Investing in Scotland's Future: Resource Spending Review

1. Strategic Overview

This is the Scottish Government's first resource spending review since 2011. It sets out the high-level parameters for resource spend within future Scottish Budgets up to 2026-27 and provides a long-term plan focused on the outcomes we want to see, to deliver on our ambitious 'Programme for Government' and the 'Bute House Agreement' with the Scottish Green Party.^{[1] [2]} It offers a strategic funding framework for the Scottish Government and our many partners to plan for the future. The public sector in Scotland needs this clarity so it can continue to deliver for the people of Scotland now and for generations to come.

This section sets out the challenges the spending review addresses, and broadly how the Scottish Government is continuing to direct public spending towards strategic outcomes within the constraints upon us.

1.1 Economic and Fiscal Context – the challenge we face

The volatile economic and fiscal context makes it essential that the Scottish Government offers leadership and direction in the prioritisation of public spending. Scottish Government's 'Medium-Term Financial Strategy' (May 2022) published alongside this document sets out the economic and fiscal outlook in detail, and it is clear that choices will have to be made in future Budgets over the remainder of the parliament that take account of the challenges the Scottish economy faces.^[3]

With inflation at a 40-year high of 9 per cent, households and businesses are under significant pressure, while still recovering from the shock of the COVID-19 pandemic.^[4] Bottlenecks in supply chains are proving more persistent than originally feared, including due to continued COVID-19 restrictions in China. The Russian invasion of Ukraine and the increases in global commodity and energy prices are continuing to exacerbate significant cost pressures across the economy, adding to the underlying impacts of EU Exit, which have meant that the UK has one of the highest rates of inflation in the G7.

Within this context, the Scottish labour market has remained robust, with low levels of unemployment, elevated levels of vacancies, and intense competition for staff between employers, putting upward pressure on earnings growth. Despite this, wages and earnings have not maintained pace with the rapidly rising rate of inflation. As a result, the Office for Budget Responsibility (OBR) and Scottish Fiscal Commission (SFC) are now both forecasting the largest fall in household living standards since records began. ^{[5] [6] [7]}

Source: ONS, SFC. Scottish figures (SFC) available from 1998-99, UK figures (ONS) provided from 1956-1957.

Whilst this pressure is being felt by most households, the impact is greater for low-income households who need to spend a greater proportion of their income on food and energy, where inflationary pressures are particularly intense.

We also face significant volatility in our funding outlook. The funding available to the Scottish Government can vary substantially over time as economic forecasts change and as the UK Government revises its spending plans. The difference in timing between the UK Spending Review, OBR forecasts and SFC forecasts, which form the basis of our funding envelope, has contributed to the uncertainty. Unlike the UK Government, the Scottish Government is extremely constrained through the Fiscal Framework, a legislative requirement to balance the budget and by limitations on its ability to borrow or increase tax revenue to fund additional resource spending to manage these fluctuations. The Scottish Government is fully deploying the levers we have under the framework, however, it is increasingly clear that they are insufficient to manage the challenges we face.

The spending decisions of the UK Government are the single largest determinant of our funding position, as they feed through to the Block Grant via the Barnett formula. The Scottish Government has no control over the spending decisions of the UK Government and cannot determine growth in the Block Grant. The UK 'Autumn Budget and Spending Review 2021' in October 2021 set out a funding cash envelope for the Scottish Budget at a time when inflation was at 3.1 per cent and only expected to rise to 4.4 per cent in 2022.^[8] Taking high inflation into account, the true spending power of those funding envelopes has already been significantly eroded, and to date the UK Government has chosen not to adjust spending plans to reflect this.

The central funding position which underpins this spending review is based on current tax policies and reflects a range of assumptions built into official forecasts. The funding envelopes set out here are indicative of what we can reasonably expect over the spending review years, but it is the Scottish Government's annual budgets which will confirm these. Similarly, tax policy decisions are also generally reserved for annual budgets and any changes to tax policy will be considered in the round in line with our published 'Framework for Tax 2021' and prevailing economic conditions.^[9]

The UK Spending Review settlement provides the basis for Barnett projections in the first two years of the Resource Spending Review.^[10] This provided a baseline increase of just 1.8 per cent in cash terms each year which is a real-terms decrease of 0.6 per cent. This is below average cash terms uplifts since 2010 of over 2 per cent. We assume the UK Government will decide to spend over and above its spending review announcements so have included a further £250 million in 2023-24 and £400 million in 2024-25. Nevertheless, we remain at the mercy of decisions in Westminster which are often at short notice and taken late in the financial year.

