given the "complexity'' of this, the committee stressed it was "critical that there is a sufficient level of transparency'' from both the UK and Scottish governments to "ensure public confidence in the operation of the new financial powers and the fiscal framework''.

The committee noted the new tax powers meant approximately 40% of the money spent by the Scottish Government would be raised north of the border - describing this as a "fundamental shift from a budget which historically was almost wholly funded by a block grant from Westminster''.

But the report added: "It is important to note at this point that having additional tax powers does not mean that the Scottish Government will therefore have more money to spend.

"This is because each time a tax is devolved there is a reduction in the size of the block grant to reflect the revenues foregone to HM Treasury.''

With the Scottish budget still "substantially dependent on a block grant from the UK Government'' the committee also said Chancellor Philip Hammond's decision to change the timing of the UK budget from March to the autumn of each year had "potentially significant implications'' for Holyrood.

"Publishing the draft budget after the UK budget/Autumn Statement substantially limits the amount of time available for scrutiny of the Scottish government's revenue and spending proposals,'' the report said.

MSPs added that a number of Holyrood committees had raised concerns about this.

The committee will write to the Treasury "highlighting the potential challenges to the budget scrutiny timetable by changes to the timing of the UK budget announcement and asking what consultation took place with the devolved governments''.

Convener Bruce Crawford said: "It is clear to us the increased dependence of the budget on relative economic performance, combined with the complexity of the fiscal framework, means there is now a much greater degree of volatility and uncertainty in the budget process.

"This uncertainty is exacerbated by the potential impact of Brexit on economic growth and the public finances.

"This report is intended to provide clarity and demonstrates the importance of cross-party, parliamentary oversight of both the draft budget and the fiscal framework.''

Finance Secretary Derek Mackay said he would consider the report "carefully and provide a formal response ahead of Stage 3 of the Budget Bill''.

Mr Mackay added: "The formal budget process is under way with the introduction of the Budget Bill, enabling Parliament to scrutinise the Government's proposals to deliver increased investment in schools and our health service whilst protecting low income households.

"I will continue to take forward constructive discussions with other parties on our budget and am considering the detail of the propositions that we have received to date.''

A Treasury spokeswoman said: "We are absolutely committed to continuing to work closely with the Scottish Government to successfully implement the fiscal framework.''