Draft budget 2018-19: ministerial statement

Presiding Officer, I am delighted to set out the Scottish Government's budget proposals for 2018-19.

These comprehensive proposals will use the powers of this Parliament to build a fairer Scotland and put the progressive values of this Government into action.

It invests in our public services and supports business to develop and thrive.

Of course, this is a budget delivered in the most challenging of circumstances.

We must support our economy to keep pace with the changing technology and access new markets - whilst also dealing with UK Government austerity and the damaging uncertainty caused by Brexit.

Austerity and uncertainty is damaging the UK economy, with a knock-on effect on public finances. The pound has fallen, inflation has risen, and growth forecasts have been downgraded.

As a result we face the most challenging economic and fiscal environment for any budget in the devolution era.

However, the fundamentals of the Scottish economy remain strong.

Since 2007, Scotland has largely closed the productivity gap with the rest of the UK.

And, in 2017:

• our economy continued to grow
• the number of people in work has reached a record high
• unemployment is close to its lowest ever level

Today the Scottish Fiscal Commission has published its first comprehensive report on 'Scotland's Economic and Fiscal Forecasts' and my thanks go to the Commission for their work.

The SFC report underlines these fundamental strengths in our economy.

It predicts continued growth; that employment will rise further; and that earnings growth will match the UK.

But the Commission also highlight the negative impact Brexit will have and the challenges we will face from a declining working age population.

They forecast that productivity growth will be subdued, that the labour market will tighten as a result of reduced migration and that this will impact on GDP.

While the Commission's forecasts for growth are more cautious than other forecasters, it is clear that to grow faster we must boost productivity and grow our working age population.

That's why this budget sets out immediate measures to stimulate economic activity and improve productivity.

For Scotland's future prosperity this Parliament must also reach a consensus on the powers we need to increase the number of working age people in Scotland.

And, we must continue to make the case for a common sense solution to Brexit that keeps Scotland, and the UK, in the single market and the customs union. Even while we do this, however, we will redouble our efforts to ensure our economy will flourish no matter the outcome of the negotiations.

Presiding Officer, equally important to the budget's economic context is the fiscal context.

Over the ten years to 2019-20, UK Government austerity will see the Scottish Government's Fiscal block grant allocation reduced in real terms by £2.6 billion.

And despite the claims of the Chancellor, as the independent Fraser of Allander Institute recently stated – and I quote - "by 2019-20 the resource block grant will be around £500 million lower than in 17-18".

Of course, we welcome the additional capital funding that will transfer to Scotland, and we will make good use of Financial Transactions that are available, but the reality is you cannot spend Financial Transactions on teachers, nurses, or police.

Instead, we will use Scotland's own resources to invest in our public services and provide the support and infrastructure our economy needs to flourish in a low-carbon, high-technology world.

We believe strong public services and a vibrant economy go hand in hand.

Undoubtedly, our public services require a strong economy to generate investment - but equally the most successful economies in Europe are built upon the firm foundation of strong public services.

At the heart of this budget is immediate action to support the economy - a series of key investments and programmes that deliver for business now and build the right environment for the future.

The global economy is changing at an unprecedented rate, but Scotland already has competitive advantages in many industries of the future, like life sciences and renewable energy.

This budget therefore delivers an increase of £270 million - a 64% increase - in the Economy, Jobs and Fair Work Portfolio.

That additional funding contributes to investment of almost £2.4bn in enterprise and skills through our Enterprise Agencies and our skills bodies.

The increased investment includes a 70% uplift in our funding for business research and investment - taking our investment in the coming year from £22 million to £37 million.

The budget also contains an initial £10 million to support the new South of Scotland Enterprise Agency - and it doubles, to £122 million, the funding allocated to the City Region Deals.

Through the Scottish Funding Council, the budget also invests around £1.8bn in our colleges and universities - providing a real terms increase in their funding.

This investment funds the teaching, research and innovation that will provide opportunities for our young people, train the workforce of the future and drive our productivity.

And, the budget allocates an initial £18m for the new National Manufacturing Institute announced by the First Minister on Monday. Construction of this new centre of excellence begins next year.

