Scotland’s Rural Economy

Ahead of a meeting with National Farmers' Union of Scotland, Rural Affairs Secretary Mairi Gougeon and Finance Secretary Shona Robison wrote to the Chief Secretary to the Treasury Darren Jones to express serious concerns over UK Government decisions in the UK Budget that will negatively impact Scotland’s rural economy.

The letter reads:

We are writing to express our grave concern over the UK Government decisions in the UK Budget that will negatively impact Scotland’s rural economy. It is important that these issues be considered further, as a matter of urgency, particularly in light of the upcoming UK Spending Review.

Funding

A unilateral decision has been taken by the UK Government to baseline funding from 2024-25 and apply the Barnett formula to future agricultural and marine funding. This decision was made without any meaningful engagement or consultation with the Scottish Government. We wish to express our shock and alarm with this decision and the manner in which it was taken, given the wide-ranging impact it will have. The Cabinet Secretary for Finance and Local Government’s letter of 19 November highlighted a number of issues which arose following the UK Budget. One of these was the budgetary settlement for agriculture and marine funding. We have set out further detail on these issues in this letter and urgently seek further discussion with you on these matters.

Agriculture

The UK Government’s 2021 Spending Review ring-fenced £609.7m in 2022-23 and £620.7m in 2023-24 and 2024-25. This represents a real terms decrease of 10.4% for agricultural funding for Scotland over this period. We would like to see, as a minimum, an inflation adjustment to the 2025-26 allocation to address this and to ensure that the 2025-26 allocation is uplifted for inflation. This did not happen in the UK Budget, which baselined agriculture funding into the Block Grant at its 2024-25 level.

The unilateral decision taken by the UK Government to baseline agricultural funding and apply the Barnett formula to future funding is contrary to the Bew Review recommendation for collective engagement between the four nations to agree the principles of future intra-UK funding allocations. Indeed, Lord Bew’s report specifically ruled out the use of the Barnett formula as a suitable basis for future allocations.

The 2021 Spending Review allocation included £25.7m of funding from the Bew Review each year until the end of the Parliament, included in the ring-fenced amount referred to above. This funding followed the previous UK Government’s acceptance of Lord Bew’s findings that Scotland had been historically underfunded in terms of agriculture funding. It also accepted the recommendation about collective engagement, but failed to follow through on it.

At the EFRA-IMG on Monday 18 November, Defra representatives indicated that the UK Government’s view is now that the Bew Review recommendation about engagement on future allocations somehow only applied to 2022. That is at odds with our understanding, and we would ask you to now clarify whether that is the view of the UK Government? We urge you to implement the Bew Review recommendations in full and sit down with us to discuss future allocations.

Alternatively, if you are repudiating the Bew recommendations, you should do so openly so that all stakeholders are aware that this pledge has been abandoned. The 2022-25 Spending Review allocation to Scotland for agriculture is 17% of the UK allocation, which represents a historical percentage based on 20 year-old agriculture production figures. The 17% fails to recognise the vast potential for nature and climate outcomes from Scotland’s land (which includes 66% of the UK’s total area of peatland, and 46% of woodland).

Marine

While the UK was a member of the EU, and subsequently from repatriated EU funding, Scotland received 46% of the total available UK allocation. This was due to the size and importance of the Scottish marine sector and our larger sea area. Since Brexit, Scotland’s marine funding allocation has remained at the 2014 level of £14m per annum, over the three-year period of the current Spending Review (2022-25), and this figure has now been used as the basis for future funding. By contrast, Denmark – which has a similar population to Scotland but both a smaller sea area and marine sector – will receive an average annual funding settlement of €28.7 million (approx. £24m) through the EU’s new European Maritime, Fisheries and Aquaculture Fund (EMFAF). This shows how Scotland has not only lost out on this
funding through no longer being part of the EU, but also how the UK Government has failed to provide a sufficient replacement.

In addition, Scotland’s 2024-25 allocation did not include, as it should have, a share of the £100m UK Seafood Fund (UKSF), announced by the previous UK Government and operated at a UK level, with no involvement of devolved
governments. We would be grateful for clarity regarding the availability of the UKSF. It is our view that, if the £100m quantum remains available, Scotland should receive 46% of this. Overall, we would expect a meaningful increase of marine funding available from the UK Government, which must reflect the importance of the size of our marine sector and sea area, taking into account Scotland's historical shares of the overall allocation.

Future allocations

The agricultural and marine sectors face immense levels of uncertainty without a multi-year funding settlement. Prior EU multi-year frameworks were applied for 7 years. Given the long-term nature of the investment and commitment required, and the importance of supporting economic activity within the sectors, we are seeking clear commitments for at least the next three years as part of the UK Spending Review.

While it is right that the Scottish Government has the freedom to make budgetary decisions, a Barnett settlement fails to recognise Scotland’s greater share of UK land and seas. It is evident that this settlement will penalise Scotland’s farming and marine industries.

As work progresses on the UK Spending Review, which you have indicated will report in the Spring, we are keen to discuss the above with you as soon as possible, and ultimately ask that you reconsider the settlement, through meaningful engagement with the devolved governments.

Inheritance Tax

We also want to draw your attention to an issue in relation to the proposed changes to Agricultural Property Relief (APR) for Inheritance Tax that HM Treasury may not have considered.

We understand that HM Treasury officials have received correspondence from Jeremy Moody of the Central Association of Agricultural Valuers on behalf of Scotland’s Tenant Farming Advisory Forum, in which he draws attention to the impact of the proposed APR changes on tenant farms. Please see a copy of this letter enclosed for ease of reference.

As that letter points out, secure agricultural tenancies under the Agricultural Holdings (Scotland) Act 1991 can be bequeathed to family members or other legatees and have an inherent value which can be substantial. It is likely that even moderately sized tenant farms in Scotland could be caught by these changes and have few of the options available to owner-occupiers to raise the funds necessary to meet an Inheritance Tax bill.

At a time when we are seeking to encourage tenant farming and the next generation, this measure presents a considerable barrier, and perhaps even greater than that facing owner occupiers.

While the letter from the Tenant Farming Advisory Forum refers principally to 1991 Act tenancies, there are a number of other forms of tenancy that exist in Scotland (including crofting tenure) which are capable of bequest. It is vital that HM Treasury considers the impact on all forms of land tenure when assessing the impact of your proposed changes.

We believe that this issue adds further weight to the call from the Scottish Parliament to reverse the changes, and to urgently undertake and publish impact assessments on the cumulative impact of the budget proposals on farmers, tenant farmers and crofters in Scotland. Our officials are available to work with their counterparts in the UK Government on these important considerations.

We look forward to your response and to working constructively with you to address the fiscal and policy challenges outlined above. This letter has been copied to the Secretary of State for Environment, Food and Rural Affairs for their awareness.