Scotland 'should be able to launch own furlough scheme'

Scotland should be able to launch its own furlough scheme if needed, researchers have argued, as they called for the reform of funding arrangements to devolved governments across the UK.

The report, published on Tuesday, said that Scottish, Welsh and Northern Irish Governments should be either given minimum funding guarantees by Westminster or enhanced borrowing powers, if stringent health measures and additional economic support is needed.

It also said there could be a regional furlough scheme under certain circumstances.

And the report’s authors, from the Institute of Fiscal Studies, the Fraser of Allander Institute at Strathclyde University, and University of Stirling Management School, also added that good communication and coordination across both the UK and devolved Governments was essential.

David Bell, professor of economics at the University of Stirling, said: “Effective communication and coordination between the UK and devolved Governments is vital for effective policy-making given the interactions between funding and policy decisions taken by these two levels of government.

“There were improvements during the early stages of the Covid-19 pandemic but stakeholders have told us these have not been sustained.”

Prof Bell, as well as David Phillips and David Eiser, said that while their report did not take a view on how serious the threat of the Omicron variant was, the rise of the mutant virus or other future outbreak, affected some parts of the UK much harder than others.

They said HMRC should examine the feasibility of making the furlough and self-employment income support schemes available on a geographical basis, and if it is practical without the risk of significant fraud or error, devolved Governments could be given the option of paying for furlough and income support schemes to be reinstated if they want to tighten public health restrictions significantly.

Thresholds for hospitalisation, for example, could also agreed above which the UK Government would pay for the schemes, the report funded by the Economic and Social Research Council said, to provide extra support in areas facing the most serious situations.

Mr Phillips, an associate director at the IFS, said with surging coronavirus rates it was “vital to lean lessons from earlier waves of the pandemic”.

“If new policy and spending announcements start to come in quick succession, the devolved Governments should swiftly be given some combination of the funding guarantees successfully deployed last year, and/or enhanced borrowing powers, to allow them to respond in a timely and effective way,” he said.

“Without such measures, they could find themselves uncertain about how much funding will be available until announcements are made for England, potentially holding up policy development and implementation.”

The report also examined the case for a number of permanent reforms to funding arrangements, which it said would make them more robust in the future.

The Economic and Social Research Council funded paper said that while minimum funding was useful in times of extreme crisis it was not appropriate in normal times.

Therefore, they said, in the long term, an alternative of automatically allowing the devolved Governments to defer the impact of lower-than-expected funding to later years would provide most of the benefit.

Mr Eiser, a knowledge exchange fellow at the Fraser of Allander Institute, said: “Currently, the devolved Governments cannot borrow to fund discretionary resource spending.

“There is a strong case to change this on a permanent basis to provide them with additional flexibility to respond to unforeseen events.

“Set at a modest level, such as 1% of their resource budget, this would pose no meaningful risks to the UK Government’s overall fiscal stance or fiscal targets.

“For similar reasons, there is also a good case for extending the devolved Governments’ existing – and very restrictive – drawdown limits from their reserves.”

And as part of long-term proposals, it said the Scottish Government’s usual annual borrowing limit to address tax and welfare forecast errors should also be doubled to £600m as a starting point.

A Treasury spokesman said the UK Government had worked closely with devolved administrations, and continued to do so.

“The UK Government’s £400bn Covid support package has supported people, businesses and public services in all parts of the UK, and we have just made £860m of additional funding available to the devolved administrations to use how they see fit when tackling Covid-19,” the spokesman said.

“The Statement of Funding Policy for the devolved administrations was updated in October and a review of the Scottish Government’s Fiscal Framework is due to take place next year.”

Cabinet Secretary for Finance and Economy Kate Forbes said: “We welcome the recommendations of the report, which underline and reinforce the points we have made in respect of Scotland’s current financial powers, and we will consider the detail closely.

“The pandemic has brought in to sharp focus the need for additional fiscal flexibilities for the devolved governments to be provided on an ongoing basis – including greater borrowing powers, reserve limits and year-end flexibility.

“Disputes over Covid funding from the UK Government shows exactly why the current arrangements do not work for Scotland and that we need more financial powers, including enhanced borrowing capabilities, to implement appropriate support measures during the pandemic.

“Additional flexibilities would allow the Scottish Government to mobilise and deploy funding in an effective and efficient way to support our businesses and citizens.

“The reserve and resource borrowing powers in the Fiscal Framework are insufficient to deal with the volatility inherent in its operation.

“Recent UK Government funding announcements have been unclear about the extent of new funding over and above previous indications.

“We urgently need the UK Government to confirm what additional funding is coming to Scotland and how much of it will have to be repaid in future.”