Investing in Scotland's Future: resource spending review framework

1. The Context

This chapter explores the context for the Resource Spending Review, and introduces our three priorities:

• To support progress towards meeting our child poverty targets
• To address climate change
• To secure a stronger, fairer, greener economy

1.1 Context for the Resource Spending Review

The Resource Spending Review is being developed in a context of uncertainty and following a period of shocks and shifts which have changed the world in which we live.

The pandemic has dramatically affected every area of life in Scotland. Scotland’s economy experienced a significant shock due to COVID-19, which has been exacerbated by EU Exit. The economy appears to be recovering more quickly than expected from the pandemic, with GDP predicted to reach its pre-pandemic level in the second quarter of 2022.^[1] But we know that this only tells part of the story, and that the impacts of COVID-19 continue to be felt acutely by many individuals, businesses and communities across Scotland.

We also know that the impacts of the pandemic have been, and continue to be, felt unequally. The pandemic has deepened existing inequalities, with those already more disadvantaged disproportionately affected. It also exposed the effects of digital exclusion, wealth inequality and generational divides.^[2]

It seems likely that inequalities exacerbated by the pandemic will continue to deepen, which will affect people’s resilience to other types of risks – such as health or climate risks. The testimony and demands from young people, activists, and participants from the global south at COP26 brought home the fact that the threat from climate change continues to intensify and that its impacts are already being experienced by many people across the world. Experts expect crises to happen more frequently and with greater intensity and severity.^[3] In this context, increasing resilience and building in flexibility to future shocks is key to achieving wellbeing across society.

Amid the challenges of COVID-19, we have also seen examples of creativity and innovation, including changes to ways of working that benefit employees and employers. There is much that we should rightly capitalise on in order to support the building of a fairer, greener Scotland.

The National Performance Framework^[4] describes the kind of Scotland we want to see and remains a cornerstone of our work. Although our future is uncertain, we can be sure that climate change, technological advances and changing demographics will significantly affect our lives. Some effects will be felt during the next five years of our Resource Spending Review period, while others may not materialise for many years. We must shape our spending plans, so that our public services meet our needs now and are ready to meet the needs of our children and future generations. The Resource Spending Review is our opportunity to do this, and to lay the foundations for a sustainable future in an increasingly interconnected world.

Since May, the Scottish Government has demonstrated leadership in the face of the challenges outlined above. The delivery of the 100 Days Plan^[5] was followed by the Programme for Government^[6] and the Covid Recovery Strategy^[7] which set out our next steps in meeting these current and future challenges over the course of this Parliament and beyond. In August, the Bute House Agreement^[8] re-affirmed our commitment to securing a fairer, greener Scotland and saw two Scottish Green Party Ministers join Government.

In order to realise this ambition, it is vital we set out a clear financial plan that shows how funding will support the achievement of our goals. Budget 2022-23 acts as a first step in this plan, setting out how we will fund the first year of these ambitious programmes. The Resource Spending Review builds on this foundation and will set out how we marshal our resources effectively to ensure their long-term success.

1.2 A stable foundation to rebuild our public services

This Resource Spending Review will be an important milestone in Scotland’s fiscal journey. We have not had the conditions to publish a multi-year spending review since 2011 as planning horizons have been shortened by our reliance on UK Government confirming the block grant, with a UK Spending Review promised and postponed twice in recent years.

This Resource Spending Review will build on the foundations of the 2022-23 budget and set out our spending plans from 2023-24 to 2026-27, the final year of this Parliament. Alongside the development of a fiscal framework for local government, it will give our delivery partners across the public and third sectors greater financial certainty to help plan and realise our shared ambitions effectively. Like the Scottish Government, public bodies have been working to a one-year budget cycle since the end of the last spending review period in 2014-15.

The UK Spending Review of October 2021^[9] offered clarity over funding for a three-year period from 2022-23 and outlined the block grant to be received by Scottish Government in each of those financial years. However, the UK spending review period ends in 2024-25, so we will need to predict UK Government activity – spending, tax and borrowing decisions – beyond 2024-25 and into a new Westminster administration, to estimate the money available to us when shaping our own spending plans.

Even within the UK spending review period, there is no guarantee that Scottish Government will receive the block grant funding set out in the UK Spending Review document on 27 October 2021. In 2020-21, a minimum funding guarantee allowed the Scottish Government to respond to the pandemic with vital support for businesses in confidence that the promised funding would be received from UK Government. The minimum funding guarantee has not been renewed, which means that if the UK Government does not deliver against its spending plans, there is a risk that we do not receive the funding we have planned for.

And the funding announced by UK Government cannot be considered enough. Our block grant has been cut each year of the UK Spending Review compared to 2021-22, as COVID-19 funding has been removed even as the public service response to the pandemic and its aftermath must continue. Furthermore, the increases announced to baseline funding do not undo the damage of more than a decade of austerity.

