Local Government, Housing and Planning Committee
Budget Process
Letter from the Cabinet Secretary for Finance and Economy to the Convener, 24 January 2022
Dear Ariane
Thank you for the opportunity to give evidence on the 2022-23 Scottish Budget alongside the Cabinet Secretary for Social Justice, Housing and Local Government on 11 January 2022.
Following that session I understand that you have requested further evidence on a number of issues and I am very happy to provide a response below.
The Scottish Government has no current plans to review the funding methodology for local government. As I stated in evidence to the Committee, and also to the Finance and Public Administration Committee prior to Christmas, I am open to considering changes to the distribution formula but any request to do so must come from COSLA and I will not impose such a review on local government.
In evidence we discussed the complexity of the distribution formula and the number of variables used to ensure a fair and comprehensive assessment of need. The full details of the process are set out in the Scottish Local Government Finance ‘Green Book’ for Grant Aided Expenditure and other allocations.
With regards to progress on a Local Government Fiscal Framework, I wrote to COSLA and Council Leaders alongside the Scottish Budget to reaffirm my commitment to working with COSLA to develop a rules based fiscal framework. Due to the pandemic, the initial work had been delayed, however Scottish Government and COSLA officials have now recommenced discussions. Substantive work will be taken forward in the first part of 2022, with the development of a fiscal framework also having a direct relevance to the Scottish Government’s Resource Spending Review.
A fiscal framework cannot be imposed by the Scottish Government, and as COSLA and the Scottish Government take this work forward, it will be important for local government, or indeed other relevant stakeholders, to bring forward proposals that can then be explored in partnership with COSLA. The development of a fiscal framework is also an important part of the ongoing work on the Local Governance Review, which considers how powers, responsibilities and resources are shared across national and local spheres of government, and with communities.
Finally, with regards to the operation of the Barnett Formula and decisions set out in the Scottish Budget, as you’ll be aware and as set out in the UK Government’s Statement of Funding Policy, the Barnett Formula allocates to Scotland a population share of changes in funding for comparable spending in England (or, as the case may be, England and Wales). Barnett consequentials accrued to the Scottish Budget are added to, or deducted from, the total available funding available to Scottish Ministers – the block grant (which is then in turn adjusted as per the Fiscal Framework). It is then for Scottish Ministers to decide how all the resources available to them should be allocated.
Unlike at an annual Budget when consequentials are separately identified on the basis of the funding changes associated with specific programmes, at a Spending Review consequentials are allocated on the basis of net changes in overall (Whitehall) departmental budgets. Therefore the UK Spending Review does not separately identify funding for individual policies and accordingly there are no identifiable consequentials to consider in respect of these policies – rather, they are subsumed within the aggregates notified to us. Furthermore, even after accounting for all consequentials resulting from the UK Spending Review, the independent Scottish Fiscal Commission has shown that our overall 2022-23 Budget is down 2.6 per cent from this year – or 5.2 per cent in real terms – due primarily to UK Government funding reductions. This conclusion is highlighted in the Commission’s Economic and Fiscal Forecasts report.
I am aware of claims that the Scottish Budget delivered a £371 million real terms cut to the core Local Government budget. This assertion double counts the impact of inflation and inflationary pressures such as increased national insurance contributions and pay pressures. As I outlined in evidence, I understand that inflation is having a significant impact on all budget lines, but I cannot inflation proof across the Scottish Budget because the overall funding that I receive is not inflation proofed.
Despite the overall reduction in the resources available in the Scottish Budget between 2021-22 and 2022-23, the total local government settlement has increased by £588.2 million or 5.1 per cent in real terms including significant additional funding provided for joint priorities, priorities which also attract widespread cross party support across the Scottish Parliament.
I hope this supplementary evidence is helpful in informing the Committee’s deliberations.