Scotland's Widening Net Fiscal Deficit in 2024-25: An Overview
Expanded budget deficit primarily due to increased devolved expenditure
Scotland's net fiscal deficit expanded in the 2024-25 financial year, with several key factors contributing to this trend.
Higher Devolved Expenditure
The primary driver of the deficit's widening was a significant increase in devolved spending, accounting for 1.2% of GDP. This growth overshadowed other factors such as the decrease in North Sea revenues.
Decrease in North Sea Revenues
A reduction in oil and gas tax receipts by £0.8 billion, equating to 0.4% of Scotland's GDP, further exacerbated the deficit. This decrease was due to the volatile nature of these resources.
Changes in Reserved and Devolved Revenues
While devolved tax revenues, such as Scottish Income Tax, increased, they were offset by reductions in reserved revenues, primarily due to policy changes like cuts to employee National Insurance Contributions.
It's important to note that the Scottish Government's budget is not primarily funded by devolved revenues. The budget still largely depends on the Block Grant.
Comparison with the UK's Fiscal Balance
During the same period, the UK's overall fiscal balance also deteriorated, although the specific dynamics were different. The UK faced broader fiscal challenges, including rising public sector net debt despite efforts to improve it. The OBR highlighted uncertainties in fiscal forecasts, making predicting exact trends difficult.
While Scotland's fiscal deterioration was largely driven by increased devolved spending, reduced North Sea revenues, and changes in revenues, the UK's fiscal challenges were influenced by broader economic conditions and policy changes affecting various regions.
Regional Fiscal Transfers
Like Scotland, other regions outside the South East of England also rely heavily on fiscal transfers, indicating a broader UK pattern of fiscal reliance and economic imbalance.
Other Notable Points
- Total revenues in 2024-25 were £94.1 billion, surpassing the sum of devolved current spending of £62.6 billion and social protection spending by the UK Government of £22.3 billion.
- The Scottish Government points out that GERS allocates defence spending to Scotland on a population basis, but only £2.1 billion was actually spent with industry in Scotland in 2023-24.
- Reserved expenditure (excluding North Sea) fell by 0.8% of GDP relative to the previous year, primarily as a result of the cut to employee National Insurance Contributions announced in March 2024.
- Public spending in and for the benefit of Scotland has risen to 55.4% of GDP, compared with 44.4% for the UK as a whole.
- Devolved expenditure in 2024-25 was £72 billion, with a 6.8% increase, far outstripping the growth in devolved revenues.
- The Fraser of Allander Institute has made a statement regarding these findings.
- The Scottish Government has welcomed the fact that devolved revenues are growing faster than devolved spending.
In conclusion, Scotland's fiscal balance in 2024-25 was negatively impacted by a combination of factors, including increased devolved spending, decreased North Sea revenues, and changes in reserved and devolved revenues. Understanding these factors is crucial for making informed decisions about Scotland's economic future.
The increase in devolved spending accounted for 1.2% of Scotland's GDP and was the primary driver of the widening net fiscal deficit in the 2024-25 financial year, while a decrease in North Sea revenues due to the volatile nature of these resources further exacerbated the deficit. In the business sector, devolved tax revenues, such as Scottish Income Tax, increased but were offset by reductions in reserved revenues, primarily caused by policy changes like cuts to employee National Insurance Contributions.
