Spinning the Scottish Budget: Part II

Yesterday I rushed out a blog looking at the figures that were (and just as importantly were not) shown in the Scottish budget (> Spinning the Scottish Budget).  I've had some time now to dig a little deeper and if anything the spin is worse than I initially thought.

Let's be very clear: the budget is for 2017-18 so that is the year that matters, the year for which decisions are being made.

So let's look at the figures shown for real year-on-year growth in "Fiscal DEL" (aka Discretionary Spending Limits) for each of the last four draft budgets;

Not showing the real year-on-year growth for 2017-18 in the 2017-18 budget is a glaring omission is it not? The data to calculate the figure is of course there, it's just disguised in cumulative percentages and absolute totals. So let's fill in the gap (and while we're at it we'll show what the actual prior-year real terms year-on-year growth figures turned out to be):

So the first observation we can make (as per my last blog) is that Fiscal DEL is budgeted to increase by 0.7% in real terms for 2017-18.  If you've been listening to the SNP's rhetoric you would be forgiven for thinking that this budget was severely hampered by spending cuts due to "Westminster Austerity" - it may be impacted by that, but the net effect still allows real spending growth.

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Note also that Fiscal DEL doesn't include new capital borrowing powers - factor those in (and other adjustments) and Total DEL actually rises by 1.1% next year (the only year we're actually budgeting for here) - see last blog for more detail.

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The other thing that jumps out (and has caused me some headaches) is that it appears the actual real-terms Fiscal DEL trend in prior years was nowhere near as bad as presented in the draft budgets. I've spent quite a while trying to work out why, and it seems it's all down to the difference between inflation assumptions used at the time and the actual HM Treasury GDP deflator now known. What matters is the bottom row in the table above - that is the actual real terms year-on-year changes in Fiscal DEL based on the actual nominal figures in prior draft budgets (the known actuals, not the forecasts) adjusted by the most recent HM Treasury GDP deflator (as used for the current 2017-18 budget).

This was been a real pain to pull together because neither the 2016-17 or the 2017-18 forecasts show the actuals for 2014-15 or before (despite showing the actuals for 2010-11). If I was a cynical soul I'd think this was a conscious decision to hide the fact that the real-terms decline in 2014-15 was nowhere near as bad as forecast at the time and that 2015-16 actually saw a real-terms spending rise despite the fall forecast.

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The fact that 201-11 data is shown in all cases does give me reasonable confidence that the nominal figures I have deflated here are comparable on a like-for-like basis, but I can't be 100% sure. If anyone has an alternative analysis that contradicts my analysis (using the latest HM Treasury GDP deflator) then I'd love to see it and would be happy to compare notes

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But what about the longer term forecasts that are included in the Draft Budget - don't they show we face further budget cuts down the line?  Well, let's just say that the forecast presented is at best extremely crude.

To illustrate, the graph below shows the real-terms discretionary DEL forecasts produced in each of the last four years (indexed to 2013-14):

Note that to be able to see what's happening the y-axis doesn't start at zero - the index makes it easy to scale the movements in percentage terms.

It's clear that the real-terms forecasts used have always turned out to be pessimistic - so despite the rhetoric of "Tory Cuts", in fact what we've seen is more like a real-terms spending freeze. Still painful of course, but not as bad as you'd think if you happen not to be obsessive enough to attempt this analysis yourself.

When it comes to how far forward to forecast, the Budgets are also hugely inconsistent (the longer term forecast has only recently been added as a distraction - sorry "innovation")

• The 2014-15 budget forecast the budget year + 1 additional year
• The 2015-16 budget forecast the budget year only
• The 2016-17 budget forecast the budget year +3 further years
• The 2017-18 budget forecasts the budget year +2 further years

Look at the differences between the 2016-17 and 2017-18 longer-term forecasts in the graph above and you get a feel for how uncertain they are.  Despite this - per my last blog - the figure focused on in the commentary relates to that 2019-20 forecast relative to 2010-11 actual (despite the fact that this is a budgeting exercise for 2017-18).

You might argue that, however uncertain the forecast, it's reasonable to highlight the speculative longer term view relative to the historic peak. Even if you accept that, it's surely an observation that should be made in addition to not instead of explaining that the actual budget year under discussion is one with real-terms year-on-year spending growth.

Like me, maybe you've started wondering what that longer-term forecast is actually telling us - after all, by 2019-20 the Scottish Government is assumed to be responsible for 46% of that revenue (i.e. 46% of revenue raising powers will have been fully devolved). So you might think this forecast long-term real-terms decline is in large part a reflection of the Scottish Government's assessment of the effectiveness (or not) of their economic strategy and the impact of them using those powers.

But you'd be only partially right. Whilst there are explicit forecast assumptions about income tax, LBTT and Scottish Land-fill Tax, there is no assumption at all about Air Passenger Duty (APD). The commentary would certainly make you think that the planned APD reduction has been allowed for in the forecast: 

"we will introduce a Bill in the first year of the current Parliament to establish the tax which will replace APD in Scotland from 1 April 2018. We remain committed to delivering a 50 per cent reduction in the overall tax burden of APD by the end of this Parliament"

A 50% reduction in APD would amount to a 0.6% reduction in total Fiscal DEL in 2019-20 (before taking account of the economic activity benefits that might flow) - so it's not an insignificant consideration. But the forecast simply uses the OBR assumption for Scottish APD based on current policies because (I'm told) the forecasts can't make assumptions about legislation not yet passed.

The point is: the forecast is of limited value at best and - given this is a budget for 2017-18 - we should really focus on what it tells us about Scottish Spending in 2017-18.

What is tells us is that despite "Tory Austerity", Scottish Spending (whether you're looking at Fiscal DEL, Discretionary Spending Limits, Total DEL settlement from HMT or Total DEL) is rising in real terms.

Simple really.