The powers in the UK Internal Market Act (IMA) for the UK Government to spend in devolved areas raise further uncertainty for the public spending landscape in Scotland. The UK Government has indicated it will not seek Scottish Government agreement to this spending, risking incoherence in spending plans and inconsistent policy priorities. Scottish Government continues to oppose the IMA and believes that funding for devolved purposes should be allocated to the Scottish Parliament and Scottish Government under HM Treasury’s Statement on Funding Policy in the normal way.

Despite these challenges, we believe it is vital that our own spending review covers the full parliamentary term. By going further than the UK spending review period, we are looking to give public bodies, including our local authorities, financial stability and the opportunity to plan multi-year projects in greater confidence of future funding.

We have a duty to future generations to manage public finances responsibly and lay stable foundations for the people of Scotland to adapt and thrive whatever the future brings. That does not mean austerity, which disproportionately affects the poorest and most vulnerable in our society. It means making informed and evidenced decisions about how we best use the funding available to us to meet the needs of our communities through effective and sustainable public services and increasing prosperity in a fair and green way.

Annual budgets will continue to be set through the annual parliamentary budget process, which gives the Scottish Government the authority to spend public funds and gives the flexibility to review and update spending plans to respond to changing circumstances and reflect the evolving fiscal landscape.

1.3 Our priorities

In order to effectively develop and appraise future spending plans it is important that we have a set of core priorities to guide the Resource Spending Review process. Drawing on the commitments the Scottish Government has made so far, which set the path for our recovery from the pandemic, we have identified three priorities for the review which we will use to inform our decisions about the allocation of funding.

• Child poverty: the experience of poverty lies at the heart of many social and economic challenges we face as a nation, resulting in poorer outcomes over an individual’s lifetime and considerable investment to mitigate its negative impacts. We will focus on increasing household incomes and reducing costs to lift more families out of poverty, and will work to mitigate the impacts of poverty for children ensuring they can fulfil their potential. In particular, we will focus on supporting priority families out of poverty. We have declared a national mission to tackle child poverty. Plans developed through the Resource Spending Review will help set us on a critical path to reduce child poverty levels to less than 10% by 2030-31.
• Climate change: the global climate emergency is one of the gravest threats facing Scotland and the wider world. Experts agree that public spend on climate change can deliver future benefits that far outweigh the costs today. The Scottish Government will continue the momentum generated by Glasgow’s hosting of COP26 by investing in the protection and restoration of our natural environment, decarbonising our homes, industries and transport and leading the way in renewable energy and green technology. Government investment on its own will not be sufficient. While there are areas of society that should always remain government funded, we recognise that the scale and urgency of the climate challenge means private investment will be critical to shift to a net zero, wellbeing economy. Our work on the climate emergency requires a long-term, whole-of-government shift towards the transformational change required to becoming a net zero nation. In this context, the Resource Spending Review will seek to support activities to meet our statutory commitments to reduce emissions to net zero by 2045, to secure a just transition that leaves no one behind, and to build resilience to climate impacts. We will also work towards climate justice, recognising that the impacts of climate change often deepen existing inequalities.
• Economic transformation: the impact of COVID-19, combined with the effects of the UK’s exit from the European Union have created challenges for Scotland. The Scottish Government’s National Strategy for Economic Transformation will seek to transform the economy, setting us on a path towards a wellbeing economy for all. This will be an economy that is rooted in Fair Work. It will improve standards of living, enables businesses to grasp the opportunities of a green recovery, and secure the new jobs of the future. Our ambition for a stronger, fairer, greener economy will consider how the investment of public funds will support each of these dimensions in tandem.

As the Finance and Public Administration Committee noted in their pre-budget report^[10], the Resource Spending Review is an opportunity to step away from the pressures of a one-year budget cycle, and create the fiscal space to invest in long-term, preventative measures which have a greater impact on these cross-cutting priorities.

This is also true of the transformative change necessary to enable us to continue to deliver public services effectively and sustainability for an evolving society. The National Care Service will be launched in this Parliament, along with a commitment to increase social care capacity. It is the single biggest public health reform since the foundation of the NHS, with all the complexity and ambition that suggests. A multi-year spending review allows us to reflect the impact the creation of the National Care Service will have on how the Scottish Government, local authorities and delivery partners work together and to ensure that funding enables and supports both the National Care Service and the people who access its services.

Q1. In Chapter 1 we have identified three priorities to guide the Resource Spending Review process:

• To support progress towards meeting our child poverty targets
• To address climate change
• To secure a stronger, fairer, greener economy

Setting these as priorities helps us consider where spend should be targeted and re-directed. Do you agree that our resource spending should focus on these?

We welcome your views on these three priorities for this Resource Spending Review.