Scottish Budget: 2023 to 2024

Chapter 1 Strategic Context: A Stronger & More Resilient Scotland

Introduction

The past year has been defined by economic turmoil. Throughout this crisis the Scottish Government has taken decisive action to protect the most vulnerable and support our businesses and communities.

At one level this is a global crisis, with the combined impacts of the Covid‑19 pandemic and Russia's illegal invasion of Ukraine creating a disruptive set of financial and economic challenges that all governments must address.

These challenges include responding to sharp increases in the cost of living driven by the significant increase in food, fuel and energy prices; in the cost of doing business, including the impacts of supply chain disruption and labour shortages; and in the costs for organisations, in the public, private and third sectors, operating within this challenging environment.

However, Scotland and the UK face additional and unique challenges. Brexit has resulted in the loss of membership of the European single market and the end of frictionless trade and free movement of labour. This has had a deep and lasting impact on our economy and comes at the end of a decade of damaging austerity, imposed by the UK Government, that has made our public services less resilient. The Office for Budget Responsibility (OBR) forecasts that the new trading relationship between the UK and EU will reduce the size of the UK economy by four per cent relative to remaining in the EU.

Coupled to the economic damage created by Brexit, the lasting impacts of the UK Government's disastrous September mini‑budget have made the situation more challenging, with the higher cost of borrowing inflicting further damage on the public finances.

The Bank of England is warning the UK is facing the longest recession in 100 years. The Scottish Fiscal Commission (SFC) is forecasting that Scotland will enter recession, with record falls in living standards, and that the economy will take almost six years to recover to pre‑pandemic levels.

Business and households are paying a steep price for the economic mismanagement of the UK Government. The OBR is forecasting that average household disposable incomes will fall by 7.1 per cent in real terms by 2023‑24. The impacts of inflation are being particularly keenly felt by those on lower incomes – widening income inequalities.

Inflation at a forty‑year high is having a corrosive effect on our budget and our ability to respond to the pressures being felt by people and businesses.

This crisis is pushing thousands of households into poverty. It puts livelihoods – and lives – at risk. It has laid bare the fiscal constraints of devolution, as we cannot borrow to support day-to-day expenditure when times are hard, to assist us through these difficult days. The crisis requires the Scottish Government to take decisive action. In setting this Budget, the Scottish Government is using the powers available to us to the maximum extent that is responsible, to meet the challenges faced by the people of Scotland.

Fiscal and economic context

Under the devolution settlement the Scottish Government cannot borrow to meet these increased costs, nor can we alter Income Tax rates midway through a financial year. This means that the Scottish Government's budget is effectively fixed in cash terms each financial year. We have made representations to the UK Government for funding or additional flexibilities to help us manage these challenges, but the Scottish Government has received no additional in‑year funding. Instead, we have had to cut some of our programmes.

Throughout this current financial year we have taken difficult decisions to ensure our public services continue to deliver. In May 2022 the Scottish Government published the Resource Spending Review (RSR) which set out the high‑level parameters for resource spend within future Scottish Budgets up to 2026‑27 and a medium‑term plan focused on the outcomes we want to see. Since then the fiscal landscape has tightened dramatically.

According to the latest data inflation now stands at 11.1 per cent, the highest UK rate since 1981. Since 2021, the 2023‑24 Scottish block grant has reduced by 4.8 per cent in real terms when applying the GDP deflator. While the GDP deflator is the usual comparator for analysing real terms changes in public spending, as highlighted by the OBR and SFC, it may not fully capture the inflationary pressures faced by the public sector in the current environment. Using CPI as an alternative measure of inflation, the core Barnett funding from the UK Government would be 10.8 per cent lower than in 2021‑22. As well as high inflation, businesses and households are also facing pressures from rising interest rates, with the Bank of England base rate reaching 3 per cent in November following the largest increase since 1989.^[1]

This year we have faced significant, and entirely understandable, pay demands from public sector workers. In response, we reallocated over £700 million more than originally budgeted to enhance pay uplifts to better reflect the increased cost of living. Where settlements have still to be reached, we will continue to engage and negotiate in good faith with our partners. But the fact remains that every additional pound we spend on pay deals must be funded from elsewhere within our budget.

