The Scottish and Welsh governments should be given greater borrowing powers, allowing them to act more quickly in the fight against Covid-19, a leading think tank has said.
The Institute for Fiscal Studies said ministers in both Edinburgh and Cardiff could find their ability to respond to the pandemic “delayed or compromised” by the current finding arrangements.
A new paper from the IFS suggested the Scottish and Welsh administrations are “very reliant” on cash from the UK government to pay for new measures being brought in as part of the response to the virus.
Don't forget the devolved governments. With constrained borrowing powers and different challenges (age structures, types of business etc) to England current funding systems may not be fit for purpose at this extraordinary moment. Important new piece here https://t.co/7d2l2W9yYv
— Paul Johnson (@PJTheEconomist) March 25, 2020
It said the current set up, where the devolved governments receive a proportion of cash spent in England under the Barnett formula, combined with “limited” reserves held in Scotland and Wales , meant “the funding arrangements for the devolved governments may not be appropriate for the task at hand”.
IFS associate director David Phillips said: “The funding arrangements for the devolved governments in Scotland, Wales and Northern Ireland do not look well designed to deal with the coronavirus crisis.
“Devolved governments have limited reserves, constrained borrowing powers and the funding flowing to them as a result of the Barnett formula won’t reflect the challenges that they face.
“As a result, the devolved governments’ ability to respond effectively may be delayed or compromised and vital funding mis-allocated across the UK. ”
He added: “There is a case to give them access to greater borrowing powers and to consider bypassing the Barnett formula – at least for now.”
The IFS indicated any changes to the current set up should be temporary, stressing: “It is important not to rush into making new long-term fiscal arrangements in the midst of a crisis.”
It noted that the Scottish government is permitted to take a maximum of £250 million a year from reserves for day to day spending, with a further £100 million a year permitted to boost capital spending.
But the IFS said: “In the coming financial year (2020-21), forecasts suggest there could be around £100 million of unallocated reserves that could be drawn down, which might sound sizeable but is less than 0.3% of the Scottish Government’s budget and less than 1% of the Scottish NHS’s budget.
“In the case of the Welsh Government, its budgets for 2019-20 and 2020-21 already involve drawing down reserves by the maximum £125 million a year it is allowed.”
While the IFS said “some borrowing” is allowed, the rules “preclude borrowing to cover the day-to-day costs of new policy measures – such as responses to the coronavirus”.
The think-tank continued: “There is therefore a case for giving the devolved governments greater access to borrowing via the National Loans Fund, at least for coronavirus related measures.
“This would allow them to develop, cost and announce plans more quickly than if they have to wait until UK government plans for England have been announced.”