24 March 2017
Scotland’s public finances are changing
We outline the changes, resource implications and challenges associated with the implementation of the new devolved financial powers of the Scotland Acts.
In a new report published on 23 March 2017, Audit Scotland sets out how the Scottish Government is managing a range of new devolved financial powers. The report recognises that progress has been made and challenges have been faced, but emphasises that the challenges are substantial and the scale of change needed to implement them is significant.
So, what exactly is changing?
The new financial powers of the Scotland Acts will give the Scottish Parliament more control and choice over taxes, social security and borrowing in Scotland. The amount of revenue raised and spent in Scotland is expected to increase from £4 bn to £22 bn by 2020.
The financial powers in the Scotland Act 2012 have all been introduced and work will continue to implement the powers in the Scotland Act 2016 until at least 2021, as set out in the timeline below:
Devolution of two taxes collected by Revenue Scotland:
Land and Buildings Transactions Tax replaced Stamp Duty raising £425m revenue in 2015/16.
Scottish Landfill Tax which raised £147m revenue in 2015/16.
New Fiscal Framework sets out calculations for grants received from the UK Government, borrowing limits and fiscal and economic forecasts.
Reduction of the UK income tax rate and setting of the Scottish Rate of Income Tax (SRIT) at 10%. Administered by HMRC, with estimated revenue of £4.9bn for 2016/17.
Implementation of the Additional Dwelling Supplement (ADS) collected by Revenue Scotland – currently set at 3%.
Powers for borrowing and maintaining cash reserves with an overall revenue borrowing limit of £500m, capital borrowing limit of £2.2bn and a cash reserve limit of £125m.
UK vote to leave the EU. Impact of Brexit is unknown but it may have implications for the way the new financial powers are introduced and managed.
This year will see a phased introduction of the financial powers in the Scotland Act 2016:
Further control over SRIT rates and bands generating estimated £11.8bn revenue.
2012 Act powers extended to increase borrowing and cash reserve powers. The Scottish Government will operate with a revenue borrowing limit of £1.75bn, a capital borrowing limit of £3bn, and will be able to carry forward overall reserves of up to £700m.
Devolution of employability services, with plans to replace the Department for Work and Pensions (DWP) Work Programmes. Transitional arrangements are in place for 12 months before these programmes are fully devolved. DWP systems will be used for the Work First contract and Skills Development Scotland will manage the Work Able contract.
Under the Scottish Fiscal Commission (SFC) Act 2016, the SFC will become a statutory body from 1 April 2017. The SFC will be responsible for preparing forecasts for the Scottish Government’s draft budget and Budget Bill, however there will be no requirement for the SFC to provide an assessment on the financial sustainability of public finances.
Devolution of Air Passenger Duty, which will be replaced by Air Departure Tax (ADT) from April 2017 and administered by Revenue Scotland, generating estimated revenue of £326m.
Assignment of VAT collected in Scotland to the Scottish Budget. The methodology for this assignment is still to be agreed between the UK and Scottish Governments but will be collected by HMRC and is expected to raise an estimated £5.6bn.
Creation of a new social security agency to deliver 11 benefits totalling £2.8bn in Scotland. This will be administered in phases due to interdependences between different benefits and reserved policies, such as Universal Credit.
Devolution of the Aggregates Levy with estimated revenue of £53m to be collected by Revenue Scotland – a date has still to be agreed for implementation of this power due to outstanding legal challenges to the UK-wide levy.
What are the resource implications for implementing these new powers?
The UK Government will make a one-off payment of £200m towards the cost of implementing the changes. The Scottish Government spent £18.5m in 2015/16 on devolution programmes but has not yet identified the total expected costs, which are likely to be in excess of £200m. The changes will involve significant updates to IT systems, estimated at a cost of £80m. Audit Scotland has reinforced previous recommendations made on managing ICT programmes.
There are significant staff implications for agencies involved. The Scottish Government faces challenges in recruiting staff with the skills it needs and is currently making changes across the organisation to ensure it can deliver the additional responsibilities. The SFC is also facing challenges in recruiting staff with the right skills.
Information and data-sharing arrangements are also needed across a complex range of public bodies to support the new financial power, which will have implications for data protection and security.
What are the challenges associated with these new powers?
The Scottish Government and public sector bodies face a number of significant challenges in implementing these new devolved powers, including:
The devolved powers are significant in scope and scale and present major challenges to the capacity of the Scottish Government to implement them effectively. This is particularly relevant in the context of Brexit, financial austerity more generally, and a potential second independence referendum on the horizon.
The new devolved powers have never been implemented or administered before by the Scottish Government and, as such, they may not have the skill set required to fully understand and respond to the risks associated with implementation.
Implementation requires setting up new agencies and developing new and untested IT systems to support delivery. Historically, public bodies have generally not administered these major project management challenges well.
The new powers contain opportunities and threats to Scotland’s public finances. This will be more directly affected by the strength of the Scottish economy in maintaining the tax base required to support public services and in the efficiency of the Scottish Government in collecting taxes.
It is likely that the Scottish Government’s tax revenues will fluctuate, potentially significantly, between years. If the £700m reserve limit proves to be insufficient, this could present major challenges to the funding available to support public services.
At the same time, these new powers provide a powerful incentive to politicians to focus on growing the economy as a means of improving Scotland’s public finances. They also present a significant opportunity to simplify much of the bureaucracy of government systems inherited from Westminster and to deliver new, efficient and innovative ways of managing the business of government.
In summary, the Scottish Government inherits new and significant financial powers under the new devolution settlement. These new powers are broad in scale and scope and present significant challenges to the skills, capacity, and competence of the Scottish Government in implementing them. The Scottish Government is showing every sign of being capable of meeting these challenges effectively and efficiently. It is also taking advantage of the significant opportunities associated with the new powers to re-invigorate the Scottish economy and to make government less bureaucratic, more effective and more citizen focussed.