Investing for jobs: Capital Spending Review 2021-2022 to 2025-2026

Chapter 1: Context and Strategy

Purpose of the Capital Spending Review

In the 2018 Programme for Government, the First Minister announced a National Infrastructure Mission to increase annual investment in infrastructure by 1% of 2017 Scottish GDP by 2025-26.  It aims to ensure that investment is £1.5 billion higher in 2025-26, than the £5.2 billion the Scottish Government invested in 2019-20

This is the level we think is required to match the ongoing investment of our key OECD competitors.  We are the first part of the UK to commit to overcome historically lower UK investment, and seek to reach such internationally competitive levels.

Our Capital Spending Review is Scotland’s first multi-year capital settlement for around a decade.  It sets out plans for more than £33 billion of funding to deliver our National Infrastructure Mission in full.

Around 90% of the capital budget supports infrastructure - from the homes we live in and the water, energy and telecommunication we consume, to how we travel to the places we work, shop and learn. Capital investment crucially supports employment and economic recovery through our large-scale infrastructure plans.

The economic rationale for the National Infrastructure Mission was supported by a paper produced by Scottish Government analysts^[1], which set out the important role that infrastructure investment plays in improving the productive capacity of the economy and delivering long-term economic benefits.

The National Infrastructure Mission runs through the full next Parliamentary term, and consequently our Capital Spending Review also covers financial years 2021-22 to 2025-26.  It has the potential to boost Scottish GDP by £10 - £25 billion over 15 years, and is estimated to support around 45,000 jobs.

Our Infrastructure Investment Plan 2021-22 to 2025-26, is also published alongside this Capital Spending Review and sets out a robust pipeline of work – offering good, green jobs, stimulating supply chains and building market confidence.  The Infrastructure Investment Plan includes details of over £26 billion of major projects and national programmes – with more to be confirmed in future years.

Our capital funding also supports economic growth beyond infrastructure by investing directly in businesses to boost innovation and employment, funding research and development, and capitalising the Scottish National Investment Bank.

The clarity provided by our new multi-year capital plans, and the investments they will underpin, has the potential to boost confidence in sectors across Scotland’s economy, and to encourage necessary private sector investment.  It offers public bodies certainty to develop and implement their own medium-term plans.

Internationally, Spending Reviews are generally exercises which review government programmes or projects, often as a means to find fiscal headroom.  They can focus on allocative choices – doing the right things – and efficiency improvements to boost value for money.  They are also often used to implement systematic change, such as reviewing the functions and performance of public bodies or embedding a wider culture of ongoing policy evaluation.

Prior UK Spending Reviews have historically set multi-year departmental budget limits across all spending, which is not common elsewhere.  There has not been a full UK capital spending review for around half a decade.  Although this means that the devolved administrations must operate without confirmed capital budget settlements beyond 2021-22, the Scottish Government does not wish this to become a barrier to longer-term planning and development.  We are therefore taking action now to set out multi-year funding plans, so that our essential pipeline of work can make the progress that is needed.

This Scottish Capital Spending Review has been developed from the work of the Infrastructure Commission for Scotland, and provides the funding to deliver its agreed recommendations.  Across the Scottish Government, Ministers have identified the right things to invest in to boost outcomes for Scotland.  As such, our Capital Spending Review has had a clear focus on ensuring the right allocative choices.  It also sets out portfolio capital allocations across the next five financial years.

The Capital Spending Review and Infrastructure Investment Plan have been developed coherently, ensuring the right strategic approach.  Within our three overarching strategic themes, the purpose and goals of the Scottish Capital Spending Review are:

• Ensuring a collaborative approach across Scottish Government, and a coherent strategy.
• Prioritising investment in areas that boost delivery of our core purpose and national outcomes.
• Responding to the challenges of Covid-19 and building back stronger.
• Identifying and delivering the right funding for improvements to meet future Scottish needs, such as through the use of digital technology.
• Generating additional investment, such as through revenue finance.
• Ensuring medium-term fiscal sustainability.

Context for the Capital Spending Review

Covid-19

This Capital Spending Review is being delivered against the backdrop of two of the most significant events to impact the economy in recent years – the Covid-19 pandemic and the UK’s exit from the European Union.

The Covid-19 pandemic is the greatest public health crisis of our lifetime and the necessary actions taken to minimise the spread of the virus have caused a profound shock to the economy. This has particularly hit construction, tourism and hospitality, food services, arts, entertainment and recreation sectors. Even where sectors have continued to trade, turnover is down, resulting in precarious cash flows. Consumer demand, how we travel, purchasing habits, and decision-making may see enduring changes as a result of the pandemic. Effects are particularly stark in hospitality, retail and aviation, for example. How we invest in infrastructure can help our recovery.

