The Pre Budget Report and the devolved administrations

Following the Pre Budget Report, and the work done by the Institute of Fiscal Studies on the spending implications of what was announced (available here), I’ve been trying to work out its implications for the budgets of the devolved administrations.

In its usual way, the Treasury has issued ‘regional press notices‘ identifying key implications of the PBR for Scotland, Wales and Northern Ireland (and the English regions).  These identified consequential payments, attributed to ‘additional provision for UK Government departments’, as follows:

Scotland                                     £104 million

Wales                                            £60 million

Northern Ireland                   £143 million

It’s never at all clear how such numbers are calculated, or on what basis, and indeed whether they’re part of the devolved block grant or include spending on devolved social security programmes (housing benefit and council tax benefit for all three administrations, and all social security in Northern Ireland).  I would suppose that the Northern Ireland figure includes increased social security payments, but have no way to verify that.

What interests me more is the impact that UK Government spending plans for the next spending review period (2011-12 to 2013-14) will have for the devolved administrations, if the present financing arrangements remain intact.  This means a lot of assumptions, including Labour’s spending plans not being altered after the election, the general financial environment not getting any worse, and proposals for change including the partial tax devolution ones set out in Scotland’s Place in the United Kingdom not being implemented.  Even trying to work things through on this basis is quite complex.  The UK Government has promised to maintain real-terms spending on health and Sure Start, and to increase slightly spending on ‘front-line’ schools.  (I have translated that as relating to all consequential spending on devolved functions comparable to that in England for the Department for Children, Schools and Families, for simplicity’s sake.)  Those functions account for the bulk of the block grants to the devolved administrations, and (by my reckoning) for 73.5 per cent of changes in the block grants for the Scottish Government and 74.1 per cent for the Welsh Assembly Government. (These numbers are only for Scotland and Wales – I’ve not had a chance to do the sums for Northern Ireland.)  The IFS say that this means spending on other functions must decline by 6.4 per cent in real terms in 2011-12 and 2012-13 to compensate for the protection of health and education (as well as development aid).

The Scottish block in 2008-09 (using estimated out-turn figures from PESA 2009, available here; see table1.12) was £27 746 000, and that for Wales was £14 427 000.

If the block grants were to be changed in those proportions (and in 2008-09 values), the blocks for 2011-12 and 2012-13 would be as follows:

Scotland                     £27 062 100

Wales                         £14 215 500

This means that the block grants will remain very largely what they are in real terms, with reductions of about 1.5 per cent from the 2008-09 levels.  This obviously is a significant constraint on devolved Scottish and Welsh public spending, but given the austerity likely to be visited on many other areas of public policy, it is actually not too bad an outcome at all – if, of course, Labour’s plans in fact are sustained.  There are many imponderables, not least the cost of servicing the huge public debt, whether unemployment remains relatively low, and how strong are political commitments to those spending plans. The IFS add that we face ‘two parliaments of pain’, with the overall debt burden reaching a peak around 2015-16, in consequence of the fact that the UK is now running a structural (not just a cyclical) deficit.  The ‘if’ therefore remains a big ‘if’.

There’s also a question of what the implications of this situation will be.  The outlook for major transport infrastructure projects has to be bleak, if the department’s budget were to be cut by 6.4 per cent.  As two of the major schemes on the agenda are electrification of the Western main line, and the ‘High Speed 2′ project ultimately extending from London via Birmingham and Manchester to Glasgow and Edinburgh, this is not good for Wales or Scotland’s transport links.  Moreover, if the devolved budgets are largely sheltered while important areas of spending in England are cut, that will fuel existing English resentment about the way the devolved administrations are treated.  And if the Treasury seeks to maintain the allocation of devolved spending between capital and current spending, with capital spending and investment scheduled to drop dramatically after 2011-12, that means that the choices open to the devolved administrations about how they spend their money are limited in another respect.  As the Treasury has been concerned about their low levels of capital spending in the past, it would be ironic if it were now to try to prevent the devolved administrations increasing capital spending to fit with UK spending targets.

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7 Comments

Filed under Devolution finance, Labour, Scotland, Wales

7 responses to “The Pre Budget Report and the devolved administrations

  1. Scott

    This doesn’t look good for the politics of financial equity. Stable or slightly increasing per-capita spending by the devolveds (stable budgets and slowly declining populations) combined with, presumably, cuts in English per-capita spending. If you do total public sector spending including disability (presumably set to go up in S and W) and pension the developments would look worse still. It would be a very sophisticated English voter who didn’t get angry about it and an exceedingly grown-up English politician who didn’t exploit it.

    Will some more politicians get strategic and start selling fiscal autonomy as the rational way out?

    • I’m not sure that’s right, either about demographic trends (Wales’s population has broadly matched England’s, Scotland’s has at last stopped declning in relation to it), or about what happens with social security spending. That forms part of total public spending, which is the easiest data to get hold of and much used by papers like the Daily Mail, but not part of either the devolved block grants or the budgets that are likely to be cut most. It’s treated as Annually Managed Expenditure (AME), to increase flexibility in managing them and to take them outside the block grants. Of course, unemployment (and so the costs of paying for it, through Job Seekers Allowance and other benefits) goes up in times like these, but that appears already to have been allowed for in the government’s figures. However, so far unemployment has risen much less than was initially expected (or than in previous recessions), and if it were to spike that would disrupt all those projections.

      Regarding the final point, that’s at least part of the reason for the SNP’s refusal to countenance anything short of full fiscal autonomy as an alternative to Barnett. There’s a reasonable suspicion than partial fiscal autonomy is a way of transferring the risks of asymmetric shocks without also transferring the instruments to take action to control such risks. From the point of view of the centre, there’s certainly an attraction in getting a devolved administration to make its own cuts, and take responsibility for them, rather than control things from the centre and take all the blame. But this is all starting rather late to make that happen. Devolved governments offered fiscal autonomy five years ago might have taken it, and then found themselves having to make cuts themselves. Now, the incentives to do so are much, much less.

      English politicians who try to exploit this are riding a tiger, and probably know it. That’s not to say that papers like the Mail or Telegraph won’t try to get them to do so.

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