Scotland has a world leading reputation for our efforts to tackle climate change. To support our transition to a low carbon economy, the budget allocates £60m for a Low Carbon Innovation fund.

We will also invest £1.2bn in our transport infrastructure including support for new and improved road and rail developments - not only dualling the A9, but turning it into an electric highway, and delivering new railway investments like the electric trains now running between Edinburgh and Glasgow.

In addition we will make a £20m investment in the coming year to support the transition to electric vehicles and support more green buses.

And, as promised in the Programme for Government, the budget doubles investment in active and sustainable travel.

In total, this budget invests over £4bn in infrastructure - part of our £20bn infrastructure investment plan over this Parliament.

Presiding Officer, I can confirm today that the budget also includes the first steps toward one of the most significant infrastructure projects of this Parliament – superfast broadband for the whole of Scotland.

At the end of this year we will achieve our target of delivering fibre internet access to at least 95% of premises. As a result of our actions to date, Scotland has experienced the fastest rate of progress of any part of the UK.

We want that progress to continue.

Our new Reaching 100 programme is an ambitious plan to make superfast broadband available to every home and to every business premise in every part of Scotland by 2021.

This commitment will position Scotland at the forefront of the digital revolution and is unmatched anywhere in the UK.

I am therefore delighted to confirm to Parliament that the initial procurement for the Reaching 100 Programme begins today.

And that over the next four financial years it will be supported by investment of £600 million.

Investment in skills and innovation, new technologies, manufacturing, infrastructure and broadband – these are all part of a package of measures to improve our productivity, boost our trade and make Scotland the most attractive place to do business.

We will support the internationalisation of our businesses and help boost exports through the work of Scottish Development International.

We will also support our culture sector with a £10m investment in a new Screen unit and funding to protect arts and culture.

Now let me turn to business rates.

Following the Barclay Review, I confirmed that I would go beyond what is recommended with a set of new reliefs to incentivise investment.

Our Growth Accelerator means no business rate increases will be payable for new or improved properties for a period of one year.

And a separate, additional measure will ensure that no new build property will enter the valuation roll until it is first occupied.

The budget also protects our Small Business Bonus Scheme, which lifts 100,000 properties out of business rates altogether.

This Scheme is part of the most competitive package of rates relief anywhere in the UK. And in the coming year this package will be worth around £720 million - a record high.

I can also now confirm that we will accept the remaining Barclay recommendations almost entirely, except on charity relief, which we don't intend to curtail for universities or council ALEOs. An implementation plan providing fuller details on how and when these reforms will be implemented is being published today.

The Barclay Review also favoured a switch from RPI to CPI for the application of the inflationary uplift to the poundage rate - but was unable to recommend this in the context of its revenue neutral remit.

For many Scottish businesses though this was the number one ask of the budget.

I can therefore announce today that the inflationary uplift in the poundage next year will be capped at CPI, not RPI.

Presiding Officer, our package of business rates measures provides a boost of almost £100m and helps keep Scotland the most attractive place in the UK to do business.

Nowhere is the interaction between investment in public services and a successful economy seen more clearly than in education.

Raising the bar for all and closing the attainment gap is the key priority for this Government.

Since my last budget over 2,300 schools have benefited from targeted investment and 506 extra teachers are teaching in Scotland's schools because of our Attainment Scotland Fund.

I am therefore delighted to announce today that I am increasing the Attainment Scotland Fund to £179m.

This means £120 million will again be allocated direct to headteachers through the Pupil Equity Fund.

And a further £59 million will be providing targeted support for children and young people in greatest need.

I am also allocating £10 million for support to children and young people with complex additional support needs.

We recognise that a strong education system relies on a strong teaching profession. That is why I am committing an overall funding package of £88 million in the local government finance settlement to maintain the national pupil teacher ratio and ensure that places are provided for all probationer teachers.

This budget also protects our continued commitment to university education free of tuition fees.

Presiding Officer, this Government is committed to getting it right for every child. We want Scotland to be the best place in the world to grow up.