We continue to deal with the unforeseen – though entirely understandable and accepted – costs of resettling refugees fleeing the war in Ukraine. The way thousands of people in Scotland have opened their homes is an example of our country at its very best. Responding to this conflict has required a concerted effort at all levels, from the Scottish Government working closely with local government and third sector partners nationally to grassroots organisations collaborating within their communities. Scotland will always play our full part when supporting those fleeing conflict and persecution and we are making provision for continuing costs of Ukrainian resettlement in this Budget.

Taken together, in 2022‑23, the Scottish Government has allocated almost £3 billion to help mitigate the cost of living crisis, including a range of support for energy bills such as delivering energy efficiency and heating improvements and providing advice for those most in need through Warmer Homes Scotland and our Area Based Schemes. In our most recent Programme for Government (PfG) we also set out a comprehensive cost of living support package which included increasing the Scottish Child Payment to £25 per eligible child per week (opening the benefit to around 387,000 children); and emergency legislation to put in place a rent freeze until at least 31 March 2023.

As a result of these pressures, in the autumn the Scottish Government had to make unprecedented reductions in planned spending totalling £1.2 billion in the current financial year. This Emergency Budget Review ensured the Scottish Government was able to reprioritise and provide further help to those most impacted by the cost of living crisis while ensuring we manage our budget prudently in the face of rising inflation and economic uncertainty.

In November, the UK Government set out revised tax and spending plans in its Autumn Statement. Whilst this brought some improvements to our resource position for 2023‑24, this additional funding comes at a cost, with our Barnett funding increases in 2023‑24 and 2024‑25 likely being offset completely by lower projected Barnett funding in 2025‑26 and 2026‑27 – the latter two years of the Scottish Government's Resource Spending Review period. At the end of this period, the block grant is expected to still be lower in real terms than it was in 2021‑22.

Our choices

The economic and fiscal context of this Budget demands a response from Government that supports the most vulnerable and helps build a sustainable economy. In taking the decisions in this Budget we have been driven by our values. We have also developed this Budget in dialogue with our partners in the Scottish Green Party, consistent with the Bute House Agreement.

The Scottish Government is committing substantial amounts to protect the people of Scotland from the impact of decisions and policies made by the UK Government. We are choosing a different, more progressive path for Scotland.

This Budget takes further steps to address the deep inequalities in our society as we seek to eradicate child poverty in Scotland. It delivers on the need to create a wellbeing economy and a just transition to Net Zero, creating wealth and opportunity across the country. And it provides the impetus to reforms necessary to ensure that our first‑class public services remain sustainable in the face of the challenges to come.

We are determined to meet our longer‑term priority commitments: achieving our final statutory child poverty targets in 2030‑31; investing in the just transition and meeting our 2045 Net Zero target; and ensuring public services across Scotland are sustainable, person‑centred and high quality.

Inequality, the economy and public services are fundamentally interconnected. One cannot be prioritised to the detriment of the other. Advancing these priorities will help people to take more control of their lives, live well and play their full part in society.

People who choose to make Scotland their home are our most important resource, and it is only by ensuring every citizen can achieve their maximum potential that Scotland will do likewise. That is why this Budget strengthens the social contract between the Scottish Government and every citizen of Scotland for the wider benefit of society.

This social contract means that people in Scotland continue to enjoy many benefits not available throughout the UK – including free prescriptions, free access to higher education and the Scottish Child Payment. It also means that in Scotland families are shielded, as far as possible, from the welfare cuts and austerity policies of the UK Government.

Where we have the power, we are choosing a different, more progressive path for Scotland.

The Scottish Government has taken significant steps to modernise the taxes that have been devolved to the Scottish Parliament, in line with our fair and progressive Scottish Approach to Taxation. The decisions we have made on tax at previous Scottish Budgets also continue to raise significant additional revenue for the Scottish Budget, allowing us to invest more in our public services, economy and financial support for our citizens.