This is clearly insufficient to meet the challenges we face. Without a substantial response at UK level by the UK Government, using economic levers currently reserved to Westminster to bring down inflation and mitigate the risk of a recession, there will be some areas where we will not be able to achieve our desired outcome. Unlike the Scottish Government, the UK Government has the fiscal levers which could be used to mitigate the severest impacts of the cost of living crisis and the risk of rising poverty levels in the most vulnerable parts of our society. However, the UK Government has so far chosen to prioritise future year tax cuts, rather than act now to support the most vulnerable. This limits the funding available to us to provide services, to support households and business and to invest in our workforce, restricting what we can achieve through this Resource Spending Review.

1.2 Delivering Strategic Outcomes for Scotland

The resource spending plans we present in this review build on our track record of directing public spending to where it benefits the people of Scotland most.

Over the remainder of the parliament, the Scottish Government will direct the allocation of around £180 billion of public funds and our focus on outcomes and reform will ensure we maximise its public value. Within this, £73.1 billion will be invested in health and social care including in developing a National Care Service, £22.9 billion for social security assistance including the game changing Scottish Child Payment, and a guaranteed £42.5 billion funding for local government for the delivery of local services, £12.3 billion for education and skills and £11.6 billion for the justice system.

Our plans also indicate around £18 billion of capital investment over the period to 31 March 2026, which will be used to fund capital programmes across portfolios including improvements in Scotland's transport network, the NHS and wider public sector estate, affordable housing and the shift to a low carbon economy, with over half a billion of additional funding directed to net zero programmes, compared to previous plans.^[11]

Source: Scottish Budget; 2016-17 to 2022-23

As is clear from Figure 2, the plans set out in this review are building on strong foundations of increasing public investment in priority outcomes for Scotland. For example, from 2016-17 to 2022-23 the Health and Social budget has risen by £5 billion, and the budget for Social Security Assistance has risen by £3.9 billion. By the end of the Review period in 2026-27 these budget lines will have increased by £6.9 billion and £6.3 billion respectively. The spending review locks in recent growth in budgets across all portfolios, despite prevailing fiscal challenges.

Since the last spending review, we have rightly set, with the Parliament's agreement, stretching and ambitious child poverty and climate change targets. To meet these targets, we must allocate resources accordingly.

We have demonstrated this through sustaining the additional investment announced in the 'Best Start, Bright Futures: Tackling Child Poverty Delivery Plan' published in March 2022.^[12] The spending review supports the flagship increase in the Scottish Child Payment, as the most significant measure currently available to the Scottish Government for addressing child poverty, and other key commitments such as the expansion of free school meals and concessionary travel for younger people.

This spending review also supports the delivery of the Scottish Government's updated Climate Change plan, Climate Change Adaptation Programme, Sectoral and Regional Just Transition Plans and the North East and Moray Just Transition Fund, alongside measures identified in the Programme for Government and Bute House Agreement to address the climate crisis, in a way that is fair and just.

A number of measures to support both of these priorities also support action to mitigate the impact of the cost of living crisis. These include support for social security payments, the Scottish Child Payment and investment in energy efficiency - and the spending review sets out plans for building on these over the medium term.

In meeting those challenges it is critical that Scotland has a strong economy that underpins our ability to deliver on these outcomes. We want our economy to be globally competitive and sustainable, with thriving businesses and quality jobs and fair work for everyone. The commitments set out in the 'National Strategy for Economic Transformation' (NSET) are therefore supported in this spending review.^[13]

The resource spending set out in this review will drive the Scottish Government's vision for Scotland's public services. We are committed to strong, responsive public services which serve individuals' needs, improve national outcomes and create the right opportunities for Scotland to be healthier, happier and more prosperous. We want public funding to build a Scotland where communities are inclusive and empowered, and people grow up loved and respected, well-educated, and healthy. The collective impact of the investment we are making will help us achieve this.

Building on these choices, in support of our strategic priorities, the spending review now presents further specific investment to deliver on our national goals, including:

• Delivering our commitment to increased year on year funding for the National Health Service investing £73 billion over the period of this review, with 50 per cent of that invested in community health services.
• Investing in social care and integration over the spending review period laying the groundwork for the National Care Service, bringing social care into parity of esteem with healthcare and transforming the provision of this essential service.
• More than doubling the value of the Scottish Child Payment (SCP) to £25 per week per child and rolling out the SCP in full to children under 16, by the end of 2022 and maintaining this over the spending review period.
• Implementing measures which reduce the cost of the school day, including expanding free school meal provision and working to build a system of school age childcare that is free to those on the lowest incomes.
• Funding to recruit 3,500 additional teachers and 500 support staff.
• Continuing to deliver the Scottish Attainment Fund, to tackle the poverty related attainment gap.
• Addressing backlogs in the justice system, supporting victims of crime and continuing to reduce reoffending.
• Supporting all parts of government to deliver the National Strategy for Economic Transformation.
• Delivering on our employability offer to parents by spending £670 million over the review period to help reduce child poverty – supporting thousands of parents into work, and parents already in work to increase their earnings.
• Spending £160 million over the spending review period on digital transformation to deliver better outcomes - bringing 300,000 households online through the Connecting Scotland programme and enabling access to gigabit and superfast broadband.
• £95 million of further investment across the review period to support increasing levels of woodland creation.
• Resource funding to support capital investment in low carbon infrastructure and affordable housing over the period of the Capital Spending Review including £1.8 billion to make homes and buildings warmer and an increase in active travel spending to a combined resource and capital total of £320 million a year over the period.

