Fiscal pre-budget update: Cabinet Secretary for Finance - 3 September 2024

Presiding Officer, 

This Government has consistently warned of the significance of the financial challenge ahead.

Prolonged Westminster austerity, the economic damage of Brexit, a global pandemic, the war in Ukraine, and the cost of living crisis have all placed enormous and growing pressure on the public finances.

In the last three years alone cumulative CPI inflation has seen prices increase by 18.9%  - diminishing how far money will go for households and governments alike.

In the face of these challenges, the Scottish Government has stepped in to support people and services where it has been needed most – on social security, health, and public services.

As set out in our 2024-25 budget, we have delivered a real-terms uplift for the NHS.

We have continued to tackle inequality by committing £6.1 billion in social security benefits and payments - including increasing the Scottish Child Payment to £26.70 a week. Helping the families of over 325,000 under 16s who currently receive it.

But we have done so without the equivalent UK Government action and their repeated failure to properly review the adequacy of funding settlements.

This issue has been acutely felt across the four nations. Just last year the Welsh Government had to introduce emergency savings measures in order to balance its budget. And in 2022/23 the Northern Ireland Executive needed to draw down from the UK Reserve.

The new Labour UK Government has since confirmed the failures of the past administration, outlining that the previous UK Government – and I quote the new Chancellor Rachel Reeves - “never fully reflected the impact of inflation in departmental budgets”.

The Treasury’s audit has estimated that this year’s departmental spending budgets are at least £15 billion lower in real terms compared to 2021 spending review plans. 

The Chancellor has set out the £22 billion funding gap inherited from the previous administration. The Prime Minster confirmed that the forthcoming UK Budget will be “painful” as they seek to address the fiscal position.

Now while it is welcome that the new UK Government has accepted the diagnosis that we have given for years on the UK’s public finances, their solution is sadly looking like an extension of the folly of austerity.

I made clear there was a difficult financial outlook in last year’s Medium Term Financial Strategy. I set out the projected, and growing, gap between forecast funding and planned spending in Scotland.

At the time this was forecast to be £1 billion in 2024/25, rising to £1.9 billion by 2027/28. And I made clear that this was not sustainable, and I called on the UK Government to act.

At the same time, with the powers at our own hand, I announced a range of measures at Budget 2024/25 to support the delivery of a balanced position whilst protecting public services.

However, given the circumstances, and the uncertainty about additional funding and further in year pressures, I must take further and more urgent action now to ensure that we can balance the Scottish Budget in 2024/25.

Presiding Officer, pay continues to be a significant driver of in-year pressures, with expected additional costs of up to £0.8 billion in this financial year alone.

Whilst I welcome the UK Government’s acceptance of the Pay Review Body recommendations, it remains to be seen whether the UK Government will fully fund it. Simply, if they do not fully fund the pay deals it will leave a substantial gap between the expectations of the workforce and the available funding.

In addition, we must also recognise that we have a larger public sector in Scotland relative to the rest of the UK.  Our public sector workforce will need to evolve to ensure the delivery of high quality public services within continued Westminster austerity, and I will set out more detail on our approach in the Budget.

Alongside pay, there are of course other pressures that arise in-year that we must ensure are funded.

There are costs that emerge due to natural demand-led changes, for example legal aid, police and fire pensions, and the costs of accommodation for Ukrainian Displaced People.

And more widely, the budget must still be managed for wider operational pressures. Most notably, NHS Boards are having to address the significant health and social care backlog that arose during the COVID pandemic and a recent further surge in COVID and respiratory cases.

While the Scottish Government has to operate within a largely fixed budget determined by Westminster this Government will of course do everything we can to protect people and public.

Of course were Scotland an independent country, we would not be paying the price for bad decisions taken at Westminster - whether that be years of austerity cuts, Brexit, or reckless mini budgets - all of which have taken money out of the economy and funding for public services.

However, Presiding Officer, within the current devolution settlement the fact remains that our main lever to remove these pressures in-year is to reduce spending to achieve balance.

That is why I am setting out today a range of measures to support the 2024/25 budget totalling almost £1 billion, of which up to £500 million are direct savings. The savings include:

• Up to £60 million of further savings that will be realised through the implementation of the Emergency Spend Controls - particularly targeting recruitment, overtime, travel and marketing.
• As previously announced, we will not progress with the removal of Rail Peak Fares, or the concessionary fares extension to the asylum seekers pilot. We have also agreed with Local Government that they can draw on specific existing programmes to fund pay deals. Collectively, these decisions amount to a further £65 million of savings.
• We will make a further £188 million of additional specific savings across all portfolios. This includes a reduction in resource spend on sustainable and active travel, and increased interest income on Scottish Water loan balances. Full details are being shared with the Finance and Public Administration Committee, and published alongside this statement. 

• These savings should also be considered in the context of the recent and regrettable Scottish Government decision to mirror the UK Government decision not to retain universality in the winter fuel payment, which would have cost up to £160 million.

At present, I am also reluctantly planning on the basis of utilising up to £460 million of additional Scotwind revenue funding.

In the past it has allowed me to protect budgets from cuts that would otherwise have been made. This includes being able to continue to support Net Zero expenditure.