Our decisions on tax policy for 2023‑24, as set out in Chapter 2, deepen the progressivity of our tax system. In coming to these decisions, we have balanced the need to raise revenue to support public services and tackle inequality, with our desire to protect people's incomes at a time of rising inflation. Our decisions mean that the majority of income taxpayers in Scotland, those earning up to £27,850, will continue to pay less than if they lived elsewhere in the UK.

The Scottish Government estimates that the decisions we have made in this budget on Income Tax through maintaining Income Tax Thresholds and increasing the Higher and Top rates of tax and Land and Buildings Transaction Tax will provide around an additional £550 million in 2023-24 to support our public services – this is on top of the extra revenue raised by previous changes to our Income Tax system. These decisions mean that we have been able to go well beyond our previous commitment on health and social care – to pass on all frontline consequentials – and deliver instead a £1 billion uplift to the health budget. Over and above this it has allowed us to progress our expansion of Free School Meals for all Primary 6 and 7 pupils in receipt of the Scottish Child Payment, as the next step in fulfilling our commitment to universal provision in primary schools from August 2024.

In total, the decisions we have taken since the devolution of tax powers, will raise around £1 billion^[2] more than if we were to simply replicate the Income Tax system in place in the rest of the UK. As well as securing essential funding for the NHS, this additional revenue helps fund our social contract. This includes an enhanced Scottish Child Payment, expanded universal early learning and childcare for all three- and four-year-olds, a better deal for undergraduate students with no tuition fees and less debt, and provides free prescriptions, saving Scottish patients £9.35 per item as compared to England.

Priorities for 2023 ‑ 24

This Budget will prioritise the Scottish Government's strategic objectives of eradicating child poverty; transforming the economy to deliver a just transition to Net Zero; and providing sustainable public services.

Eradicating child poverty

The Scottish Government continues to take bold action towards our aim of reducing inequality and eradicating child poverty. Despite the efforts of this Government, poverty still blights the lives of too many people in Scotland. Many children miss out on opportunities to flourish because they are growing up in poverty.

The pandemic has exacerbated inequality in our society and the cost of living crisis is placing significant strains on families and households across the country.

Best Start, Bright Futures, our second Tackling Child Poverty Delivery Plan 2022‑2026, sets out how the Scottish Government will work with partners to deliver Scotland's National Mission to tackle child poverty and drive progress toward the ambitious statutory targets set for 2030.

Through the Emergency Budget Review, we have ensured that our National Mission on Child Poverty has been given the priority it requires. That has enabled us to increase the Scottish Child Payment to £25 per week per child – a 150 per cent increase in 8 months – and to extend eligibility in November 2022. In addition to the expansion of free school meals and concessionary travel for younger people, we have taken bold steps to help children and young people escape poverty.

We recognise the interdependencies between education and child poverty. At all levels, education enables every child to have the opportunities and the choices they need to flourish and break the cycle of poverty. Improving the life chances of our children, young people and learners of all ages through excellence and equity in education is central to our National Mission on Child Poverty. This Budget, including funding delivered through the local government settlement, will continue to advance our ambitious education and skills priorities.

Given the similar interdependencies between health and poverty, we will continue to enhance support for those with greatest healthcare needs, working to reduce health inequalities and continuing our investment in community‑based mental health and wellbeing support for children, young people and families.

Our action on child poverty will also enable Scotland to keep The Promise to children and adults with care experience and those at the edges of care. Our investment in whole family support is critical to keeping children at home where that is safe by supporting them and their families when they need it and for as long as they need it – preventing the need for future chronic interventions. In the forthcoming year we will explore how preventative investment across portfolios can be aligned to help Scotland eradicate child poverty, recover from Covid and keep The Promise.

The Scottish Government cannot achieve this on our own and that is why we are committed to continuing to work in close partnership with COSLA, local government colleagues and our partners in the third sector to achieve this. We will work together to transform the delivery of Scotland's public services with a focus on flexible, preventative, person‑centred interventions that ultimately reduce the need for crisis interventions and support families to thrive.

