We Need To Talk About: Budget Underspends

/ Dr Craig Dalzell

Victoria Quay

Q. When is a surplus not a surplus?
A. When someone is talking down the Scottish Government.

Today the Auditor General published its annual report detailing an independent opinion on how well the Scottish Government is managing its finances (or how badly it is failing to do so).

This year, as last, there have been howls of anguish from those opposed to the Scottish Government at the fact highlighted by the Auditor General that the Government spent £350 million less last year than it was given in the Block Grant.

As the opening question suggests in most normal countries when your government spends less than it has available to spend then it is running what is known as a budget surplus. This is, especially in today’s economic climate, generally considered to be a “good thing“. Not so in Scotland, apparently, where the phrase to be used instead is “budget underspend”.

How this has occurred, is due to the peculiar way by which the Scottish Government is funded and is constrained to spend its money.

The first thing to understand is that right now the Scottish Government doesn’t raise much of its own money directly. The vast bulk is allocated by the UK Government annually via the Barnett Formula and given to the Scottish Government in one lump sum known as the Block Grant.

The second very important point to note is that the Scottish Government is not allowed to borrow money to cover current spending the way that the UK Government or even many other devolved states and regions are allowed to do. This means that it cannot account for any sudden rises in costs or any unexpected emergencies which might require urgent action.

The Government must also allow for planning for projects or services for which the actual cost may not be known until the project is actually completed. For a hypothetical example, let’s say that the Government wants to budget for student grants and loans to cover the new intake in the coming year. It asks how many extra students will be joining the education system and is told that the number could be as low as 18,000 or as high as 22,000. Now, a government with borrowing powers might choose to budget for 20,000 and cover any excess with borrowing but the Scottish Government is not allowed to do this. It must therefore be fiscally conservative and budget for 22,000. If only 20,000 students join then there will be an excess of money in the education budget and hence a “budget underspend”.

This same line of argument runs through all aspects of the budget process. We simply don’t know if the winter flu season will be longer or shorter than last year; we don’t know if the courts will be busier or quieter than last year and we don’t know if a major infrastructure project will “accidentally” come in under-budget.

In many ways it’s actually quite remarkable under these circumstances that the government can spend £32,669 million of its allocated £33,016 million Block Grant. £350 million sounds like a vast number but in the realm of government budgets on the scale of tens of billions, single percentile changes result in numbers in the hundreds of millions. This year, the Scottish Government has managed to spend 98.95% of their budget without pushing it over.

One objection often made is that this is somehow money “lost” to education or health budgets. Again, often these underspends are accrued when a fiscally conservative target ends up over-estimating actual costs or when a project is streamlined mid-way and savings are found. Even if every penny was budgeted for, these post-hoc surpluses would still creep in from time to time. They are, by nature, unaccountable.

This all brings up another question though. What happens to the unspent money?

Well, two things can happen. Between 1999 and 2007 the Labour led governments, which also ran underspends in each of its years in power, simply returned the unspent funds to the UK Government. By the time the SNP came to power in 2007 these funds had totaled £1.5 billion [page 9 here]. The SNP negotiated for the funds to be returned over a period of the following four years. Since then, the underspent funds have been rolled over into the following year’s budget (of course, given that there will inevitably be an underspend in that year too this doesn’t automatically translate to increased budgets. Merely an avoidance of budget cuts).

For those still skeptical about the government’s abilities to manage finances in this way, let’s think about a personalised example.

Imagine that instead of earning a monthly salary you were given your entire annual salary in one lump sum on January 1st. Like the Scottish Government you will not be allowed to borrow money to cover any overspends (though some capital borrowing like your mortgage or your car Hire/Purchase is allowed).

Think about planning your annual budget. Do you know if food prices are going to go up or down? How about fuel? Will you have any unexpected medical or vet bills? Will your winter heating be as bad as last year? Will a storm knock down your garden fence? Could you budget everything down so that your last penny is spent exactly on midnight on Hogmanay?

It’s not so easy now, is it? I doubt there are many who read this who think they could managed their own personal budgets successfully in this way. Is it, therefore, so hard to understand why this has happened on a national scale?

The solution to the whole underspend problem, of course, would be to allow Scotland the powers given to most normal national governments and even to many normal devolved governments. Allow it to build investment funds when running a surplus and to borrow to cover temporary shortfalls and deficits. Debt might be a bogeyman in the current political climate but, in reality, it is an important tool when used in a fiscally responsible manner.

