We Need To Talk About: Budget Underspends

Craig Dalzell
on : 
2nd Oct 2015
Bulletin item expiry date: 
18th Nov 2015

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.