Cost crisis - letter to the Prime Minister: October 2022

Rt Hon Rishi Sunak MP
Prime Minister
10 Downing Street
London
SW1A 2AA

26 October 2022

Dear Rishi,

It was good to speak last night – once again, congratulations on your appointment as Prime Minister. Notwithstanding our political differences, I very much hope we can establish a constructive working relationship based on mutual respect between our governments.

As we discussed, you take office at a time of profound economic disruption and uncertainty, and the measures announced by your predecessor exacerbated a cost of living crisis that is causing significant damage to households and businesses now facing higher mortgages, spiralling interest rates and financial instability.

The economic and cost crisis, with the highest inflation in decades, driven by energy cost increases linked to the war in Ukraine and pandemic supply chain disruption, requires action by governments across the world.

However, Scotland and the UK face unique challenges. Years of austerity, the loss of single market access and the need to rebuild services and investment post-Covid mean that this is a crisis unprecedented in nature and scale.

Moreover, the UK Government is now paying an unnecessary additional risk premium on borrowing, adding billions to payments and undermining the UK’s fiscal credibility. According to the Institute for Fiscal Studies, the Chancellor may have to announce a further £30 to £40 billion of tax increases or spending cuts to return the UK’s public finances to a sustainable footing.

Spending reductions of such a scale would have a severe knock-on impact on the Scottish Government’s budget, vital public services and infrastructure investment. As a result of Westminster decisions, Scotland has already suffered a decade of austerity that disproportionately hurt the poorest and most vulnerable. It is imperative we do not repeat the mistakes of the past and unleash another round of austerity. I hope you will agree that it would be folly to repeat that approach - our public services would not withstand it. 

The Scottish Government is using all of our powers and resources to support households to mitigate the cost crisis. By March 2023, we will have invested almost £3 billion supporting energy bills, childcare, health and travel, as well as social security payments that are either not available elsewhere in the UK or are provided on a more generous basis. We have also allocated more than £800 million to support businesses.

However, it is clear much more needs to be done. It is not credible to argue that devolved funding settlements set when inflation was around 3% are now sufficient to address the reality of public services being eroded by double-digit inflation.

All responsible governments faced with a crisis of this magnitude need to take action that meets the scale of the challenge and ensures public services are provided with support required. Amongst other measures, it seems to me that the following are essential:

• further targeted financial support to low income households to help those most negatively impacted by rising costs. Following the announcement that the Energy Price Guarantee will now only last until 31 March 2023, urgent clarity on what support will remain available for those who still need it is required. This is also the case for non-domestic consumers and the Energy Bills Relief Scheme
• social security benefits should increase with inflation in April and a permanent £25 uplift to Universal Credit should be introduced now, and extended to means-tested legacy benefits. The two-child limit for Universal Credit and tax credits must be reversed, along with the abolition of the benefit cap
• an enhanced windfall tax to fund support in place of increased borrowing and/or spending cuts. Around £9.3 billion could be raised by broadening the Energy Profits Levy and removing the investment allowance
• additional funding for devolved governments should be made available to support people, provide fair public sector pay uplifts and protect public services

Tackling this crisis also requires high standards of social and environmental protection and regulatory certainty for business. In that context, it makes no sense to take forward the Retained EU Law Bill, with the huge uncertainty it would create. 

Withdrawing the Northern Ireland Protocol Bill and repairing trading relations with our European neighbours would similarly deliver much needed economic benefit at this difficult time.

The severity of the situation we face cannot be overstated. Lives and livelihoods are at risk. Co-operation and decisive action is needed across the governments of the UK.

Finally, I noted the view expressed in your speech yesterday that your government has a mandate to deliver the policies set out ahead of the 2019 general election. 

As you know, the Scottish Government was re-elected on a commitment to give people in Scotland the opportunity to vote in an independence referendum. That commitment is supported by a substantial majority in the Scottish Parliament. As I indicated last night, it is my intention to honour this mandate.

I look forward to meeting soon to discuss these and other matters and to establishing regular and constructive dialogue in the interests of those we serve.

I am copying this letter to the First Minister of Wales and to the Head of the Northern Ireland Civil Service. 

Best wishes,

Nicola Sturgeon