For those still raising a cry at this news then please, put your own money where your mouth is. Present your own fully costed budget for next year and we’ll see just how accurate your own estimates are.

Edit: I got a message claiming that the Scottish Government has been granted borrowing powers under the Scotland Act 2012 with the implication that therefore the underspend was a deliberate attempt to artificially worsen the impact of austerity.

There are borrowing powers under this act. The Scottish Government will be allowed to borrow up to £200 million per year and will have a total debt ceiling of £500 million total. This power came into force for the financial year 2015-16 therefore do not affect the above figures which cover 2014-15.

TCG logo

39 thoughts on “We Need To Talk About: Budget Underspends”

  1. Brilliant piece. Weirdly it has taken a Green and not somebody affiliated in any way to the SNP to educate to me the fact that the Scottish Govt (SNP) have negotiated a deal with Wastemonster that any “govt underspend” comes back to Scotland in the next budget (pocket money) period.

    Liked by 3 people

    Reply

  2. Very good rendering into everyday understandable analogies.

    Only quibbles:
    When you said “spends more” in the third paragraph, I think you meant “spends less”.

    Also white text on green background does not, IMO, work very well. A couple of other non B+W alternatives which do work well are yellow on blue, white on maroon.

    Like

    Reply

    • Corrected the typo, thanks.

      I’ll give the colour scheme a think although personally I find it quite easy to read and given that it’s a Green blog I’m not sure blue would work.

      Of course, everyone’s eye (and monitor) is different. This may be a contributing factor. Maybe I could play with typeface and font.

      Liked by 1 person

      Reply

    • Good article.

      You said “many devolved….”. I’d like to know besides Scotland, Wales and NI, how many other countries have devolves parliaments?

      On the colour scheme, I this the other gentleman is colourblind as white on green is fine, yellow on green or yellow on blue as he suggested would be aweful to read……….and fail to be Green of course which is the whole point

      Like

      Reply

  5. As a former Economics student with a degree in that and Economic History I found the whole article easily understood and more to the point factually acurate. KEEP UP THE GOOD WORK.

    Liked by 1 person

    Reply

  9. Thank you for this clear account, and for making the initial distinction between the Barnett Formula and the Block Grant. The former term is often still used in referring to the latter, but should apply only to the annual increments. The problems arise in the calculation of the Block Grant, for example:
    – it starts on a raw population basis (with no canonical link to any valid assessment of fiscal need);
    – it applies only to those department budgets that are devolved (so not to DWP or MoD expenditure)
    – many projects are deemed by UK Treasury to be of UK benefit so withdrawn from Barnett-consequential funding beyond England (e.g. Olympics)
    – there is no mechanism to determine what are UK or England-only spends, but the default position is UK for Central Govt. spending that is outwith devolved departments, or crosses several e.g. HS2.
    – there is no statutory basis for any of this, nor any process for appeal
    Full Fiscal Autonomy would shine light into this darkness!

    Liked by 1 person

    Reply

  10. Pingback: We Need To Talk About: Budget Underspends | scottishpolitcalgroup

  11. This is an interesting article. Thanks for publishing it and going to the trouble of researching the matter in some depth.

    I contacted the Convenor of the Finance Committee earlier this year and he was unable to assist in any shape or form. Can I ask you where you were able to obtain the figures you quote? I was directed to the official scot. gov site, which provides no clear details of these surplus funds. The annual reports don’t specifically detail underspend, which may explain the legitimate criticism levelled at the current government.

    You mention the Scotland Act 2012 and the potential for borrowing provision within it. Can you identify who pays the interest in the borrowing transaction and what public body acts as regulator for it? The Scottish Government has so far refused to announce whether it will have its own Office of Budget Responsibility under fiscal autonomy (1).

    Would you agree that some authority with no political ties should be given the task of ensuring public funds are properly spent and the fate of underspent funds made transparent?

    I too think your chosen colour scheme and font choice is just fine.

    1. TaxpayerScotland called for a Scottish OBR in January this year. The Smith Commission has said that the Scottish Government should have one:  Smith report para: 2.4.34: ‘It is the UK Government’s view that the Scottish Government should bring forward proposals fully consistent with the OECD principles, and reflecting the UK experience with the OBR, to enhance the Scottish Fiscal Commission as part of agreement to a new fiscal framework for Scotland.’

    Like

    Reply

    • The numbers are detailed in the link to the Auditor General’s report. Here is the link again. http://www.audit-scotland.gov.uk/docs/central/2015/s22_151001_scottish_gov.pdf

      The full final details of Scotland’s incoming current borrowing powers aren’t quite clear but it looks like the UK gov will issue the bond on Scotland’s behalf and that the Scottish Gov will be fully responsible for paying back the loan including interest.