Creating the best possible conditions for delivery of these actions and wider outcomes featured strongly in responses to the Resource Spending Review framework public consultation launched in December 2021. The report outlining the findings of the valuable contributions received to this consultation, together with an 'Equality and Fairer Scotland Statement' are published alongside this document.^[14]

Section 2 sets out more detail on what the Scottish Government aims to achieve through the spending review while section 3 sets out how we intend to deliver reforms that will maximise funding for investment in services and deliver better outcomes. Information relating to portfolio spending is set out in section 4.

1.3 Public Service Reform – efficiency for better outcomes

These challenges, uncertainties and constraints in the economic and fiscal outlook make it essential to drive reform across public services, policies and programmes, in order that resources are targeted effectively to deliver the best outcomes for Scotland.

While there are year-on-year increases in the resource budget available to the Scottish Government, a significant proportion relates to increased social security responsibilities. In addition, while devolved funding has decreased compared to the levels of investment available at the height of the COVID-19 pandemic, the impacts of the COVID-19 pandemic continue to put significant pressure on the NHS, wider public services and budgets. The cost of delivering public services and of building public infrastructure is increasing, just as household costs are, with inflation running at 9 per cent, a 40-year high. As we continue to prioritise our spending, we need to do so in a context where the purchasing power of the public pound has reduced.

This situation therefore demands a range of responses, including a re-energised drive for innovation and efficiency. The more efficient and effective we can become in the delivery of public services, the more able we will be to achieve key priorities and direct support towards those who need it most.

1.4 Public Service Delivery

Decisions taken by the UK Government to reduce public sector headcount and hold pay levels well below inflation, have a consequence through the Barnett formula for Scottish Government funding and public sector employees in Scotland. Whilst we recognise the need to reset the public sector following the COVID-19 pandemic, including by returning to a pre-pandemic size, the Scottish Government does not support the approach being taken by the UK Government. We will manage a transition that supports the well-being of the workforce and follows our Fair Work principles.

To do this, the Scottish Government will use this spending review as a springboard to begin a new and purposeful phase of engagement with delivery partners and public sector bodies, trade unions, public sector employees and service users to help Scotland navigate the challenge of a post-COVID-19 pandemic reset. This will include improving post-pandemic employee wellbeing, meeting shared objectives of fairness and sustainability, driving high quality service delivery and ensuring sustainable levels of public sector pay. In doing so, we will be guided by the lasting principles of the Christie Commission and our commitment to Fair Work. We will be focused on how a high-performing public sector continues to make a vital contribution within Scotland's economy, environment and society.

This work will begin with meetings with trade unions and public sector bodies to ensure there is a shared understanding of the challenge and to build a collaborative approach to identifying solutions.

To support the spending plans set out in this review, section 3 identifies key areas for reform over the life of the parliament (which generally exclude local government given their separate responsibilities), including:

• Changes to working practices, with our Fair Work principles at their heart, to support greater flexibility and continued hybrid working across the public sector.
• A pathway to return the overall size of the public sector workforce broadly to pre-COVID-19 pandemic levels, while supporting expansion in key areas of service delivery, helping to hold total pay bill costs - as opposed to pay levels - at 2022-23 levels.
• Support through public sector pay arrangements for those on the lowest incomes faced with the hardest impacts of the cost of living crisis.
• An enhanced focus on delivering efficiency savings across the public sector, while recognising existing efficiency programmes in some sectors, which we will support through a variety of levers including:
• Fresh consideration of the public body landscape, with further engagement ahead of the next Budget about a programme of reform;
• A multi-year estates programme to make the best use of public sector property and other assets, reflecting the impact of the COVID-19 pandemic on ways of working and the delivery of services;
• An increased focus on maximising revenue through innovation, reflecting the guidance in the Scottish Public Finance Manual;
• A programme of digital reform, focused on inclusion and connectivity, developing a strong digital economy and investment in digital transformation of public services; and
• The development of a strategy for public procurement that will drive greater collaboration and value for money.

1.5 Spending Plans - overview

The vision and supporting actions set out in this spending review underpin the high-level planning assumptions that are being provided to Scottish Government portfolios. Annual budgets for portfolios, local government and public bodies for the period 2023-24 to 2026-27 will be presented to the Parliament through the annual budget process, reflecting updated funding assumptions, economic and fiscal forecasts and tax policy decisions. However, the funding envelopes included in this spending review (summarised in Table 1) are intended to guide financial planning and reform across the public sector, in anticipation of future Scottish budget setting processes.