The Outcome of the Targeted Review of the Capital Spending Review – Updated Spending Allocations for 2023-24 to 2025-26

Fiscal Position

The National Infrastructure Mission

The National Infrastructure Mission (NIM) was announced as part of the 2018 Programme for Government. Our aim is to increase Scottish Government's annual infrastructure investment by 1% of 2017 Scottish GDP, £1.5 billion, by the end of this Parliament. The National Infrastructure Mission was introduced with an aim of raising Scottish infrastructure investment to internationally-competitive levels; boosting broadband, transport, and low-carbon energy; and supporting inclusive economic growth.

Just under 85% of the Scottish Government capital budget, including Financial Transactions funding, flows from UK Government decisions and allocations. The remaining sums arise from income and receipts, deployment of Scottish Government capital borrowing powers, from innovative financial and revenue finance models, and from recycling repayments from earlier Financial Transaction loans. We remain on track to meet the National Infrastructure Mission. The latest forecast for the National Infrastructure Mission trajectory is published in the Medium-Term Financial Strategy^[6].

For the Capital Spending Review, we focus on the spending plans associated with capital grant, use of borrowing and Financial Transactions.

Capital Grant

The UK Spending Review provided confirmation of the capital grant allocations in the years 2022-23, 2023-24 and 2024-25. As described above, these were lower than expected in each year, at a time when inflationary pressures mean that more rather than less investment is needed. The trajectory of the monetary value of capital grant allocations to Scotland shows relatively little change between 2022-23 and 2023-24 and a slight reduction between 2023-24 and 2024-25. In real terms, this represents a steep decline in the buying power of our investment given the rates of inflation. It also does not match the ambition Scotland has to deliver increased investment in infrastructure to internationally competitive levels – set out in our National Infrastructure Mission – and fails to respond to the need for infrastructure to support Scotland's net zero emissions targets.

Given this outcome, and the lack of allocation for 2025-26, we have revised our modelled figure for 2025-26 downwards but with a modest increase on the previous year. Until annual budgets are confirmed, and any adjustments made for consequential funding, the final figures for any given year will not be known.

Capital Borrowing

As stated in the Medium-Term Financial Strategy, published alongside this updated Capital Spending Review, the Scottish Government's capital borrowing policy has been updated to allow for up to £450 million of borrowing and other funding in each of the remaining years of the Capital Spending Review, as well as allowing for more flexibility in the Government's spending plans across these years. This will allow us to re-phase capital programmes in reaction to any changes in market conditions or supply chain impacts that will in turn have impacts on the construction industry. Where further capital borrowing is required to support the funding position, the terms of any borrowing will be amended to balance the resource cost impact and longer term fiscal sustainability.

Financial Transactions

It was assumed in the 2021 Capital Spending Review that no Financial Transactions would be available for years beyond 2021-22 as there was uncertainty around the UK Government's plans for the continuation of Financial Transactions funding.

The UK Spending Review subsequently confirmed that £828 million of Financial Transactions would be allocated for years 2022-23, 2023-24 and 2024-25. Since then, an extra £400 million of Financial Transactions is anticipated from previous years' adjustments by HM Treasury across 2023-24 and 2024-25, with the precise timing to be agreed with HM Treasury.

Whilst Financial Transactions are not interchangeable with capital grant and there are limitations on their use, they can be used to continue the capitalisation of the Scottish National Investment Bank and provide further funding for the enterprise agencies and key Government activities such as the North East and Moray Just Transition Fund and the Heat in Buildings strategy, where there is an interaction with the private sector or a role for loans or equity support. Financial Transactions are a useful tool for being able to support businesses and investment in the private sector however the uncertainty and volatility of their funding presents a challenge for managing these programmes and providing certainty and a pipeline. Current market conditions may also impact on the appetite to take on additional debt through Financial Transactions loans.

The portfolio funding envelopes presented in this review are based on the capital, borrowing and Financial Transactions profiles in Table 2 below.

¹ Capital grant figure includes UK Capital Allocation, Additional Whitehall Transfers, Fossil Fuel Levy in 2022-23 only and excludes estimated capital receipts.

² Modelled capital allocation figure.

³ Combination of capital borrowing, consequentials and other capital funding. Expected capital borrowing to be between £250 million - £450 million each year from 2022-23.

⁴ Actual borrowing.

⁵ Includes FT consequentials and excludes FTs recycled.

⁶ Includes additional £400 million of FTs with £200 million in 2023-24 and £200 million in 2024-25, with profile to be agreed with HM Treasury.