Since its introduction in August over 20,000 Baby Boxes have been delivered, and this budget funds this important part of our social contract.

A child's early years are critical to determining outcomes in later life.

Since 2014 we have increased high quality early learning and childcare by almost 50% to 600 hours per year.

By 2020 we will increase publicly funded entitlement to 1,140 hours per year benefitting thousands of children and parents across Scotland.

That requires us to invest now for the long term.

In 2017/18, we provided £60m to support the expansion.

Now, for 2018/19, we are allocating £93m in resource funding and £150m of capital funding. That's a total investment of £243m next year.

This will support the expansion by upskilling the early years workforce, refurbishing and expanding of existing premises, and constructing new settings.

It will also provide funding for graduate level Early Learning and Childcare courses.

This means that in the coming year we will invest almost a quarter of a billion pounds to build more nurseries, support childcare professionals, create jobs and graduate opportunities, and provide support for parents.

Ours is the best publicly-funded childcare package in the UK and an investment that will pay dividends throughout the lives of our young people.

Local Authorities are our partners in delivering vital services and I welcome the constructive engagement from COSLA.

Throughout our discussions I have made clear my desire to treat Local Government fairly and I believe this budget does so.

I know that local authorities have been concerned about a possible cut to their budgets of around £300 million.

However, as a result of the decisions that underpin this budget, I have been able to avoid this.

I can announce today that the local government resource budget will be protected in cash terms and the capital budget will be increased in real terms - resulting in a total increase in local authority core funding of £94 million.

In addition, Local Authorities have the option to increase the council tax by up to 3%. If they choose to do so, they will raise an additional £77m, which would secure a real terms increase in local government funding.

Local government will also be the beneficiaries of the doubling of investment in City Deals.

Our Police and Fire services also make a huge contribution to our local communities.

We will deliver more than £20 million of additional investment to protect the police revenue budget, and an additional £5.5m for continued transformation of the fire service.

Scotland's police and fire services will also retain the full benefit of, at long last, having the ability to recover VAT - boosting their spending power by £35 million in 2018-19.

The budget also secures investment in key measures to make our communities safer, including tackling domestic abuse, reducing re-offending, protecting witnesses, and modernising the justice system.

Ensuring that everyone in Scotland has access to good quality, secure, affordable housing is a key part of making Scotland fairer.

New figures out this week show that since 2007 this Government has delivered nearly 71,000 affordable homes - and we are building social rented housing at twice the rate of the Government in England.

Our commitment to deliver 50,000 affordable homes over the five years of this Parliament is a significant challenge but one that we are determined to meet. The benefits of this investment will be felt throughout our society for generations to come.

I am therefore delighted to announce investment in 2018-19 of £756 million - part of our commitment to invest over £3 billion in affordable housing over this Parliament.

We will also take steps to make home ownership a reality for more of our young people. To help achieve this I am introducing a new relief on Land and Building Transaction Tax for first time buyers up to £175,000.

All first-time buyers will benefit from this, and as a result 80% of first time buyers will be taken out of LBTT altogether.

Alongside this record investment in housing we will also invest £137 million in 2018-19 in energy efficiency and heat decarbonisation.

Good quality affordable housing is one way in which we can help to drive down poverty.

One of the most devastating results of UK Government austerity has been a rise in rough sleeping and homelessness. Our Programme for Government set out a national commitment to eradicate rough sleeping and transform the use of temporary accommodation.

In 2018-19 we will invest £10 million in an 'Ending Homelessness Together Fund' that will total £50 million over the next five years.

This will drive change and improvement in line with the recommendations of the Homelessness and Rough Sleeping Action Group.

We will also tackle Child Poverty in all its forms.

This budget supports the first investment in a new £50 million Tackling Child Poverty Fund which will help address the underlying social and economic cause of poverty.

We will also continue to mitigate UK Government welfare reform, investing over £100 million on interventions including bedroom tax reversal and the Scottish Welfare Fund.

This Parliament is currently passing our own Social Security Bill, and while I cannot allocate funding for specific benefits until the Bill is completed, I can confirm I will allocate additional funding in-year to support the land mark step of increasing Carer's Allowance.

