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Uncertain budgets in uncertain times bring valuable lessons for devolved finances

Author: ICAEW Insights

Published: 09 Mar 2021

Audit Scotland reports on the scale of the financial management challenges faced by the Scottish Government in responding to the pandemic. There are lessons for Wales, Northern Ireland and English regional and local authorities too.

Audit Scotland recently published Tracking the implications of COVID-19 on Scotland's public finances, a report on the financial challenges faced by the Scottish Government in responding to the coronavirus pandemic. 

The pandemic has been not only a public health crisis but also an economic and fiscal one across the UK. Both the UK Government and the devolved administrations, including Scotland, have taken unprecedented actions in response. 

The Scottish Government has received £9.7bn more funding through the Barnett Formula for 2020-21 as a direct result of UK Government spending announcements for England in response to the pandemic. It has used this funding to support 170 spending announcements specific to Scotland, adding to the UK-wide support measures such as the furlough scheme. 

Commitments of such scale and speed require effective joined-up planning and controls to ensure funds are spent in the most effective way, limiting fraud and error. The volatile and uncertain trajectory of the pandemic makes this challenging for any government.

Under the Barnett Formula, the funding provided to devolved administrations is linked to spending on public services in England. For example, if the UK Government increases the budget for English police forces, the funding provided to the devolved administrations (including Scotland) should also increase. One benefit of the devolution settlement is that the Scottish Government can choose how it plans to spend any additional funding it receives and so in this example would be under no obligation to spend any of the increase on policing. 

In more normal economic times, the UK Government sets out its spending plans in three-yearly comprehensive spending reviews, subject to smaller adjustments for changing circumstances and priorities in the UK Budget in October or November each year. In theory, this should provide devolved administrations with a reasonable idea of the funding they have available when they are putting together their budgets. 

The last two years have seen the UK Budget delayed until March (just before the start of the financial year) after the devolved administrations have completed their own budgets. This has made it that much harder to plan, even before the rapidly changing response to the pandemic.

In July 2020, the UK Government attempted to mitigate some of the challenges facing the devolved administrations by adopting a policy of guaranteeing Barnett Formula funding in advance of a series of spending commitments for English public services. The Scottish Government received six such funding guarantees during 2020-21, totalling £6.6bn, but confusion about whether certain UK government spending announcements were already covered has hampered financial planning. 

Audit Scotland’s report highlights an example from January where the Scottish Government believed they would receive further funding after spending announcements in England, only to find it was already covered by an existing funding guarantee.

Uncertain and regularly changing budgets are not conducive to good financial management because they limit the time available to make evidence-based prioritisation decisions and establish effective control environments. Possibly because of the difficulties of allocating funding at short notice, the Scottish Government decided to carry forward £1.1bn of 2020-21 funding to 2021-22. 

The Scottish Government asked for a relaxation of rules around borrowing and spending to provide it with greater flexibility but such a request was refused. Audit Scotland warned that while such additional flexibility could bring short-term benefits, there are greater risks in the medium to long term.

In his Spring Budget announcement, the Chancellor confirmed that Scotland would receive an additional £1.2bn of Barnett Formula funding for 2021-22. This should provide some certainty but subsequent spending decisions could change this amount again.

The financial management challenges faced by Scotland during the pandemic highlight the importance of easy-to-understand funding mechanisms that provide as much certainty as is possible. This also applies to the other devolved administrations in Wales and Northern Ireland, as well as to regional and local authorities in England.

Commenting on the report Oliver Simms, Manager, Public Sector Audit & Assurance for ICAEW said: “Audit Scotland have set out the unprecedented financial challenges facing the Scottish Government in responding to COVID-19. The last year has highlighted the difficulties of operating in a fast-moving situation with significant financial uncertainty, and how that has tested financial management capabilities and processes.

“There are some important lessons in this report for both the UK and Scottish Governments on how to ensure they are in the best position to plan and implement the financial response to a crisis, as well as the heightened risks of fraud and waste that must be tackled.” 

Alison Ring, Director of Public Sector for ICAEW, will be in conversation with Stephen Boyle, the Auditor General for Scotland, at 14:00 on Monday 15 March in the latest event of the series looking at the role of non-executive directors in the public sector. They will discuss the importance of good governance in the public sector, especially in light of the current challenges highlighted in Audit Scotland’s report, the role of Audit Scotland and how NEDs can contribute to effective governance.

The webinar on good government in the public sector is open to all and you can register your place here.

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