Investing for jobs: capital spending review framework 2021-2022 to 2025-2026

Spending Outlook

The UK Comprehensive Spending Review

The Chancellor 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.

The pandemic has led to a significant, and not yet fully clear, deterioration in the UK public finances. Alongside meeting health needs, the costs of economic supports such as the furlough scheme are significant. All parts of the UK have experienced a large economic shock, suggesting ongoing downward pressure on government revenues from decreased economic activity.

The Chancellor confirmed on 21 July 2020 that the UK Government will undertake its Comprehensive Spending Review in the Autumn, which will set UK resource budgets for the years 2021-22 to 2023-24 and capital budgets for the years 2021-22 until 2024-25. The Scottish Capital Spending Review is preparing to cover another year again, to 2025-26, consistent with delivering our key National Infrastructure Mission.

It is unclear what the Treasury's response will be to the significantly changed fiscal context. The Chancellor's language has sought to manage expectations down, with reference to only real-terms growth across resource and capital grant over the period as a whole, and against a resource baseline lower than the pre-COVID-19 2020-21 funding.

It is possible that the pressures on capital and resource funding may differ. For example, the UK Government may seek to bring forward a programme of capital stimulus. Alternatively, more UK borrowing may be required for social security or other resource purposes, constraining the scope for capital increases. It may be that the UK Government does not consider real-terms growth possible in each year.

The Case for Scottish Government Action

The Scottish Government will engage fully with the UK process and will continue to press for early clarity on funding envelopes. Until then, the Scottish Government must undertake its own capital planning based on modelled forecasts. These are based on the best information available, but estimates can never be fully accurate.

One question is why Scottish Ministers should await a UK Comprehensive Spending Review outcome before commencing our own financial planning.

HMT have delayed previously announced UK Capital Spending Reviews, and their response to the UK National Infrastructure Commission, four times so far. COVID-19 and Brexit uncertainties could again affect their plans. Delay risks uncertainty and paused investment, damaging our economic recovery.

Given we don't know when the UK Review will fully conclude, there is a risk it falls very close to our own Budget 2021-22 process, or even the end of the financial year and Scottish election, leaving insufficient time for proper Scottish financial planning.

The First Minister committed, in September 2018, to a National Infrastructure Mission to increase annual investment in infrastructure by 1% of 2017 Scottish GDP by 2025-26. As the Advisory Group on Economic Recovery concluded in June 2020, it is important for Scotland that the Scottish Government continues to deliver the Mission, to aid our recovery from the economic harm arising from COVID-19.

There are significant benefits in a Scottish Capital Spending Review that sets out forward investment levels, consistent with the Mission. This will help us deliver our own plans in a confident and realistic way, rather than be held in thrall to an uncertain UK Government agenda. It permits more control over the momentum of economic recovery and future developments in Scotland.

Scottish Ministers recognise that nearly all of the major projects announced as part of the 2015 Infrastructure Investment Plan have already successfully been delivered. For example, nearly £0.5 billion investment in our Digital Scotland Superfast Broadband programme has ensured over 97.8% of premises across Scotland can now access fibre broadband, helping homes and businesses. Our comprehensive Edinburgh to Glasgow Improvement Programme delivered over £850 million investment in comprehensive improvements to railway infrastructure and rolling stock, boosting our connectivity and economy. We have enabled new Early Learning and Childcare facilities, which boost outcomes for children and support their carers, and invested over £3.5 billion in affordable homes.

Moving forward, clarity on 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.

Our draft Infrastructure Investment Plan 2021-22 to 2025-26, published alongside this Framework, aims to provide as much market certainty as possible, through its significant pipeline of around £24 billion of major projects and programmes.

Future Funding Scenarios

We have prepared for a Capital Spending Review alongside working up our new Infrastructure Investment Plan. This allows strategy, project and programme funding to be aligned. It means we can show confidently that our announced plans are affordable and fully funded, whether through our Programme for Government 2020 or as set out in the draft Infrastructure Investment Plan.

This Framework sets out future funding scenarios and our own planning assumptions. Later in the year, once the UK Comprehensive Spending Review has concluded, we can publish detailed multi-year capital allocations, alongside Scottish Budget 2021-22.

As we must proceed on the basis of estimates, the Office of the Chief Economic Adviser has modelled three potential scenarios:

• Scenario 1: Consistent with Office of Budget Responsibility (OBR) estimates based on plans announced at UK Budget 2020-21
• Scenario 2: Real terms funding uplift of 1%, using July OBR inflation estimates
• Scenario 3: Funding outlook flat in real terms, using July OBR inflation estimate

Scenario	2020-21	2021-22	2022-23	2023-24	2024-25	2056- 26
Scenario 1 – Consistent with UKG March 2020 Budget	4,866	5,616	5,917	6,252	6,476	6,476
Scenario 2 - Real Uplift - Baseline Growth + 1% (July Inflation)	4,866	4,921	5,075	5,228	5,387	5,387
Scenario 3 - Flat Real Terms (July Inflation)	4,866	4,872	4,976	5,077	5,180	5,180

*excludes Financial Transactions funding

Given the UK Comprehensive Spending Review aims only to cover a period one year shorter than the Scottish National Infrastructure Mission and next Parliamentary term, the final 2025-26 year is forecast prudently to hold at level cash.

Scenario 1 is consistent with UK Conservative manifesto claims that the funding allocated to Scotland would be sufficient to meet the National Infrastructure Mission in its entirety. We call on the UK Government to deliver on its commitment.

However, in light of the impact of COVID-19, and shifts in UK Government language around future investment, the Scottish Government cannot be confident that this level of funding will be available. Scottish Ministers are committed to setting out a clear path to deliver the National Infrastructure Mission, and have consequently also considered how more pessimistic future UK scenarios could impact our plans.

We set out transparently in this Framework the information to evidence that our plans are realistic, and deliverable, and that Scotland can have full confidence in them.

Financial Transactions (FTs) are a type of capital funding, initially introduced by Treasury in 2012-13. They are available for equity investments, or loans to individuals or private or third sector organisations, such as companies or universities. FTs require to be repaid by the Scottish Government to UK Government. Previous Financial Transaction budgets have been used to good effect in Scotland, such as to grow early stage innovative companies or to improve people's chances to own their own home.

Financial Transactions consequentials to Scotland have predominantly arisen from UK funding of the English 'Right to Buy' housing scheme, which is expected to conclude in March 2023. Intentions thereafter will only become clear in a UK Comprehensive Spending Review. There is currently a lack of certainty around their continuation.

Any UK decision to discontinue FT budgets would have a significant impact and requires a lengthy lead-in time to allow orderly transition, if that is what's required. We call on the UK Government quickly to clarify its intentions regarding continued use of this type of funding, and to replace the budgets with at least commensurate levels of capital grant should it prefer not to continue with FTs.