The increase will be delivered by Summer 2018, and backdated to April.

The staff in our schools, hospitals and other public services do an outstanding job.

We have always sought to offer a fair deal, particularly for the lowest paid, by ensuring that all public sector workers earn the living wage and that those on low pay receive guaranteed increases. However, now is the time to lift the 1% pay cap.

We are determined to provide a pay package that is affordable - and one that also reflects the increasing cost of living.

I am grateful for the constructive engagement of the Trades Unions on this matter; including the joint letter from myself and the STUC to the Chancellor ahead of the Autumn budget.

Unfortunately, those calls were ignored by the Chancellor. This limits how far we can go on pay - however, unlike other Governments across the UK, we committed to lifting the pay cap, and lift it we will.

Today, I have published a progressive pay policy. I can confirm that we will deliver a guaranteed minimum pay increase of 3% for all public sector workers earning £30,000 or less.

For those earning above £30,000, we will limit the increase to 2% and apply a cash cap of £1,600 to those earning £80,000 or more. This demonstrates our commitment to closing the gap between the lowest and highest paid.

Presiding Officer, this is the framework that will apply to public sector pay negotiations. However, let me make clear three important additional points.

Firstly, notwithstanding the policy I am setting out today, we will respect the recommendations of independent pay review bodies.

Secondly, we will be mindful of any developments for NHS staff elsewhere in the UK to ensure that our health service staff are treated at least as fairly as those in any of the UK nations.

And we will retain flexibility to enable us to address any particular recruitment challenges.

Once again, the Scottish Government is leading by example, delivering on our promises and putting fairness at the heart of what we do.

Our decision to lift the pay cap will benefit thousands of nurses and other healthcare staff. I know I speak for everyone in the chamber when I thank our NHS staff for the work they do in caring for the people of Scotland.

Our approach to health and care is one of reform and investment.

That is why, in the coming year, we will invest £110m in the reform of primary care – supporting our GPs and health centres to meet the changing needs of our people.

We will increase our direct investment in mental health, and Child and Adolescent Mental Health in particular, by a further £17m - the third annual increase in a row, which will help to deliver an additional 800 mental health workers over this Parliament.

This budget will also deliver over £550m in 2018-19 in direct support of social care and integration through Scottish Government and NHS investment.

We will continue to support free personal care and the roll out of Frank's Law by April 2019.

Underpinning all of this is increasing investment in the NHS.

This year to increase health resource spending in line with inflation would require an additional £200 million. That is equal to the amount being cut from Scotland's resource block grant in real terms this year by the UK Government.

But we've been clear that over this Parliament we will increase health resource spending by a total of £2 billion – considerably more than inflation.

So today I can confirm that our increase in health resource funding in 2018-19 will not be £200 million - it will be more than £400m, taking our total frontline investment to over £13 billion in the coming year.

Presiding Officer,

In this budget we are:

• investing in the NHS
• increasing social care investment
• protecting local services
• delivering a growth package for business and supporting the low carbon transition
• providing real terms increases for our universities and colleges
• expanding childcare
• directing more resources to headteachers to close the attainment gap
• protecting our police and fire services
• safeguarding culture and the arts
• taking action to alleviate poverty
• lifting the public sector pay cap

However, in the face of real terms cuts to our block grant, it has been possible to deliver for the NHS and support these other investments only because of the decisions I have taken on tax.

We do not take decisions on tax lightly.

In November we set out four key tests that any change to income tax would have to meet. It must:

• protect low earners
• make tax fairer
• generate additional revenues for public services
• protect our economy

We also commissioned advice, informed by the Council of Economic Advisers, on options for the additional rate of tax.

Having carefully considered contributions from the public, civic society and the business community, I have decided to reform Scotland's income tax system.

Using the limited powers available to us, the decisions I have reached will make our income tax system fairer.

They will safeguard those on low incomes and overall when coupled with our spending decisions will protect and grow the economy.