In this Budget we will:

• deliver the Scottish Child Payment, uprated to £25 per week in November 2022 and available to around 387,000 children, getting much needed cash into pockets– a benefit not available in the rest of the UK.
• uprate all other devolved benefits in April 2023 by September CPI (10.1 per cent) at a cost of £428 million.
• provide £20 million to extend the Fuel Insecurity Fund into 2023‑24 which will provide a lifeline for thousands of households, including the most vulnerable in society, against rising energy prices.
• continue to invest in our No One Left Behind and Fair Start Scotland employability programmes that prioritise those who face complex barriers to accessing the labour market, including parents.
• continue to invest around £1 billion in high quality early learning and childcare provision, with a further £42 million invested in holiday food provision and expanding our support for school age childcare.
• provide £50 million for the whole family wellbeing programme for preventative, holistic, family support and a further £30 million to #KeepThePromise to our care experienced children and young people.
• continue capital investment in the affordable housing programme and provide £80 million of capital funding to support the expansion of free school meals.
• increase spend on our concessionary travel schemes, providing access to free bus travel for over two million people, including all under 22 year olds.
• maintain £200 million annual investment in the Scottish Attainment Challenge to increase the pace of progress on closing the poverty‑related attainment gap.

Transforming the economy to deliver a just transition to Net Zero

We are living in a global climate and nature emergency, with climate change and a loss of biodiversity among the greatest threats facing people and the planet. This environmental crisis is not some far off, future problem – Scotland is already experiencing the impact of rising sea levels, extreme weather events and hotter summers.

There is global consensus on the need for urgent, whole‑economy action to reduce our emissions and urgently tackle the impacts of climate change. This creates a huge economic opportunity for Scotland that we must fully realise.

Scotland was one of the first countries to declare a climate emergency and we have been committed to using all powers and resources at our disposal to accelerate the transition, leading the world in our approach to loss and damage and to the need for a just transition as well as in the strength of our statutory targets. As a nation we must also adapt and build resilience to the impacts of global climate change which are already locked in.

We have been consistently clear that this transition must be socially just. These principles underpin the Bute House Agreement which set out a bold, long‑term programme of work to deliver against the scale of our Net Zero ambitions and this Budget reinforces our commitment to this work.

Ambitious, enhanced policy packages will be set out in our upcoming draft Climate Change Plan and new Just Transition Plans by the end of 2023. This Budget delivers progress as that work develops and looks to support our existing Adaptation Programme.

A stronger, fairer, greener economy benefits everyone living in Scotland. Through the delivery of our National Strategy for Economic Transformation we can help ensure that Scotland emerges strongly from the current economic crisis. We will shape our longer term future in line with our vision for a wellbeing economy that serves people and the planet first and foremost, for current and future generations.

We will also continue to work with the business community to identify how we can best support them through both the current and longer‑term challenges they face including issues such as planning and regulation.

This transition to Net Zero is filled with opportunity. Continued targeted investment by the public and private sectors will unlock the opportunities of the transition while simultaneously growing our economy, be it creating good jobs and supporting localised and decarbonised supply chains, or delivering skills provision that is designed for a Net Zero economy. This investment will help us respond to the current cost of living crisis – improving energy efficiency to help tackle fuel poverty, expanding the use of renewable energy and improving access to public transport and digital connectivity.

A stronger, fairer and greener economy is both a driver and a consequence of our actions to tackle child poverty and address the twin climate and nature crises. Within this Budget we continue to prioritise actions that will contribute to sustainable and inclusive economic growth, not just to provide employment and income to households, but also to safeguard the future of revenues needed to support public services. In this Budget we will:

