Emergency Budget Review: 2022 to 2023

2. Introduction

This Emergency Budget Review (EBR) sets out the next steps the Scottish Government is taking to respond to the current economic circumstances, which are amongst the most complex and challenging in recent times.

Against this difficult and highly uncertain backdrop, it is vital that the current situation and potential solutions are considered with care. An expert panel has therefore been convened to provide independent commentary to inform the EBR and the Scottish Budget 2023-24. Their full interim commentary will also be published alongside this week's Emergency Budget Report.

This has been undertaken in the context of regular changes to the UK Government's fiscal plans alongside the prospect of another era of austerity, which would have significant consequences for devolved budgets. These uncertainties limit what the Scottish Government can do in the short term and present serious risks for the 2023-24 Budget that will be laid before Parliament in December.

This context was set out initially in the Resource Spending Review (RSR) on 31 May and updated in the Programme for Government (PfG) published on 6 September, on the same day a new Prime Minister was appointed. It was not, at that point, expected that there would be another new Conservative Party leader, and therefore a new Prime Minister and Government, before the publication of this Emergency Budget Review.

In addition to high inflation, the Scottish Government budget is facing the most severe level of uncertainty since devolution. As well as causing significant volatility and instability in financial markets, the piecemeal approach both the former and current UK Governments have taken when presenting fiscal plans, and changing the publication dates of those plans, coupled with a series of tax and policy reversals, present a significant challenge to the devolved nations' financial planning processes.

Since the UK Government's fiscal plans directly impact upon the level of funding available to the Scottish Government through both the Block Grant and the Fiscal Framework, this has introduced significant volatility to our own budget. For example, following the UK Government "mini-budget" we anticipated a potential £660 million increase to our funding position over the period 2022-23 to 2024-25. However we now anticipate a cumulative net loss to the Scottish budget of £230 million over the same period, partly as a result of reversals in the UK Government's tax position. In simple terms, therefore, in a period of less than one month, the Scottish Government's indicative funding has fluctuated by £890 million and this is before the impact of any spending cuts that might be announced by the Chancellor in the Autumn Statement.

*Includes effects of the abolition of the Additional Rate of Income Tax, decision to bring forward the cut to the Basic Rate of Income Tax to 2023-24, and the changes to SDLT thresholds. This figure was provided by HM Treasury.

**Includes effects of SDLT changes and the decision to retain the Basic Rate at 20% indefinitely. In addition, the 19p UKG basic rate tax cut had been factored into SG funding from 2024-25 as outlined in May 2022 MTFS. In the absence of updated BGA figures from HM Treasury, this is an indicative estimate based on the Scottish Government's own assessment which is in line with what external commentators have said.

This indicative assessment, based on HM Treasury estimates and Scottish Government analysis, is subject to relevant Office for Budget Responsibility and Scottish Fiscal Commission forecasts. However, it illustrates the challenges presented by the fiscal framework and the impact that the continuing influence of UK Government decisions has on the devolved public finances.

Additionally, the Scottish Government has explored all options to offer fair and affordable pay awards to around 450,000 devolved public sector workers delivering essential services in Scotland. Indeed, public sector wages are currently on average 7% higher in Scotland than in the rest of the UK, recognising the value that we place on sustaining public services for the people of Scotland alongside providing fair and sustainable pay awards for those who deliver them. Since the UK Government has decided not to act and provide additional funding for pay, in ways that devolved fiscal powers cannot, this has necessitated difficult decisions being taken within the 2022-23 financial year. Although some public sector pay negotiations have still to conclude, the Scottish Government has already committed over £700 million of additional resources to fund enhanced pay settlements.

The Scottish Government committed to undertaking an EBR to supplement normal budget processes and determine any and all opportunities to direct additional resources to support those most in need, and ensure existing resources are allocated as effectively as possible in light of changing circumstances. The review primarily examined the scope for change within the current 2022-23 budget, alongside an assessment of the context that will inform the forthcoming Scottish Budget 2023-24. The process has considered all devolved budgets – including capital investment in infrastructure - and determined where savings can be made. Unlike our annual budget process, this in-year exercise takes place at a point in the budget cycle where the majority of spend is already contractually committed or supporting vital programmes, so the opportunity to make change is necessarily limited. Budget adjustments have been set out for parliamentary approval as usual in the Autumn Budget Revisions, with the Spring Budget Revisions to follow in 2023. The EBR also sets a new starting point for future spending decisions, allowing us to take the current economic challenges and cost of living fully into account.

These challenges are likely to continue. Fiscal uncertainty and the combined impacts of inflation and pay deals mean that, unless the UK Government's position changes radically, the Scottish Government will need to consider options for resetting previous spending plans and considering revenue options in the 2023-24 Budget. The measures in the EBR sit within our strategic ambitions for financially sustainable public services, firmly based in the Scottish Government's reform principles. These early measures are needed to protect frontline service provision, but we are also committed to effective public service reform designed in line with well-established Christie Commission principles. We know that the needs of communities and people across Scotland are varied, and all public services will need to work together to better support people to thrive, and to prevent the human and economic cost of inequality in future years.

It is known that the impact of the cost of living crisis is not felt equally. Emerging evidence on the cost of living crisis from a wide range of sources has been considered to understand the economic and social challenges facing Scotland and we are publishing this evidence in an analytical report, The Cost of Living Crisis in Scotland. Some of this analysis was in place for the equality assessments that informed the 2022-23 Equality and Fairer Scotland Statement, and the report brings together known evidence as we approach the Scottish Budget 2023-24. Recognising the unprecedented nature of the changes on our budget this year, this Emergency Budget Review is also accompanied by a summary of the equality and fairness evidence which considers the specific impacts of the substantive in-year adjustments required.