As reported to Parliament, one effect of the pandemic was a delay to the Capital Spending Review, which had been due to be published by end June 2020.  The Scottish Government published its Capital Spending Review Framework in September 2020, alongside a draft of the Infrastructure Investment Plan, setting out our financial planning assumptions underpinning a full five-year Capital Spending Review and outlining the context and forecasts affecting our plans.

The Scottish Government will continue to respond quickly and decisively to tackle the continued threats of the virus, as it has done since the start of the pandemic.  This Capital Spending Review sets out how the Scottish Government aims to do everything possible to secure social and economic recovery, and support our collective wellbeing, including driving progress towards our commitments on environmental sustainability and net zero.  It shows how every lever is being used to achieve the greatest possible impact.

The budget assumptions set out in the Capital Spending Review Framework remain the basis for our forward spending plans.  However, as announced on 28^th January 2021, the Scottish Fiscal Commission has subsequently forecast a Scotland-specific economic shock to occur in 2021-22, arising from the impact of Covid-19.

The Fiscal Framework between the Scottish and UK Governments includes provision for some specific additional flexibilities under the unique circumstances we are facing. The UK Government has agreed with us that, for capital, the annual limit of £100 million for annual drawdown from the Scotland Reserve will be temporarily waived.  This flexibility is available to us for 2021-22 and the two subsequent financial years, should sufficient capital be in the Reserve to make use of it.

Consequently, the Scottish Government confirmed in the Budget that it will draw down £200 million of Financial Transactions funding from the Scotland Reserve in 2021-22, and this sum is now reflected in the first year of Capital Spending Review allocations.  No other additional drawdown beyond the conventional Fiscal Framework provisions has yet been assumed, but such plans can be revisited if need be in response to in-year developments.

EU Exit and UK Government capital plans

EU Exit is also having an impact on our economy. From 1 January 2021, the transition period came to an end and new rules came into force governing our economic relationship with the EU.

The long term impact of these changes is still uncertain but the Scottish Government’s initial analysis of the agreements reached between the UK Government and the EU is that Scotland will be worse-off outside the EU.  This makes the focus on at least matching our top international competitors even more important, as we look to ensure that infrastructure investment supports a sound economic response.

The Chancellor of the Exchequer announced on 24 March 2020 that the anticipated UK Comprehensive Spending Review would be delayed from July, to enable a focus on responding to the Covid-19 emergency.   On 21^st July 2020 the Chancellor updated that the UK Government would undertake its Comprehensive Spending Review in the Autumn, setting UK resource budgets for the years 2021-22 to 2023-24 and capital budgets for the years 2021-22 until 2024-25.

In the event, the Chancellor delivered his Spending Review to the UK Parliament on 25 November 2020. But it was a one year spending review only for 2021-22 and included a significant cash cut to the Scottish Government’s capital and financial transactions budget.

HM Treasury have now delayed previously announced multi-year UK Capital Spending Reviews five times.  Last November, however, enabled some helpful clarity on their response to the UK National Infrastructure Commission [July 2018] recommendations in the UK report “National Infrastructure Assessment”^[2].

This was a risk outlined in our Capital Spending Review Framework.  It evidences why it has been critical for Scottish planning to continue, based on our own Infrastructure Mission and strategic certainty.

UK Government delay risks uncertainty and paused investment, damaging our economic recovery.  The UK Government’s decision to cut capital investment levels in the devolved administrations, even whilst announcing a £27 billion boost at UK level, risks the GDP growth in Scotland that is so critical if we are to recover from the economic harm arising from the pandemic.

Our Strategy for Scotland

The 2020-21 Programme for Government was published in September 2020. Against the public health and economic crisis caused by the pandemic, it emphasised the importance of rebuilding our economy after the shock of Covid-19 in a way that creates a fairer and more equal society. In particular, it commits to:

• a national mission to create new jobs, good jobs and green jobs – with a particular focus on our young people, supporting retraining and investing in our Green New Deal to tackle climate change;
• promoting lifelong health and wellbeing – by tackling Covid-19, remobilising and reforming the NHS and social care and tackling health inequalities; and
• promoting equality and helping our young people fulfil their potential.

These commitments have been reinforced by the Scottish Budget 2021-22 and Medium Term Financial Strategy (MTFS) which were both published on 28 January 2021:

The Budget document reinforces the commitments set out in the Programme for Government (PfG), and sets out how we will invest to build our economy back fairer and stronger.’ (p 32, Scotland's Fiscal Outlook: The Scottish Government's Medium-Term Financial Strategy - gov.scot (www.gov.scot))

Capital funding can support infrastructure and a range of other activities.  In particular, it can support research, the creation of financial instruments such as debt or equity, or job creation and retention through investment in Scottish businesses, for example to boost innovation.

Around 90% of the Scottish Government’s capital investment in 2020-21 was directed towards infrastructure.  This Capital Spending Review is published alongside the Infrastructure Investment Plan 2021-22 to 2025-26^[3].  The two closely align, with the Infrastructure Plan setting out the strategy, and the Capital Spending Review ensuring that priorities are fully funded or financed.

