Cost crisis: letter to the Chancellor

From: John Swinney, Deputy First Minister and Cabinet Secretary for Covid Recovery
To: Kwasi Kwarteng, Chancellor of the Exchequer

Congratulations on your appointment as Chancellor of the Exchequer.

The Scottish Government looks forward to continuing to work constructively with you and your Government. Given the gravity of the current economic and fiscal position, I would welcome a meeting as soon as possible to discuss a number of priority issues, some of which I outline in this letter.

Your appointment comes at a time when citizens and businesses across the UK face incredible challenges, with the cost crisis continuing to spiral out of control. The Scottish Government published its Programme for Government today which sets out the key actions that we are taking to help alleviate these challenges, supported by our current Emergency Budget Review exercise. However, our ability to intervene is severely constrained by both the limitations on the Scottish Government’s fiscal powers, which means that our budget is largely determined by UK Government decisions, and we lack the in year flexibility to respond to a crisis like the one we now face.

In order to urgently address the crisis faced, it is clear that the UK Government must intervene and use reserved powers and financial resources to support our citizens and businesses. Longer term we need to address the Scottish Government’s lack of appropriate fiscal powers through the review of the Fiscal Framework.

I thought it would be helpful to set out some of the key areas which I believe require your urgent attention, as you develop the UK Government’s fiscal and economic plans.

Cost Crisis

The Scottish Government has taken substantial action to ameliorate the unprecedented adversity that our citizens face, however, we are limited by the devolution settlement and our fixed budget in what we can do. Most of the key policy levers that can address this crisis sit within the reserved powers of the UK Government.

Given this context, I ask that you urgently cancel the proposed increase in the energy price cap in October. This course of action is supported by energy companies and advice organisations and came to the fore in a recent meeting hosted by the First Minister.

Furthermore, the UK Government should also consider delivering an extended and targeted support package to provide support to those most in need. In particular it should target low-income households and those most negatively affected by cost increases, including larger households, unpaid carers and disabled people. This package should include the following:

• an uprating of all Social Security benefits in line with inflation to support low income households with the increased costs they will face through winter
• the provision of a £25 uplift to Universal Credit, including an extension to legacy benefits
• an enhanced windfall tax to raise additional revenue to fund actions on the cost crisis to support our citizens and businesses. This should include broadening of the Energy Profits Levy and removal of the investment allowance
• measures to support Scottish business as I outlined in my 8 August letter to you, as Business Secretary. Our business community is clear that further, urgent action is required by the UK Government to avoid a rise in business failures

Spending pressures

The impact of spiralling inflation has had a detrimental impact on the Scottish Government’s spending power since the funding envelope was set by the 2021 UK Spending Review. Inflation was at 3.1% when the Spending Review was published, it has since risen to 10.1% in July 2022. This is the highest level since 1982, and the Bank of England forecasts that it will continue to rise further this year to 13%. This is eroding the value of public spending, with significant impacts upon our public services and our economy.

The majority of the Scottish Government’s funding is determined by the UK Spending Review and there has not been a change in our allocation to take into account inflation. This has a significant impact on our ability to tackle the cost crisis, provide fair public sector pay uplifts and support our public services as they face emerging pressures and continue the recovery from Covid. In order to respond to this, the Scottish Government’s budget should be increased, both this year and across the spending review period, to ensure we can fully address these challenges, as part of an overall approach that balances long-term fiscal sustainability with increases to levels of public spending that are needed across the UK to more adequately reflect current conditions. 

Clarity on fiscal events

There has been considerable speculation about future UK Government fiscal events.  I am keen to work with you on whatever next steps you may be planning, given the potential implications for Scotland and for devolved budgets, and the opportunity an early UK fiscal event provides to tackle the cost crisis. I would welcome early clarity on your plans for upcoming fiscal events, including proposed timescales, the scope of any events, and any substantial changes in fiscal policy.

I also encourage you to engage with the Devolved Governments on the detailed planning for this and other fiscal events. In particular, it is imperative that any emergency fiscal event is followed by an Autumn Budget, as per the normal fiscal process. It is only with fully updated UK Government tax and spending plans, alongside updated forecasts from the OBR and updated block grant adjustments, that we can finalise our respective Budgets. In my own case, I want to engage quickly and comprehensively with the Scottish Parliament and the Scottish Fiscal Commission to confirm arrangements for the forthcoming Scottish Budget 2023-24. You may be aware that the Chair of the Treasury Select Committee wrote to your predecessor to highlight the impact that delays to the UK Autumn Budget has on the ability and time available for Devolved Governments to deliver their budgets and tax policies in advance of the new financial year.

I am copying this letter to Rebecca Evans and Conor Murphy.

John Swinney