      While this method has the advantage of not incurring an interest “premium” experienced by some federal states we will be limited only to 4 year loans (The UK often issues cheaper 25 year or even longer term loans) and a very tight debt and deficit limit. It remains to be seen whether these limits will be sustainable. I have my doubts.

      Liked by 1 person

      Reply

  12. Perhaps you overlooked one of my queries so I’ll provide again.

    Would you agree that some authority with no political ties should be given the task of ensuring public funds are properly spent and the fate of underspent funds made transparent?

    Surely you would agree to a regulator with legal powers to investigate the use of public funds and their eventual destination?

    A progressive government would take this as a given, would you not say?

    Like

    Reply

    • It rather sounds very close to the mandate already given to the Auditor General and I agree with their statement that as more power is devolved to Scotland then more transparency and accountability should be, as you say, a given. I have no objections to this role being strengthened and/or expanded as required.

      I also rather like that these reports are published for public scrutiny (even if they are currently a little hard to find). Unlike the Westminster reports (of which I’ve had to wade through many) I applaud the fact that they are actually quite straightforward to read. It’s far better being able to go to the root source rather than having to rely on what-ever over-spun line is spread by the media and party press releases.

      Liked by 1 person

      Reply

  13. An underspend is a bad thing. £3/4 of a billion sent back to London. When I was in the SSP, some of the people who are saying we can’t criticise the SNP for their underspend at the present time were basing all their spending promises on the alleged labour underspend! They send hundreds of millions back to London, while hundreds of thousands are stuck on food banks. It’s apparently one rule for labour, and one for the SNP. The SNP can have an underspend, but Labour can’t. The SNP can privatise ferries but labour can’t.
    If parties were really anti austerity, they’d spend to needs, never mind the block grant, and demand the money stolen from us from Westminster. Instead they claim to be anti austerity, while carrying out all the cuts. !0’s of millions of cuts from the SNP in Dundee and thousands to lode their jobs in Edinburgh. Articles like this just let them off the hook.

    Like

    Reply

  14. That’s not my understanding, does that not reduce the block grant given to us? Either way it doesn’t alter the fact that their are a million things that the Scottish government could be spending the money on. Welfare sanctions, bedroom tax arrears, stopping job losses in Edinburgh, or cuts in other cities that they themselves are implementing. The last thing we need is to be underspending at all.

    Like

    Reply

    • A common misunderstanding but the Block Grant is not reduced if underspends occur. The Grant is strictly determined by the Barnett Formula which is based on a % of public spending occurring in England. It has no determination on either the need or usage within Scotland.

      I’m more than certain that there are specific areas of spending that we could disagree on but I’m also certain that if either the Greens or the SSP were in Government under these conditions then underspends would still occur. It is quite simply impossible to plan a budget flawlessly to the penny and when you are legally prohibited from overspending then there is only one alternative. The only argument is over magnitude.

      Remember that many of these underspends occur due to projects coming in under budget. This kind of money obviously cannot be reclaimed until the project is actually finalised so it makes sense that this money is rolled into the next budget.

      Liked by 1 person

      Reply

  17. Good article but minor quibble “Between 1999 and 2007 the Labour led governments, which also ran underspends in each of its years in power, simply returned the unspent funds to the UK Government. ”

    Not really, they went into EYF – END YEAR FLEXIBILITY. A problem is that it was being questioned in the HoC, and was large, larger than perhaps would be normal. I would presume there was every reason to expect the LabLib to recover it themselves if they’d got elected, in fact I vaguely remember the SNP accusing them at the time of having this as as “election fund”.

    http://www.gov.scot/Topics/Government/Finance/EYF-Guide

    Like

    Reply

    • One of the most entirely infuriating things about politics is that when Opposition and Government switch sides, often the arguments and counter-arguments remain the same.
      Avé! Duci Novo, Similis Duci Seneci! – as they say in Latatian.

      Like

      Reply

  19. Pingback: The (Economic) Madness of George | The Common Green

  20. Pingback: Wings Over Scotland | A new challenger appears

  21. Pingback: We Need To Talk About: GERS (2015-16 Edition) | The Common Green

  22. Pingback: Passing Go | The Common Green

  23. Pingback: Passing Go -

  24. Pingback: We (Still) Need to Talk About: Budget Underspends | The Common Green

Leave a comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.