Scottish Government's Medium Term Financial Strategy: May 2019

4. Spending Review Framework

Scottish Ministers are clear that sustainable public finances are a priority given continued UK austerity and growing demand on public services. 

Irrespective of the UK Government’s decision about its Spending Review, the Scottish Government therefore plans to undertake reviews of spending beyond 2020-21 in order to ensure we can continue to meet the high standards and deliver the quality public services that people across the country expect.

We will also begin work to fulfil the Budget 2019-20 commitment to bring forward a three-year settlement for local government from 2020-21.

Our aim is that where possible we will provide certainty for the years ahead.  On resource, we currently plan to publish indicative budgets in December 2019 alongside the Scottish Budget 2020-21, but that may not be possible if we do not have sufficient clarity from the UK Government on its spending plans at that stage. 

On capital, we will 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 meaning future budgets will be published by June 2020. 

4.1 Our Approach to the Resource Budget.

Our ambition is to allocate budgets to meet the changing needs of Scotland’s people and the challenges of our times, whilst considering more systematically the links between budgets and what those budgets deliver. 

We will expect all spending proposals to be focused on outcomes and to evidence as far as possible the impact (positive or negative) of spend on:

• Wellbeing – driven by Scotland’s National Performance Framework;
• sustainable and inclusive economic growth;
• tackling child poverty; and
• tackling climate change.

Fiscal sustainability will underpin our approach, and we will seek greater collaboration across portfolios and public bodies to improve outcomes, and better evidencing of external factors that drive spending (such as adverse UK Government policies or demographic changes). As part of this work we will continue our efforts to adopt a more outcomes-focused approach to budgeting.

Our Timeline

The proposed timeline for the resource budget is set out below:

• May: Medium-Term Financial Strategy and Spending Review Framework published as well as Scotland’s Wellbeing: Delivering the National Outcomes.

• June-September: Proposals developed in line with Spending Review Framework.
• October: Ministerial discussions take place on proposals provided.
• November: Budgets are reviewed in light of UK Autumn Budget / Spending Review.
• December: Budget / Spending Review (to be confirmed once UK Government position is clear) published including a three-year resource settlement for local government, and Budget Bill for 2020‑21 introduced. 

Pre-Budget scrutiny by the Scottish Parliament’s Committees will take place across this period. In publishing this framework, even with the uncertainty that exists over a UK Spending Review and EU exit, our aim is to help inform this pre-Budget scrutiny and maximise the opportunity for others to influence the Scottish Budget through it. 

4.2 Our Approach to the Capital Budget

The Capital Spending Review framework will be set in the context of the National Infrastructure Mission set out in the 2018 Programme for Government. This will steadily increase annual investment, rising by 1 per cent of current (2017) GDP by the end of the next parliament, 2025-26, compared to 2019-20.

In January 2019 we established an Infrastructure Commission for Scotland (the Commission) to provide long-term strategic advice on national infrastructure priorities, based on evidence and good practice, and to align investment with long-term inclusive economic growth and low-carbon objectives. The work of the Commission will help inform investment priorities over the 30 years ahead, and also in the more immediate period covered by the National Infrastructure Mission.^[7]

The six overarching objectives of the Commission’s remit are informed by the Scottish Government’s National Performance Framework, Economic Strategy and Economic Action Plan. These are:

• Delivering sustainable and inclusive growth across Scotland.
• Managing the transition to a more resource efficient, lower carbon economy.
• Supporting delivery of efficient, high quality, modern public services.
• Increasing industry competitiveness, whilst tackling inequality.
• Enhancing societal living conditions now and in the future.
• Ensuring alignment with the new National Planning Framework.

The Commission will also consider the following key drivers to inform their work and these will also be considered by the Scottish Government through the Spending Review process:

• Securing Scotland’s international competitiveness.
• The markets and connections that Scotland requires for goods, services and people.
• How to prioritise investment to deliver inclusive economic growth and low carbon objectives.
• Demographic and other social change factors.
• Place-making.
• Technological change and innovation.
• Considerations around development, ownership and financing of infrastructure, including Fair Work.

By the end of 2019 the Commission will provide its 30-year vision for infrastructure in Scotland together with strategic advice on prioritisation for the first five years.

As the Commission’s recommendations will be a critical input to the next Scottish Government Infrastructure Investment Plan and associated capital budget, the Scottish Government’s aim is to publish a new Infrastructure Investment Plan and the capital Spending Review by June 2020.

Our Timeline

The proposed timeline for the capital budget is set out below:

• May: Medium-Term Financial Strategy and Spending Review Framework published.

• June: Spending Review process begins.
• End June/July – Infrastructure Commission interim findings available
• November: Budgets are reviewed in light of UK Autumn Statement / Spending Review.

• December: Budget published and Budget Bill for 2020-21 introduced.
• End-December: Infrastructure Commission final report published.
• March-Summer 2020: Infrastructure Investment Plan finalised, building on Infrastructure Commission report.
• Summer 2020: Capital future years budgets set out.

4.3 Opportunities and Challenges

Our actions to tackle some of the big challenges of our time, including getting our economy fit for the future, preparing for demographic change and tackling inequality, are united by the Purpose for Scotland at the heart of the National Performance Framework: to focus on creating a more successful country with opportunities for all of Scotland to flourish through increased wellbeing, and sustainable and inclusive economic growth. 

Scotland’s National Performance Framework was updated in 2018 with a refreshed Purpose and National Outcomes. The framework has a simple yet ambitious purpose at its heart that everyone in Scotland can get behind to create a more successful country. 

Our commitments to giving every child the best start in life and our social contract with the people of Scotland to invest in early learning and childcare, housing, health, justice and education remain a priority. This is underpinned by placing our strategic focus on addressing Scotland’s long-term challenges, notably climate change and child poverty, at the core of the spending review.

We have seen significant improvements since devolution showing how people’s lives have improved for the better, including lower premature mortality, people feeling more positive about where they live and the skills profile of our population. 

We know challenges remain and inequality is holding Scotland back from reaching its full potential. The places where people live and grow up shape the opportunities they have and can influence their life chances. A place-based approach, focused on maximising the impact of the combined assets and investment available, can help us tackle inequality and improve outcomes locally. We will continue to have due regard to the Public Sector Equality Duty and Fairer Scotland Duty when shaping strategic policy and legislative and budgetary decisions, aiming to advance equality and progressively realise human rights. 

Financial and Economic Context

The financial and economic context for the Spending Review is clearly set out in this Medium-Term Financial Strategy. It includes a decade of austerity, the ongoing uncertainty over the UK’s exit from the EU and its impact, the impact of UK policies on our most vulnerable and the significant restrictions on our fiscal powers to borrow or use the Scotland Reserve. 

Public Sector Pay Policy

The Scottish Government remains committed to providing fair and affordable pay rises for public sector employees. A sustainable approach to public sector pay is crucial given the number of public sector workers it applies to and the scale of associated spending. Public sector pay, at an estimated £16.7 billion in 2019-20, accounts for well over half of the Scottish Government resource budget.

Table 5 illustrates the cumulative additional cost of various increases to the 2019-20 public sector pay bill for the Scottish Government, the 44 public bodies covered by the pay policy, the NHS, teachers, police, fire and further education. It excludes other local authority pay costs.

Table 5: Illustrative Additional Pay Bill Costs (Including On-Costs)

£ million	2020-21	2021-22	2022-23	Total
1%	130	131	132	393
2%	260	265	270	794
3%	389	401	413	1,204