• provide the Scottish National Investment Bank with an additional £244 million so that it can continue to invest in Scottish businesses, projects and communities across all three of the missions set for it by Scottish Ministers: Net Zero, place and innovation.
• continue, with the private sector, to deliver the £60 million Electric Vehicle (EV) Infrastructure Fund to expand Scotland's EV charging, provide £15 million to allow the exploration of a pathfinder pilot looking at the removal of peak time rail fares as part of our Fair Fares Review; and invest £197 million in active and sustainable travel, including increasing access to cycling and supporting behaviour change – part of our landmark commitment to invest £320 million in active travel by 2024‑25.
• invest £50 million in the Just Transition Fund for the North East and Moray– this will more than double the 2022‑23 allocation, helping to diversify the regional economy away from carbon‑intensive industries and capitalise on the opportunities, including jobs and prosperity, the transition to Net Zero brings.
• invest over £1.4 billion to maintain, improve and decarbonise Scotland's rail network, ensuring that this critical infrastructure continues to serve the needs of the people of Scotland.
• increase investment to over £366 million in delivering our Heat in Buildings Strategy in 2023‑24 which includes the development of low carbon infrastructure projects such as heat networks and measures to tackle fuel poverty. This is part of our commitment of £1.8 billion over this Parliament to accelerate the deployment of heat and energy efficiency measures as we aim to decarbonise over a million Scottish homes by 2030.
• support our businesses by freezing the non‑domestic rates poundage, providing transitional reliefs based on the forthcoming revaluation on 1 April 2023 and continue to support the Small Business Bonus Scheme to remove 100,000 properties from rates altogether. We are using our non-domestic rates regime to further incentivise investment in renewables through the introduction of new prescribed plant and machinery exemptions for onsite renewable energy generation and storage from 1 April 2023 until 31 March 2035.
• help Scotland to become a global leader in sustainable and regenerative agriculture by committing £44 million for the National Test Programme, Agricultural Reform Programme and Agricultural Transformation Fund supporting the industry to achieve our statutory emission targets.
• continue to support lifeline ferry services with an additional £122 million of capital investment in new vessels and upgraded infrastructure to support our remote and rural communities and economies as well as the journey to Net Zero with more efficient vessels and zero emissions where possible.
• invest over £26 million in peatland restoration as part of a £250 million, 10-year spending package. This will enable multi‑year, large-scale projects to be planned and delivered as we upscale activity to meet our target of 250,000 hectares of restored peatland by 2030.
• invest over £77 million to support the scaling‑up of activity to meet our annual target of 18,000 hectares of woodland creation target by 2024‑25, alongside delivery of ambitious programmes focused on nature restoration and addressing biodiversity loss.
• deliver the £34 million Scottish Industrial Energy Transformation Fund and the recently launched £26 million Low Carbon Manufacturing Challenge Fund. These initiatives will leverage co-investment from manufacturing businesses that will support their decarbonisation and strengthening competitive advantage.
• invest £42 million over the next five years to boost entrepreneurship by supporting start‑ups in Scotland through our national network of Techscalers and pre‑scalers, widening access to entrepreneurial opportunities and fostering an online community offering mentorship and world‑class education to support founders to scale up their businesses.
• develop and roll out a delivery plan empowering regions to become lead agents of economic growth, building on the Regional Economic Policy review.

Providing sustainable public services

Our public services are the building blocks of the fairer society we are determined to create. Our public services must be available to meet the needs of our citizens and we must ensure they are constantly adapting to changing need in our society. The Scottish Government remains committed to a necessary process of public service reform designed in line with well‑established Christie Commission principles, with a strong emphasis on early intervention, prevention and local delivery. We will add to those principles the need to ensure that all of our public services are designed to be person‑centred.

The Resource Spending Review recognised that the pandemic affected everyone in Scotland and that leadership was needed in the design and delivery of public services to ensure they meet the needs of current and future generations.

The NHS is a precious resource that must be available for all of us and the Scottish Government is determined to make the most significant investment we can to support the NHS to meet the challenges of today.

Through this Budget we are taking the next steps, but reform cannot be delivered by the Scottish Government alone. The needs of communities and people across Scotland are varied, and all public services will need to work together to better support people to thrive, and to prevent the human and economic cost of inequality in future years.

Doing more to combine local, regional and national expertise and resources, and embed a genuinely Scottish approach to public service delivery is fundamental if we are to deliver effective reform.

We know this model can work. The Dundee Pathfinder is breaking down organisational barriers and redesigning services to improve outcomes for people in the city across employability, mental health and childcare. The partnership in Glasgow is working to develop an approach that integrates child poverty interventions and brings together services across the city and from a range of public and third sector partners. This approach will connect families to all the services they need, through a 'no wrong door' approach, to support them to thrive.

