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

Executive Summary

As the First Minister set out in this year’s Programme for Government, COVID-19 has had a profound impact on our health, economy and society, indeed our whole way of life.

While we still face a global public health crisis, our focus will remain on managing its impacts, saving lives, and protecting our health service. But we know those impacts do not exist in isolation – the global health crisis has brought with it a global economic shock from which Scotland is not immune, which in turn has had a devastating effect on people, businesses and communities. While our mass vaccination programme presents a positive way forward, we must take a bold and ambitious approach to supporting the country through the crisis, and build the foundations for our recovery.

The transition period for EU Exit has now ended – leaving Scotland with a tumultuous and uncertain set of conditions that it did not ask for and does not want. The devastating cumulative impact of COVID-19 and the UK’s exit from the EU will continue to be most acutely felt at the bottom of the income distribution. This will have ramifications for years to come, as well as risking the progress that we, as a government, have made in protecting Scotland's most vulnerable communities. Uncertainty and disruption will continue over the life of the next Scottish Parliament, which this strategic outlook covers.

This is the third MTFS published by the Scottish Government. For the first time, it is published alongside, rather than ahead of, the Scottish Budget, as part of a suite of publications including the Public Sector Pay Policy 2021-22, and the forthcoming publications of the Capital Spending Review (CSR) and the Infrastructure Investment Plan (IIP). The MTFS sets out the key financial challenges and opportunities that lie ahead. It provides the context for the Scottish Budget and also sets out the new and specific context that will govern the life of the next Scottish Parliament. This context will frame the decisions of the incoming Government’s strategic approach to economic and fiscal policy.

Our Budget today has set out the steps we are taking to help households and businesses through the crisis. It demonstrates our commitment to build back fairer, stronger, and greener – providing a path to renewing our economy and society in the aftermath of the pandemic, mitigating against the worst impacts of the UK’s exit from the EU. While we have reasons for optimism and are ambitious for how we rebuild the economy and a fairer society, we must also recognise the constraints we face to fully deliver on those ambitions. We must also recognise the constraints we face to fully deliver on those ambitions. The forthcoming CSR and IIP will set out how approximately £33.5 billion of capital investment over the next five years can support 45,000 full-time equivalent jobs over those years.

While Scotland has gained additional tax and social security powers over recent years, UK Government decisions are still the single biggest factor in determining the size of Scotland’s Budget. The powers of the Scottish Parliament cannot shield Scotland from the joint devastation of a global crisis and a harmful and reckless policy towards the EU, nor any decision by the UK Government to return to austerity.

This MTFS sets out the economic and funding risks and opportunities that we will need to consider in the coming years. It is not a budget and does not set out spending plans, but lays out the challenges we must manage in order to balance budgets over the coming years.

At the heart of this document are the fiscal principles and choices around balancing the need for proactive management of fiscal risk; but not at the expense of supporting vital public services. Scotland’s fiscal sustainability must be maintained in a way that does not impact on those who can least afford it, whether that is ensuring a just transition to a green economy, or choosing to grow rather than to cut our way out of fiscal deficits. That is why this Government has done our utmost to maximise the effectiveness of public spending and protect budgets. We will continue to call upon the UK Government to avoid an austerity approach, which disproportionately affects the most vulnerable and poorest in society. We reiterate our demand of the UK Government to adopt a measured strategy for addressing public debt, which we called for in our UK Fiscal Path – a new approach paper published in June 2020 and updated in November 2020.

In setting future devolved budgets, the Scottish Government will take an approach based on efficiency and achieving value for money in the delivery of key outcomes. To do so in the face of continuing funding uncertainty, or without necessary powers to smooth spending trajectories meaningfully on a multi-annual basis, will require carefully balanced judgements in terms of acceptable levels of fiscal risk.

In order to achieve this balance, we will need to make maximum use of the levers we have as part of the Fiscal Framework,^[1] and work hard to ensure that every spending line is delivering on the outcomes outlined in the National Performance Framework (NPF). This demands an enhanced effort across the public sector to scrutinise, challenge and evaluate the effectiveness of public spending, to ensure that we can maximise the impact within limited resources.

However, with the best will in the world, the Scottish Government does not possess sufficient fiscal levers and powers to allow us to make the progress we wish to see, whether protecting jobs in the medium term by providing businesses with the confidence that they need, or restructuring tax and economic drivers to promote longer-term sustainable growth. This is why this MTFS also sets out what further powers we will need to respond to these challenges in a way that lives up to our ambition.

With the Fiscal Framework Review approaching, the time is right to consider how we can enhance the Scottish Parliament’s fiscal decision-making powers in order to be able to respond to future challenges. We will press the UK Government to widen our borrowing and reserve powers and include the devolution of additional tax powers within the scope of the Review.

The Introduction sets out the impact the current crisis has had on the outcomes of the NPF, showing that the pandemic is likely to widen inequalities over the medium term. In response, we must properly and sustainably fund public services.

Chapter 2 reports on the Scottish Fiscal Commission’s (SFC) latest growth forecasts, which demonstrate that the economic backdrop remains highly uncertain. The whole global economy is going through a significant economic shock, likely to be followed by a lengthy period of economic recovery. For Scotland, this is compounded by the additional costs businesses face as a result of the UK’s exit from the EU.

Chapter 3 sets out the funding outlook for the medium term, which continues to be fundamentally determined by UK spending decisions. It also seeks to illustrate the volatility and level of risk inherent in the Fiscal Framework, which determines Scotland’s revenue, as well as risks and opportunities to Scotland’s tax base.

In Chapter 4, we lay out our broad spending priorities, and provide three illustrative spending scenarios that could define the broad shape of the Budget over the next five years.

Chapter 5 brings together the funding and spending scenarios to illustrate the scale of the prioritisation decisions required in the future.

The medium-term outlook for both our budget and our spending priorities depends heavily on the success of the COVID-19 vaccination programme and the degree of long-term scarring inflicted by the COVID-19 pandemic, as well as the risks around the future trade relationship with the EU.

Chapter 5 also sets out what additional powers and flexibilities could, as part of the Fiscal Framework Review, enhance our ability to manage volatility, smooth spending trajectories and meet the challenges brought on by this new context.

The Conclusion summarises the MTFS and highlights the key elements that would enable the Scottish Government to manage fiscal risks more robustly. We need to make smart spending decisions. To do this effectively, we need the ability to set a bold and radical new approach on how to aid the recovery, providing opportunities to deliver a fairer and greener economy and driving sustainable public finances in a way that puts wellbeing at their core.

Finally, the Annexes provide more detailed information on the economic and financial modelling, as well as key data on the components of the Fiscal Framework.