Investing in Scotland's Future: Resource Spending Review

Foreword by the Cabinet Secretary for Finance and Economy

I am pleased to present the Scottish Government's Resource Spending Review.

We embarked on this spending review at a very different time - prior to the illegal Russian invasion of Ukraine, rising inflation and the cost of living crisis. At that time our focus was on four key challenges – reducing child poverty, addressing the climate crisis, building a strong and resilient economy and helping our public services recover strongly from the pandemic. These remain our priorities but we now face a different and more challenging fiscal environment in which to address them.

With inflation already reaching 9 per cent this year - its highest level for more than 40 years – this spending review now also sets out the support the Scottish Government is providing to help those struggling with the increased cost of living, alongside the challenges for public services that result from rising inflation and a lack of investment by the UK Government.

While countries across the world are facing rising inflation, and the challenges of recovering from the COVID-19 pandemic, in the UK these issues are amplified by the deep and lasting damage to our economy caused by Brexit, contributing to one of the highest inflation rates in the G7. Despite this, the UK Government is refusing to rule out a trade war with the European Union over the implementation of the Northern Ireland protocol that they negotiated and ratified.

The UK Government has belatedly taken action to mitigate some of the impact of rising energy prices on households. Although welcome, that support does not match the rise in the energy price cap and does not address the broader impact of inflation on business and public services. In short, we know the next year will be difficult for those on low incomes, those running small firms and those working in our public sector and we must recognise the risks these pose to the economic recovery from the pandemic.

The current economic crisis has highlighted again that Scotland does not currently hold the levers required to address our most pressing challenges.

Funding available for investment in public services through the rest of this parliament is currently constrained. As a result of escalating inflationary pressure, the Scottish Budget for this current year was already reduced in real terms by 5.2 per cent relative to the previous year. Growth in spending capacity over the rest of the parliament, once social security transfers are excluded, is only 2 per cent in real terms. This low level of investment is deeply damaging at a time when the UK Government has the flexibility and powers to do more.

The challenge presented by this low level of investment, as we emerge from the pandemic is heightened by the volatility created by the way the fiscal arrangements work. While there will always be a degree of volatility in the economic and fiscal outlook, the resulting effect on our funding position can be dramatic. Again, Scotland is not unique in having to manage the financial impact of the pandemic, but we are alone in requiring to fund these tax adjustments without the ability to borrow enough to prudently manage the impact. There is also the possibility that UK Government decisions reduce the block grant at any point during the parliament.

A different fiscal approach to the next four years is needed urgently, with additional public spending required and action taken to reduce the increasing burden faced by households, businesses and the public sector across Scotland and the UK as a whole. An injection of support for this financial year alone will not be enough. Austerity has already proven to not only be ineffective in terms of securing an economic recovery, and it also results in misery and suffering for so many. The UK Government must learn from the mistakes of the past and chart a different course out of the current crisis.

Despite these difficult fiscal conditions this spending review does deliver on our priorities.

This review begins a journey of reform to meet the most pressing issues facing Scotland over the medium-term. This means that rather than a uniform increase across portfolios, this spending review prioritises delivery of the commitments made in the Programme for Government and Bute House Agreement, specifically:

• Reform to improve outcomes for children currently living in poverty;
• Reform to help achieve the just transition to a net zero and climate resilient society where we play our part in tackling the global climate crisis;
• Reform in the way we experience our public services as we recover from the COVID-19 pandemic; and
• Transformation of our economy to enable growth, opportunity and a sustainable outlook for our future.

It addresses the cost of living crisis through continuing support for increasing the Child Payment to £25 by the end of this year, a payment only available to households in Scotland, and uprating eight Scottish benefits by 6 per cent at the same time as investing in energy efficiency and supporting the continued development of low carbon technologies.

It also provides for pay settlements that support the lowest paid who are most impacted by the current crisis. We have consistently sought to support those in our public sector. Devolved public sector pay in Scotland is around 7 per cent above the average UK Government equivalent due to the increases we have provided over the last few years, however, we know that people are understandably looking for more help.

Alongside this review we have also conducted a targeted review of our capital spending plans, to deal with lower-than-expected funding from the UK Government, and to ensure capital priorities align with the ambitions set out in the Programme for Government and Bute House agreement.

My aim is to provide as much clarity and certainty as I can to public bodies, other delivery partners, businesses, communities and households about the Government's forward spending plans, so that the fiscal context and the drivers for reform are clear. The figures in this spending review are not fixed annual budgets. There are many factors underpinning this spending review that are outwith our control, particularly those subject to UK Government actions. Even so, the spending review provides a clear planning scenario for annual budgets over the remainder of the parliament. As a result of the constraints I have set out these are necessarily challenging, with a sharp focus on efficiency, structural change and collaboration.

Delivering on our key priorities whilst also mitigating the cost of living crisis will require difficult decisions, but the outcome should be lower levels of child poverty, a faster growing economy, continued progress on our journey to net zero, stronger public services and crucial support for households and businesses during a time of extraordinary economic pressure. This spending review delivers the vision needed to secure a prosperous future for Scotland.

Kate Forbes MSP
Cabinet Secretary for Finance and Economy