Now is the time to build on these successes. We are committed to working together differently to ensure that systems work for the people who need them most. We are particularly focused on aligning public services to better meet the needs of six priority family groups which represent 90 per cent of those children in poverty in Scotland.

The 2023‑24 Budget sets out our intention to go beyond the investment we originally planned in the Resource Spending Review. This will secure the delivery of strong public services in the short term, whilst also enabling progress with reforms required to ensure services are equipped to deal with the even greater fiscal challenges that lie ahead.

Through the Bute House Agreement and our Programme for Government, the Scottish Government has embarked on major reforms to help Scotland recover strength and resilience. We have continued to prioritise these reform objectives in this Budget and they will remain a priority for the year ahead.

This will improve the quality and efficiency of public services by focusing jointly on the strengths of communities, and then working with them to achieve the best possible outcomes. This reduces activity that does not add value and empowers people to take more control of their lives and live well.

In this Budget we will:

• support our NHS Boards with over £13 billion, which will allow them to continue to drive forward our five‑year Recovery Plan. The reform of key services will continue, backed by £2 billion to establish and improve primary health care services in the community.
• provide £1.7 billion for social care and integration to improve services while paving the way for the introduction of the National Care Service.
• provide an additional £100 million to support delivery of the £10.90 real living wage for adult social care, building on the increase provided in 2022‑23.
• invest £160 million to address the ongoing public health emergencies and to reduce the avoidable harms associated with drugs and alcohol. This continues our commitment to provide £250 million additional funding over the life of this parliament to address the drugs death emergency.
• provide over £550 million of additional funding to the Local Government settlement, which goes beyond our existing commitments. We also re‑confirm our commitment to a new deal for local government, recognising the importance of partnership, collaboration and accountability in delivering high quality person‑centred services.
• address the significant pressures on the justice system with £165 million additional funding to allow the system to address the Covid backlog and continue with transformational reforms, including using this funding to invest an additional £80 million in the Scottish Police Authority to improve the delivery of policing and enhance the safety and security of communities across Scotland, and enabling collaboration and co-location opportunities with blue light services across Scotland, and investing £6 million to support Legal Aid reform and strengthen access to justice.
• provide over £40 million of on‑going COVID recovery funding to continue addressing the backlog of cases in the courts, which has already reduced substantially this year by over 12,000 cases, and community justice services.
• increase funding for the Crown Office and Procurator Fiscal Service to support COVID Deaths Investigations and courts recovery (£13 million).
• provide £2 million additional funding to support the costs of the COVID Inquiry.
• increase resource funding to our universities and colleges by £46 million to ensure we have a highly qualified and highly skilled workforce.

Delivering our common purpose with Local Government

The Scottish Government will continue to work closely with COSLA to agree a New Deal for Local Government. This is central to delivering a more joined up model of public service delivery. Building upon the joint working that developed the COVID Recovery Strategy, the Scottish Government recommits to focusing our activities and spending towards a wellbeing economy and accelerating the design of inclusive person‑centred public services.

We will work towards agreeing a Fiscal Framework with Local Government which will strengthen engagement throughout the budgetary cycle and establish a clear process to progress greater fiscal empowerment for councils.

We will take forward discussions to create a Partnership Agreement between the Scottish Government and Local Government founded on a common purpose of working in a more collaborative way across the public sector to achieve better outcomes for people and communities across Scotland. Our approach will be to offer greater flexibility for councils alongside more efficient assurance processes on the delivery of essential outcomes for the people of Scotland.

In addition to closer working at the national and local level, this Budget increases funding for Local Government by over £550 million compared to 2022‑23, assisting Councils in meeting the challenges posed by high inflation and the cost of pay deals. Councils will continue to benefit from the Scottish Government's decision to guarantee the combination of General Revenue Grant and Non‑Domestic Rates income thereby protecting councils from volatility in the commercial property market.

From 1 April 2023, Local authorities will have full discretion over Empty Property Relief for Non‑Domestic Rates supported by £105 million added to the settlement to support local priorities including the option to develop local relief schemes. The Scottish Government will also seek to empower councils by bringing forward new regulations to tackle non‑domestic rates avoidance loopholes which reduce public revenues.