They have both been prepared to support delivery of projects and programmes with improved outcomes and benefits within three themes:

• Enable net zero emissions and environmental sustainability
• Drive inclusive economic growth
• Build resilient and sustainable places

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Enabling the transition to net zero emissions and environmental sustainability

Building resilient and sustainable places

Driving inclusive economic growth

As the Infrastructure Investment Plan sets out, we need to adjust the balance of investment in favour of renewing and extending the life of our existing infrastructure, both on environmental and value-for-money grounds. As such, the Capital Spending Review will target a material uplift in investment in capital maintenance, relative to current levels, working towards doubling such annual investment over the next 5 years.

The Infrastructure Investment Plan sets out how we intend to apply and incorporate a new investment hierarchy framework into decision-making processes relating to public sector infrastructure investment as part of a wider asset management approach to business case development and the decision-making process.   This builds on the recommendation from the Infrastructure Commission for Scotland to take such action.

The hierarchy should help to reinforce positive behaviours around maximising the benefits from maintaining our existing assets where appropriate to do so. This should take into account asset obsolescence and poor condition, while ensuring we are reflective of local infrastructure needs, such as the different level of existing infrastructure in rural areas when compared to towns and cities.

Recent changes to HM Treasury guidance on business case appraisal methodology will be considered and aligned, where appropriate, with our Place Principle and Infrastructure Investment Plan vision, as central components of project evaluation.

The hierarchy is closely linked to the impact assessment and prioritisation framework discussed in the next section and its development will be an iterative process which will be developed as part of the future route-map for the infrastructure investment decision framework.

This Capital Spending Review will also address the significant near-term challenges presented by the Covid-19 pandemic, recognising the profound impact the virus has had on our whole way of life, and the role infrastructure has to play in helping businesses and communities to adapt and recover.

Alongside the harmful consequences, we have seen a number of potentially positive shifts that we can build upon.  This includes positive examples of community cohesion and empowerment, new collaborative ways of working among public services and more person-centred support, reduced commuting, more flexible and remote working arrangements and making more use of digital channels to access services and support.

We now have a unique opportunity, not simply to go back to how things were, but to harness the scale and pace of such changes to drive positive outcomes and ensure our investment plans are founded in fairness and dignity, safeguarding equality and driving progress towards net zero and environmental sustainability.

We will ensure a focus on the following shifts in our capital investment, to seek to address the economic, health and social impacts of Covid-19:

• Investing in digital connectivity and digital inclusion to help businesses, workers and service users to accelerate the uptake of digital services and reducing the need to travel
• Supporting safe active travel and local, accessible public services in vibrant places to sustain local communities
• Supporting green and blue spaces to provide access to nature
• Investing in local business opportunities and job-creation to preserve and generate employment to support economic recovery 

The Advisory Group on Economic Recovery considered how best Scotland might address the economic harm that has arisen from Covid-19.  A key recommendation of the group called on Scottish Ministers to maintain the National Infrastructure Mission.  We are delighted with this recognition of the value our approach can bring.

Recognising the long-term nature of infrastructure provision, and the need to future proof investment, the Capital Spending Review and Infrastructure Investment Plan also address key long-term trends, including:

• Tackling and managing climate change
• Accommodating technological developments
• Adapting to demographic change

These are described in more detail in the Infrastructure Investment Plan.  Below is a summary of the key adjustments in our investment approach that will be required to respond well to these long-term trends:

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Climate

• Adapting to climate change as well as mitigating emissions
• Investing in natural infrastructure and nature-based solutions

Technology

• Enhanced digital infrastructure and storage
• Increased support for data sharing and digital public services
• Promote digital inclusion

Demography

• Meeting the needs of older people
• Services and homes where people choose to live
• Regenerating areas of working-age population decline

In April 2019, the First Minister recognised we are facing a climate emergency and our Environment Strategy acknowledges a linked global crisis of biodiversity loss.  We need to invest in the required actions to reduce emissions to meet our ambitious net zero target level and to address the potential disruption we face from extreme weather events and the climate change already underway.  We also need to invest in action to protect and restore nature in Scotland and improve our overseas environmental impact.  This must include investment in natural infrastructure and nature-based solutions to climate change, such as woodland expansion and peatland restoration.

Recognising that emissions in 2025 need to be around 11 Mt CO₂e a year lower than our 2020 target level, we have announced an additional £2 billion capital investment in low carbon measures over the course of the next Parliamentary term.  Scottish Government investment can never be the whole answer to the climate emergency challenge, but can supplement action at international and UK level, and within Scotland by local authorities, businesses and service users.

Chapter 3 gives full details of the 5-year allocations within this new £2 billion capital investment.  Additionally, Budget 2021-22 published a full line-by-line analysis of all low carbon investment in that financial year, including almost £1.8 billion continuing underlying low carbon investment.