As the financial year progresses, and through our emergency spend controls and continued robust forecasting I am seeking to protect as far as possible that ScotWind revenue – just as I was able to do in 2023/24.

Presiding Officer, as we look ahead, it is clear that further significant action will be needed to reset the public finances onto a sustainable path.

The Chancellor has made clear that UK Government funding will continue to be tightly constrained. The Prime Minister has also made clear the difficult decisions to come.

Ahead of the Autumn Budget, we call again on the UK Government to ensure that it prioritises investment in public services and infrastructure. We know from bitter experience that yet more Westminster austerity is not the answer, and public services must be protected. 

However, if the Scottish Government does not act, then spending will continue to outstrip available funding. That is not sustainable and tough decisions will be required. Annual savings alone will not address this. So all members of this place must face up to this challenge in the demands they make during the budget process to come.

On public spending, our approach to the forthcoming Budget will be focused on action in areas key to addressing spending pressures, some of which I want to highlight today.

First, let me turn to Health.  We will take forward our vision for Health and Social Care reform. This Government will always prioritise funding for our NHS and in the 2025-26 budget, we will build on the record funding that we have allocated in the current financial year.

We will take the twin approach of investment and reform in our health services - an approach which rightly tackles the population health challenges we face. Where necessary that must mean realigning spend to ensure it reaches those that need it most.

Beyond Health, we will also continue to identify and implement opportunities to deprioritise lower impact spend and programmes across the whole of Government.

I will use the forthcoming budget to highlight how we will double down on reform opportunities and maximise efficiencies, with a particular focus on the operation of public bodies and driving further savings through efficiency levers.

This includes opportunities around estates, procurement, fund management, digital shared services, and revenue raising.

On workforce, we have recruitment freezes in place across the Scottish Government for all but the most essential roles and, where appropriate, I’m looking to extend that, across public bodies – while ensuring that frontline services in the like of our NHS, police and fire can recruit the staff that they need.

Presiding Officer, we also face significant pressures on our Capital budget. The sustained high level of inflation experienced in the construction sector has permanently increased the cost of delivering infrastructure.

This coincides with an expected real terms reduction to our UK capital funding of 8.7% over five years. This equates to a cumulative loss of over £1.3 billion between 2023-24 and 2027-28.

As indicated previously, our Financial Transaction allocation from the UK Government has dropped by £290 million – or 62% since 2022/23, adding to the challenge we already face.

These factors combined have reduced our spending power and we cannot afford all of our capital commitments. We will need to continue to make difficult decisions to ensure that our capital programme is affordable and deliverable.

In line with our investment hierarchy, we are focussing spend on essential maintenance of our infrastructure so we can continue to deliver high-quality public services. 

And whilst these will be difficult choices, this Government remains committed to protecting the most vulnerable in society. Our approach to equality budgeting will be strengthened further for the 2025/26 Budget by publishing the results of our gender budgeting pilot with the OECD.

On tax, I can confirm that we will publish our Tax Strategy alongside the 2025/26 Scottish Budget, where we will set out our medium-term ambitions for the Scottish tax system.

Of course our cumulative decisions on Income Tax since the devolution of powers are estimated to have raised around £1.5 billion in 2024/25 compared to if we had UK rates and bands. This is additional revenue which has been used to support our vital public services.

Of course anyone who would advocate removing the progressive changes to Income Tax in Scotland will need to set out where the £1.5 billion of cuts would fall as a consequence.

On the application of taxation we can only go so far, given the scope of our devolved tax powers. Raising significant further revenue would require substantial reform to the tax system or the further devolution of powers. 

These will take time and will rely on the UK Government. It is therefore essential that we aim to grow the economy and the tax base to support a sustained flow of revenues over time.

Since 2007, Scotland’s economy has grown faster than the UK as a whole, after accounting for population growth, and productivity has grown twice as quickly. And this of course has supported growth in Scottish tax revenues.

Boosting economic growth is a top priority for our government because it is key to both raising Scotland’s living standards and funding the public services that we all rely upon.

This is even more important given that Brexit has been estimated to have left the UK economy at least £69 billion worse off compared with EU membership.

And that is why our Programme for Government tomorrow will set out in detail the steps we will take this year to boost fair, green economic growth.

As members will be aware, I recently wrote to the Finance and Public Administration Committee to provide an update on the timing of the Scottish Budget. I also stated that I intend to publish the Medium-Term Financial Strategy after the UK Government’s multi-year spending review has concluded in the Spring. I am giving careful consideration to the timing of a Spending Review in Scotland and to establishing a regular rhythm of reviews.

I can confirm to Parliament that I have proposed that the next Scottish Budget takes place on the 4^th December.  I am continuing to discuss the Budget date with the Finance and Public Administration Committee and the Scottish Fiscal Commission, and will finalise this in due course.  

Finally Presiding Officer, we cannot ignore the severe financial challenges that we face. We will continue to be a fiscally responsible government and balance the budget each year - as we have done every year for 17 years and we will do so again this year.

But this will mean we must unfortunately take difficult decisions along the way.

I believe we can all agree on the importance of putting the public first in all that we do.

I am calling on members across the Chamber to work together to navigate the challenges ahead, in the best interests of all of the people that we have the privilege to serve.