Medium Term Financial Strategy: ministerial statement

Presiding officer, I am pleased to set out the Scottish Government’s second annual Medium Term Financial Strategy.

When I made the equivalent statement a year ago, I noted that Scotland’s public finances were set in the context of continuing UK Government austerity, Brexit uncertainty and an inhumane, hostile approach to immigration. I am disappointed to say that these still set the context for our public finances.

This is a time of unprecedented austerity. At the end of last year, UK public spending as a share of national income had fallen for a ninth successive year in a row, the only time that this has happened since the Second World War. The Resolution Foundation has highlighted that it particularly affects low- and middle-income households.

Between 2010-2011 and 2019-2020 our block grant for day-to-day spending has fallen by £2 billion. The decision to pursue a path of austerity by successive Chancellors means that over £12 billion less has been invested in Scottish public services over the last nine years.

Let me be clear, austerity is a choice - and not one of Scotland’s making. The UK Government’s policy of austerity is both unnecessary and counterproductive.

Leaving the European Union is not in Scotland’s interests either. It is also not Scotland’s will. Uncertainty is leading to subdued growth and leaving the EU will compound that impact.

The effect of leaving the EU is clearly seen in the economic forecasts for Scotland, with growth forecast to fall from 1.3 per cent in 2018 to 0.8 per cent in 2019. The growth forecast has been downgraded and the Scottish Fiscal Commission is clear that this is directly related to the ongoing uncertainty created by the UK’s EU negotiation process. Indeed, they highlight that the uncertainty caused by Brexit has prevented them from revising up their outlook for the Scottish economy and they expect business investment to continue to fall in 2019 and 2020 as a result, limiting growth in the economy.

Let that sink in a second. The independent forecasters of our economy have said that were it not for continued Brexit uncertainty they would be forecasting faster economic growth, not slower. There is now no doubt that Brexit is hurting Scotland before it has even happened.

During the 2014-2020 EU budget round, Scotland is estimated to receive over £5 billion in funding from the EU, supporting jobs, delivering infrastructure, sustaining rural communities, and delivering research funding for universities.

In the absence of firm commitments, we cannot yet quantify levels of funding in the future and the impact this will have on the Scottish Budget. However, the Scottish Government has been clear that, given that Scotland voted overwhelmingly against leaving the EU, funding levels should not be reduced as a result of the UK’s exit nor should these funds be centralised in London.

Against this backdrop of UK austerity and uncertainty, we are committed to using our powers in a balanced and responsible way, to stimulate the economy, protect public services and provide people and businesses with as much certainty as possible.

Decisions made in the 2019-2020 Budget ensure that 55 per cent of income taxpayers in Scotland in 2019-2020 will continue to pay less than people earning the same income in the rest of the UK, while still raising the revenue needed to support investment in the Scottish economy and public services. Had we applied UK income tax policy in 2019-2020, we would have had over £500 million less to spend.

Growing and supporting the economy is essential for financial stability and for providing the resources for our public services. Our Economic Action Plan sets out the actions that will deliver sustainable inclusive growth, improve wellbeing and attract investment across Scotland. Over £1 billion has so far been committed to City Region and Growth Deals over the next 10 to 20 years and the aim is to ensure every part of Scotland benefits through 100% coverage.

We have recently introduced the legislation that will underpin the Scottish National Investment Bank, an institution that will help shape our economy through mission-led, patient investments.

Under the National Infrastructure Mission, annual infrastructure investment will be £1.56 billion higher in 2025-2026 than the £5.2 billion we are already investing in 2019-2020.

I can also confirm today that I have accepted the recent recommendations of the Scottish Futures Trust to adopt the Mutual Investment Model as one means of supporting infrastructure spending, which will extend the range of tools at our disposal to provide crucial capital investment for Scotland.

Alongside the MTFS, the Scottish Fiscal Commission has published new economic and fiscal forecasts. As I said earlier, the negative economic impact of leaving the EU is clearly demonstrated in the forecasts, with economic growth forecast to fall from 1.3% in 2018 to 0.8% in 2019. However, the forecasts also point to a resilient Scottish economy with employment rising further over the next five years, unemployment remaining at near record lows, and earnings accelerating.

The SFC has also produced updated income tax forecasts. These have increased in every year from 2018-2019 of the forecast period, relative to the SFC’s December forecasts. For 2019-2020, the forecast of income tax revenues have risen by £20 million, largely driven by an improved outlook for earnings.

However, forecasts for the block grant adjustment deducted from the budget each year have gone up by even more. This means that the net contribution of income tax to the 2019-2020 funding envelope, on the basis of current estimates, is about £188 million smaller than forecast in December. This position is indicative; the 2020-2021 budget will be determined by the next round of forecasts by the SFC and OBR in the Autumn.

I have set out in this Medium-Term Financial Strategy a set of principles and policies that guide the use of our borrowing and reserve powers. Decisions are guided by the principles of sustainability, stability, budget flexibility, intergenerational fairness, value for money and transparency. But I should be clear that the circumstances that determine the use of our powers will often depend on factors beyond our control, with UK Government spending decisions continuing to be the main factor in determining the Scottish budget.

On capital borrowing, the MTFS sets out plans to borrow £450m this year and £350m next year. It is our policy to borrow between £250 million and £450 million annually over the remaining period of the National Infrastructure Mission, to ensure that investment increases overall year-on-year.

To ensure that there is flexibility to undertake capital borrowing when it might be most needed, a contingency of £300 million of the capital borrowing limit will be left unused. I think this strikes the right balance between supporting the economy and prudent use of the restrictive borrowing powers contained in the fiscal framework

Finally, let me turn to the framework for the Spending Review. The UK Chancellor committed to a spending review this summer, however in the context of the continuing uncertainty over Brexit, and the impending change of Prime Minister, it is – like most things relating to the UK Government – unclear if that will actually take place. Nonetheless, reflecting the importance of sustainable public finances, the Scottish Government plans to undertake reviews of spending beyond 2020-2021. And we will fulfil our commitment made during Budget 2019-2020 to bring forward a three-year settlement for local government from 2020-2021.

In line with the National Performance Framework, the Spending Review will focus on creating a more successful country, with opportunities for all of Scotland to flourish through increased wellbeing and sustainable and inclusive economic growth. It will be driven by a strategic focus on addressing Scotland’s long-term challenges.

For resource, we currently plan to publish indicative budgets in December 2019, alongside the Scottish Budget 2020-2021. However, if we do not have sufficient clarity from the UK Government on its spending plans at that stage, that may not be possible.

We will expect resource spending proposals to focus on outcomes and to evidence as far as possible their impact on the specific challenges and opportunities we face around

• securing sustainable and inclusive economic growth
• improving national wellbeing
• combating child poverty and meeting our statutory targets
• and tackling climate change and the climate crisis

For capital, future budgets will be published by June 2020, to take account of the Infrastructure Commission’s findings to be reported at the end of December 2019 and the Scottish Government’s next Infrastructure Investment Plan, which will be informed by the Commission’s advice.

It is clear from what I have already said that the resources available to the Scottish Government will be constrained by continued UK austerity. We recognise that we will not be able to do all that we want to do - or all that others will want us to do. Prioritisation will be necessary to focus resource where it will have the biggest impact.

I look forward to a responsible debate on how best to deliver that outcome, and I commend this Medium-term Financial Strategy to the chamber.