And they will provide essential revenue to enable us to invest in our NHS, without imposing cuts on vital services such as social care, business support, police or education.

Our proposals have been modelled by the Scottish Fiscal Commission and their revenue forecasts underpin this budget.

Where forecasts suggest that a particular tax change would result in a significant behavioural impact I do not have the luxury of simply ignoring it.

As a result, I have set income tax policy at levels which the analysis says will generate additional revenue.

The changes I am proposing are as follows.

Firstly, I will increase the 'Higher' and Top' rates of tax by 1 percentage point to 41p and 46p respectively.

This sets the Top Rate of tax at a level which will generate the most income, with the least risk of losing revenues next year and damaging the economy.

Had we gone further our modelling indicates that once behavioral effects and forestalling are considered, a higher rate could actually reduce income tax revenue next year. That is not a decision any sensible Government would take.

Secondly, I will freeze the 'Basic' rate at 20p but, to make the system more progressive, I will introduce a new 'Intermediate' rate of 21p.

The 'Intermediate' rate will apply to income between £24,000 and the higher rate threshold of £44,273, which will increase in line with inflation only.

To make Scotland's income tax system even fairer and more progressive, I have chosen to make one further change.

I can announce today that I will introduce a new Scottish 'Starter' rate of income tax of 19p.

This new rate will apply to the first £2000 of taxable income - between £11,850 and £13,850.

This new 'Starter' Rate, combined with the increase in the personal allowance, will ensure that no-one earning less than £33,000 - which is 70% of all taxpayers - will pay any more in tax than they do now for given incomes.

On the contrary, everyone earning below £33,000 will pay slightly less tax in the coming year than they do this year.

The introduction of the new 'Starter' rate will also mean that those earning up to £26,000 - which is 55% of all taxpayers in Scotland - will pay marginally less tax than they would if they lived elsewhere in the UK.

The specific tax reforms I have announced today will raise an additional £164m for investment in our public service and our economy.

However, taken together with our tax decisions last year, the projected growth of our tax revenues relative to the UK as a whole, and relative economic growth our income tax receipts in 2018-19 are forecast to generate £366 million more than the corresponding block grant adjustment under the fiscal framework.

These decisions have therefore enabled me to reverse the real terms cut that the UK Government has imposed on our resource budget next year, whilst ensuring that Scotland is not just the fairest taxed part of the UK but, for the majority of taxpayers, the lowest taxed part of the UK.

Presiding Officer, in all of these decisions the interests of our economy have been at the forefront of my mind. I have already outlined a range of economic investments. I want to briefly mention two more.

One of the touchstone pledges from our Programme for Government was the creation of a Scottish National Investment Bank to provide long-term, patient capital to support innovation and drive productivity growth.

Today we signal our ambition for the Bank with a commitment to an initial £340 million capitalisation between 2019-21.

However, while the Bank is being established, I intend to create a dedicated 'Building Scotland Fund'. This Fund will be worth £150m over the next two financial years and its purpose will be to support innovation in house building, help deliver modern, low carbon industrial and commercial facilities, and provide further support for business led research and development.

We will set out further details shortly.

Presiding Officer, this new Fund together with:

• an additional £96m of investment in maintaining the most attractive system of business rates in the UK
• a 70% increase in funding for business R&D
• £60m of investment in delivering low carbon technology
• over £4bn of investment in new infrastructure
• doubling our investment in City Deals
• a £600m package to deliver 100% superfast broadband to all
• almost £2.4bn of funding for Enterprise and Skills

demonstrates beyond doubt that this budget backs Scotland's businesses and will help to grow Scotland's economy.

So Presiding Officer, this budget is a comprehensive package of measures designed to protect all that we hold dear.

It provides the investments we need to meet the challenges of today and seize the opportunities of tomorrow.

It uses the power of this parliament sensibly and in the interests of the country as a whole.

It overturns the UK Government cuts to our block grant.

It delivers an additional £400m to the health service - without damaging other vital services.

And it protects the vast majority of taxpayers.

It is a budget for fairness and a budget for growth.

It is a budget for all of Scotland and I commend it to this chamber.