Emergency Budget Review: 2022 to 2023

1. Foreword

The whole world is facing a period of substantial economic turmoil. The impacts of the pandemic coupled with Russia's continued illegal invasion of Ukraine have created a disruptive set of financial and economic challenges that every government must address. Rising prices, soaring energy bills, and the resulting increased financial pressure on public services are not unique to the UK.

However, the UK Government - as a result of Brexit, inaction over the summer and the catastrophic decision to announce unfunded tax cuts for the wealthiest - has made the situation in the UK significantly worse. While these tax cuts have now been largely reversed following widespread criticism, households and businesses across the country will pay the price for the former Prime Minister's mistakes for months, and years, to come.

The financial situation facing the Scottish Government is, by far, the most challenging since devolution. As a result of inflation, the 2022-23 budget is worth around £1.7 billion less than when it was introduced to Parliament in December 2021. In addition, we face significant, and entirely understandable, demands from public sector workers for pay increases that reflect the increased cost of living. We are also dealing with the unforeseen – though entirely understandable and accepted - costs of resettling refugees fleeing the war in Ukraine. We want to act to the fullest extent possible to support households and businesses impacted by current economic conditions. We do not begrudge paying any of these additional costs. At a time of crisis, it is right that people look to their Government to support them. However, to meet these costs – that were not anticipated when our budget was set – requires a difficult process of re-prioritisation.

The fiscal constraints of devolution mean that the Scottish Government cannot borrow to meet these increased costs, nor are we able to change income tax rates midway through a financial year. This means that the Scottish Government's budget is effectively fixed in cash terms. Every additional pound that we spend in one area, means a pound less has to be spent in another area. The Scottish budget is at the absolute limits of affordability.

Alongside our counterparts in Wales and Northern Ireland, we have called on the UK Government to provide additional funding for devolved governments to ensure that public services and public sector pay are not undermined by inflation and so that additional support can be made available to those that need it most. To date, there has been no positive response to these calls – instead we are anticipating a package of cuts and tax rises in the Autumn Statement now scheduled for 17 November.

We are also deeply concerned about the direction of travel in advance of the impending UK Government decision on the uprating of benefits. This support is vital to the wellbeing of those in greatest need across our society and any below-inflation uprating of benefits by the UK Government will reduce living standards for those already living on the financial margins. There is also an associated risk to public finances in Scotland, where we believe in providing support to those in greatest need. A failure by the UK Government to increase benefits in line with inflation means that the Block Grant Adjustments for comparable benefits in Scotland will not be sufficient to support an inflationary increase in Scotland, requiring us to divert further resources from elsewhere in our budget if we are to meet that demand in the next financial year.

When we announced that we would undertake a review of our devolved budget in August it was with two objectives - to ensure a path for the Scottish Government to meet our requirement to balance the books, and to identify any additional resources that could be made available to support those hardest hit by the cost of living crisis, including through fair pay increases for public sector workers, especially the lowest paid.

While there is great uncertainty and volatility in our funding position due to the risk of in year funding reductions to our Block Grant from the UK Government and a deteriorating economic picture, this review delivers on both these tasks.

The changes we are making mean we are supporting public sector workers in Scotland with enhanced pay offers worth over £700 million more than originally planned, including pay increases of 5% to the majority of public sector workers and an offer averaging 7% to our NHS Agenda for Change staff. We have also identified around £35 million of further support, in addition to allocating almost £3 billion in funding this financial year to support the most vulnerable in our society. That includes the additional commitments to double the fuel insecurity fund and increased funding to Local Authorities to support discretionary housing payments. It also includes the commitment to double the value of the December Scottish Child Bridging Payment, from £130 per eligible child to £260, benefitting around 145,000 school age children registered to receive free school meals on the basis of family low income. Funding of around £1 million will also be provided to help island households manage energy costs due to higher costs of living, and we are providing additional support to business and SMEs weathering the cost crisis.

We have sought throughout this review to continue our focus on the government's overriding priorities of supporting public services, tackling child poverty, building a prosperous economy and achieving net zero by 2045. By definition, a budget review of this nature has required decisions which will impact on those priorities, which we are committed to continuing to deliver for the long term. Within this, we have protected the NHS with no reduction in overall Health spending and all funding from reprioritising budgets within the NHS, retained by the NHS.

The Emergency Budget Review represents part of our continuing response to the cost of living crisis. That response is undeniably constrained by the limitations on devolution. We will continue to make the case for the UK Government to do more to protect our citizens, our public services and our economy. We will also make the case that with the powers of independence the Scottish Government would be able to do so much more.

John Swinney MSP

Deputy First Minister and Cabinet Secretary for Covid Recovery