David Phillips IFS

@TheIFS - The UK Government is spending big on supporting public services and the economy through the COVID-19 recovery and beyond. There are, for example, ‘up to £30 billion pounds’ of measures counted in the ‘Plan for Jobs’ announced in the Summer Economic Update last week, although the OBR thinks they will ultimately cost around £20 billion.

However, alongside this – but with much less fanfare – are reductions in spending on other things as some previously planned projects and investments are now deemed less of a priority or infeasible given the COVID-19 crisis. The Treasury’s decisions on funding for the devolved governments suggest they expect these underspends to amount to almost £8 billion; the OBR expects more like £10 billion.

A lack of transparency over where spending is expected to be lower is contributing to confusion about the overall scale of fiscal support being provided, as well as the amount that the devolved governments in Scotland, Wales and Northern Ireland should receive to fund their own measures. It makes scrutiny of plans more difficult and is corrosive to trust. While governments of all stripes will, of course, want to follow the adage of ‘repetition, repetition, repetition’ when it comes to highlighting the goodies they are funding, official policy documents should also be clear about when and where spending is expected to be lower than previously planned too.

A multi-billion pound ‘Plan for Jobs’ - but the Treasury now expects to spend £8 billion less on other investments this year

Reading A Plan for Jobs it is not clear that, for example, the £2 billion Green Homes Grant scheme for England is funded from within pre-existing spending limits. Nor is it clear that almost half of the £400 million or so of cash for traineeships, apprenticeships, school leavers and careers advice in England is funded by reallocating funding within existing spending envelopes. This begs the question of what the government is now planning to spend less on than it previously was.

The government has been clearer that the £5.5 billion infrastructure package represents an acceleration of previously planned investments. But as with the aforementioned policies it seems to be funded by newly anticipated underspends on other capital projects rather than an increase in overall investment spending this year. This is why the devolved governments have been informed they will not receive additional funding as a result of this package: if it was an increase in overall investment spending in the current financial year, they would do so.

Taken together, this means of the ‘up to £30 billion’ Plan for Jobs, the Treasury has assumed that almost £8 billion is money that it had previously budgeted to spend, albeit on other things. And the OBR thinks such underspends could pay for an even bigger share (£10 billion) of the smaller amount (£20 billion) they think the plan will cost, according to the central projections of spending in its new Fiscal Sustainability Report.

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It can make sense to re-prioritise and re-profile spending in this way: some of the spending originally planned may no longer represent value-for-money or could even be infeasible, for example. But it’s important to make clear what is being cancelled or postponed so that other politicians, the media and public can scrutinise these decisions. And to be clear where previously planned spending is now not expected to occur in order to avoid confusion about just how big a fiscal stimulus is being provided.

Unnecessary confusion over funding for Scotland, Wales and Northern Ireland

I, myself, have been confused by this lack of transparency. When asked whether the Scottish Government would receive just £21 million as a result of the Plan for Jobs as the Scottish Finance Minister has claimed, I said that I couldn’t see how you would arrive at such a number given the schemes just mentioned, as well as the stamp duty holiday for England and Northern Ireland. It would get much more.

In a big picture sense, this is correct: the Scottish Government will get far more than £21 million. Because stamp duty is devolved to Scotland it will get much more than that to enable it to enact its own tax holiday or spend on other measures. Exactly how much is not yet clear – it will depend on updated forecasts and ultimately outturns for stamp duty revenues in England and Northern Ireland. But initial estimates published by the OBR this week suggest it could amount to around £120 million spread over this year and next. And the Scottish Government has already said it will use the cash it receives to temporarily raise the threshold of its equivalent tax to £250,000 and provide £50 million in extra support to first time buyers.

But the Scottish Government won’t, as I initially presumed, get extra funding as a result of the Green Homes Grant or the full £40 million it would if all of the money for traineeships and so on were new. Instead, apart from the stamp duty money, it will receive £21 million – the figure quoted by the Scottish Finance Minister – as a result of the combination of the ‘Plan for Jobs’ and the reductions in investment spending elsewhere that the Treasury is now expecting.

Of course, Scotland as a nation will receive much more – UK-wide measures like the Job Retention Bonus, Kickstart Scheme and VAT cut could amount to around £1 billion of genuinely new money for Scottish businesses, jobseekers and consumers. And the Scottish Government itself will receive over £700 million as a result of other funding confirmed in the Summer Economic Update – mainly as a result of extra spending on public services in England such as the NHS.

Add that to the £21 million and you get the £800 million the UK government says the Scottish Government received as a result of all the spending confirmed last week. Although, as with the Scottish Government’s figures, it is worth noting that this excludes the additional funding as a result of the stamp duty holiday, which mean the final overall figure will probably be nearer £900 million.  

More transparency please!

It is notable that the Scottish and Welsh governments have already published budget amendments formally setting out updated spending plans as of 27 May which highlight not only new spending but where cuts have been made to free up funding. Further updates in the Autumn and Winter are planned. The UK government should follow this more transparent approach, and ensure official policy statements are clearer about what is and isn’t new money. For example, they could easily have asked the OBR to sign-off the costings in the ‘Plan for Jobs’ even if they didn’t want to make this a full Budget.

The Government should also publish an updated Block Grant Transparency Report, setting out clearly how much extra funding the devolved governments are receiving and how this is calculated. The Treasury hasn’t published one of these reports since 2018, which makes understanding the increasingly complex funding arrangements of the devolved governments harder than it needs to be. An updated report would also provide clarity over how much genuinely new money is being allocated to England – as projects funded by reallocating funding do not lead to changes in the block grants.

Unfortunately, as it stands, a lack of illumination leaves significant scope for misunderstanding and even misrepresentation of the UK government’s plans. So, can the UK government please turn on the lights?

David Phillips, Associate Director, IFS (The Institute for Fiscal Studies)

This article was first published on the IFS website on the 16th July 2020

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