Emergency Budget Review: 2022 to 2023

3. Fiscal Context

Scotland and the UK – like many other countries - are facing extraordinary times with inflation at a 40 year high, driven by the strong increase in the costs of energy linked to the war in the Ukraine and continuing disruption to global supply chains following the pandemic. However, Scotland and the UK also face unique challenges, linked to the loss of access to the single market, including frictionless trade and free movement of labour.

In May of this year, the Scottish Government set out an assessment of the fiscal outlook until 2026-27 alongside its multi-year spending plans. Against the backdrop of an already weakening economic outlook over the course of the summer, the UK Government's "mini-budget" proposed a combination of supply side reforms and £45 billion of unfunded tax cuts targeted at high income earners. Instead of growing the economy, however, the UK Government's actions sparked a financial crisis which saw the pound fall to a 37 year low against the dollar and the cost of government borrowing rising to its highest level in over a decade. This ultimately required the Bank of England to intervene several times in the UK bond markets to protect parts of the pension industry and maintain the UK's financial stability.

Even though the majority of the measures in the "mini-budget" have now been reversed and financial markets have calmed as a result, the damage has been done. Households and businesses across the country are already facing higher mortgage costs, higher interest rates and uncertainty, creating unnecessary additional financial hardship. As noted by the expert panel, the immediate consequences of the "mini-budget" were to create significant political and policy uncertainty and to undermine economic confidence, none of which is conducive to stimulating higher growth in the coming years.

The UK Government has signalled that it will take "eye-wateringly" difficult decisions on tax and public spending at its Autumn Statement on 17 November when the Office for Budget Responsibility (OBR) will also provide an updated assessment of the UK's economic and fiscal outlook.

Even in the absence of updated forecasts, the scale of the challenge is becoming increasingly clear. According to independent commentators, the UK Government is still expected to find £30 to £40 billion of tax increases or spending cuts to stabilise debt, as a share of GDP, by 2026-27 – even with borrowing costs now back to levels seen prior to the "mini-budget".

Nevertheless, reductions in UK departmental spending of such a scale, if confirmed, would have severe knock-on impact on the Scottish Government's budget and vital public services and infrastructure investment. The prospect of a new era of austerity is extremely concerning as Scotland has already suffered a decade of UK Government imposed austerity that has disproportionately hurt the poorest and most vulnerable in society and resulted in under-investment in crucial public services. A recent report has also laid bare the human cost of UK-led austerity following the financial crisis, which resulted in almost 20,000 excess deaths in Scotland.^[1] Added to this, there are growing concerns that there could be spending cuts on infrastructure which would further hamper our ability to meet our net zero targets and damage our economic recovery - adding extra uncertainty to industries during these challenging and turbulent times. When the UK Government is making its spending decisions in the coming days, it is vital that Scotland's capital allocation is protected and enhanced to reflect rising inflation in their spending plans.

In the face of such uncertainty, the expert panel has recommended a cautious fiscal response. As well as supporting households and businesses through the current crisis, Government policy must not lose sight of the longer-term objectives of building a stronger, more resilient economy.