Scotland's Fiscal Outlook: The Scottish Government's Medium-Term Financial Strategy

Foreword by the Cabinet Secretary for Finance and the Economy

This is the fifth edition of the Medium-Term Financial Strategy (MTFS) and the second of this Parliament. It is being published today as part of a suite of fiscal publications including the Resource Spending Review (RSR) and an update to the Capital Spending Review (CSR). The RSR is also accompanied by an Equalities and Fairer Scotland Statement and Consultation Analysis Report. The MTFS provides a medium-term perspective on the public finances, supporting a forward-looking approach to budget evaluation. It ensures that both Parliament and Government have foresight of the financial challenges that lie ahead.

This publication of the MTFS is first of its kind in that it provides the fiscal context for the RSR; the first time in over a decade that this has been undertaken. It does so at a time of significant uncertainty.

Since the last MTFS was published, global events have had a significant impact on the economic outlook and heightened fiscal risks. While, back in December, inflation was forecast to reach 4% for the period April – June 2022 before gradually returning to 2% by the second half of 2024, the situation in Ukraine coupled with soaring energy prices and supply chain disruption has meant that inflation is now at a 40 year high and forecast to rise further^[1] . As a result, the Office for Budget Responsibility (OBR) and Scottish Fiscal Commission (SFC) are both forecasting that Scotland and the UK will experience the biggest annual fall in living standards since equivalent Scottish and UK records began^[2].^[3]

Rising inflation is having a severe impact across the country, with many households facing significant challenges. This is particularly true for lower income households who tend to spend proportionately more of their income on areas such as energy bills, where price rises have been particularly severe. Rising inflation, and the consecutive increases in the Bank of England Interest Rate^[4], are also increasing budgetary pressures on the Scottish Government and public bodies, and will put pressure on our public services in real terms.

Within this challenging context, I want to provide as much clarity and certainty as I can. The RSR sets out the high-level parameters for resource spend within future Scottish Budgets up to 2026–27, offering a strategic funding framework for the Scottish Government and our many partners to plan for the future. It sets out a renewed vision for public services in Scotland, bringing together a focus on key outcomes and the need for a sustainable approach to public finances.

At the same time, the Scottish Government remains committed to meeting the requirements of the Budget Process Review Group^[5] and will continue to protect public finances through diligent management of fiscal risks. The MTFS provides an assessment of key fiscal risks the Scottish Government faces and how the Government will manage them. It also sets out the principles for how the Scottish Government will exercise its limited resource, borrowing and reserve powers, whose real term effectiveness is being eroded each year. We will continue to work within the framework, and work to improve on it, until such a time as the people of Scotland choose a different constitutional path. However, given the increasing levels of risk we now face, the Fiscal Framework Review must properly consider the need for more powers and fiscal flexibilities to fully manage these.

Through the MTFS we are being open and transparent with the public on the risks to the funding and spending outlook. The RSR will pivot resources so that we can deliver our core priorities over this Parliament in the tight budgetary envelope that we operate in. But it is our job as a mature fiscally responsible government to deliver these priorities and ensure that public services remain robust now and for future generations despite the huge uncertainties that are out of our control.

Kate Forbes MSP
Cabinet Secretary for Finance and the Economy