Nicola Sturgeon, Scotland’s first minister, faces tougher choices on public spending after the chancellor of the exchequer, Philip Hammond, failed to increase significantly Holyrood’s funding for essential services, adding to pressure for tax rises.
A headline funding boost of £2bn for Scotland in Hammond’s budget on Wednesday was criticised by the Scottish government, which said it included £1.1bn in loans that could not be spent on services like health. The total package announced by the chancellor also carried an extra £509m for conventional infrastructure spending such as building roads, schools and hospitals.
However, the amount of money awarded for day-to-day spending drew a furious response from the Scottish National party. It said Scotland had been shortchanged by an increase in funding for public sector pay, health budgets, policing and schools that came to a relatively meagre £347m over the next three years in cash terms.
The chancellor offered some further concessions: waiving a £40m VAT bill from next year for Scotland’s police and fire services, freezing duty on whisky and other spirits, giving £3.3m to Scottish charities and allowing North Sea oil and gas firms to pass on tax reductions when they sell their fields. Previously the tax relief – a benefit for years of paying tax on oil and gas production – was not transferable and the industry lobbied for a rule change, saying the situation was blocking investment.
He is also promising extra investment for the Scottish and English border, where numerous Tory MPs hold seats, in the so-called Borderlands growth deal.
Derek Mackay, the Scottish finance secretary, said Scotland had been “shortchanged” by the budget. Its grant for day-to-day spending will fall by £200m in real terms next year, he said, compared with this year’s Treasury grant. Under the Barnett formula that sets out Scotland’s share of public funds, multi-billion pound programmes announced in the budget to help house buyers, home-builders and students in England will see Scotland’s funding in those areas increased by £1.1bn over four years.
“The reality is that over £1.1bn of the money being promised to Scotland over the next four years are loans that the Scottish government cannot spend directly on frontline public services and that have to be paid back to the Treasury,” Mackay said.
Mackay and Sturgeon had already faced their own spending difficulties after making significant election promises based on last year’s tougher budget settlement, including increasing NHS spending by £500m above inflation and lifting the public sector pay cap across the board.
Inflation is rising, adding to the cost of the NHS pledge. Economists at the Fraser of Allander Institute (FAI) at Strathclyde university estimate that increasing public pay by inflation in Scotland will add £400m to next year’s wage bill. The NHS pledge alone will require cuts of up to 20% in other departments.
Mackay has managed to save £160m by delaying plans to cut air passenger duty in Scotland by 50% from next April, but Sturgeon has confirmed that income taxes for the highest earners in Scotland are likely to increase to help plug a gap in their spending plans.
Professor Graeme Roy, director of the FAI, said the new money for housebuyers and house building would allow ministers to move money around in their existing budgets, but ministers still faced real problems with day-to-day budgets.
“The additional capital revenue doesn’t really get the Scottish government out of the squeeze in revenue budgets, which brings us back to [raising] taxes,” he said.
Scotland already spends £1,437 more per head on public services than the UK average overall, and had a deficit more than three times higher than the UK average last year. The Scottish Conservatives said the £2bn extra now available from Hammond reduced the need for tax rises.
“That extra funding also means that SNP ministers must look again at their reckless plans to raise income tax in Scotland,” said Ruth Davidson, the Scottish Tory leader.
The Welsh government’s funding, which is decided in the same way as Scotland’s, will increase by £1.2bn over the next four years, an effective increase in its budget of 2%, and by £660m in Northern Ireland. As in the rest of the UK, much of those increases are in the form of extra borrowing.
Christina Rees, Labour’s shadow Welsh secretary, said the Labour government in Cardiff did its best to protect services, but the budget offer was inadequate. “But this work will be made much harder following today’s weak and desperate budget from a UK Tory government that simply doesn’t care about Wales,” she said.
Northern Ireland’s spending has already been boosted by the £1bn extra offered by Theresa May, the prime minister, to secure support at Westminster from the Democratic Unionist party. Hammond said he would also press on with a city deal for Belfast to boost investment.