Fair and sustainable pay and workforce

We will always owe an enormous debt of gratitude to the individuals across Scotland who deliver our public services, particularly for the manner in which they enabled the country to deal with the COVID pandemic. We recognise that people working in the public sector face the same cost of living challenges as others, while public service providers face increased costs for food, fuel and supplies, similar to those faced by businesses in the private and third sectors. That is why, in the absence of any additional funding from the UK Government and given the fiscal constraints of devolution, we have taken difficult savings decisions this year to allocate more than £700 million extra to enhance pay deals with a particular focus on improving low pay.

Paying higher wages is the biggest contribution the Scottish Government can make to help many families with rising costs, impacting around 450,000 devolved public sector workers – over one fifth of Scotland's total workforce. It also represents our commitment to sustainable public services. The level of 2022‑23 pay awards, necessary in light of the level of inflation, reflected that it was no longer reasonable to maintain pay at the levels envisaged when the 2022‑23 budget was set. The costs of these pay deals have recurring implications for budgets in future years. With over £22 billion invested in employee pay this year, equivalent to more than half the Scottish Government's discretionary resource budget, financial sustainability must be a key element of all pay awards.

Going forward, pay and workforce must more than ever be explicitly linked to both fiscal sustainability and reform to secure the delivery of effective public services over the medium term. It will be for individual public bodies to establish fair and sustainable 2023‑24 pay levels in dialogue with their respective trade unions, to determine locally the target operating model for their workforces and to ensure workforce plans and projections are affordable in 2023‑24 and in the medium term. This consideration will again reflect our commitment to no compulsory redundancy and to the adoption of the Real Living Wage (now £10.90 per hour).

Our approach reflects that public bodies are best placed to determine how to deliver services within their available budget and we will continue to work with trade unions and employers.

Reflecting the exceptional circumstances – notably the challenging and uncertain outlook for inflation, the need still to conclude some pay deals for the current year and the associated implications for spending baselines – the Government is not setting out a public sector pay policy alongside the 2023‑24 Budget. We have pressed the UK Government for appropriate funding for public sector pay, but still the block grant funding – which makes up most of the Scottish Budget – is based on the UK Government's own insufficient pay proposition. Scottish Government leadership has already shown the way on pay this year, and we will continue to engage with trade unions and public sector employers on collaborative responses. We will look to say more on 2023‑24 pay at an appropriate point in the new year.

Capital expenditure

Our capital spending ambitions have been impacted by global trends, exacerbated by UK Government decisions. This remains an extremely challenging time for the construction industry. There are shortages in the labour market, borrowing costs are rising and investors remain cautious. Building materials are increasingly hard to source and price inflation is currently running at around 17 per cent. Whilst price inflation in the sector is likely to reduce, costs are not expected to decrease – as have occurred in previous recessions.

Our capital funding envelope was unchanged by the Autumn Statement and despite us maximising the capital funding available to us by planning to borrow the full £450million available in line with our capital borrowing policy, our capital spending power is significantly lower than when we set out the findings of our Capital Spending Review.

Our capital budget for 2023‑24 is £5.94 billion, augmented by the Financial Transactions budget of £424 million. This sustains £1.2 billion investment in rail, bus and active travel infrastructure, and almost £400 million in the Heat and Buildings strategy and energy innovation. It also sets out over £835 million investment in our economy and public services – prioritising the best value investments being delivered with partners, including enterprise agencies, the Scottish National Investment Bank, City Region and Regional Growth Deals programme – and supports £746.6 million in Local Government capital investment. We will also invest £752 million in the affordable housing supply programme, and provide additional capital funding to support families and young people through education and skills investments of £566 million.

Given the value of our capital budget will not be able to extend as far as was envisaged when inflation and other costs were at more benign levels, the Government will continuously review the impact of these factors on our capital programme.

Economic outlook

After having recovered from a 25 per cent fall during the height of the pandemic at the beginning of this year, Scotland's economy is facing another downturn, with larger falls in living standards.

		2021‑22	2022‑23	2023‑24
GDP growth (%)	Scotland (SFC)	14.0	1.7	(1.0)
	UK (OBR)	12.7	1.3	(1.2)
Unemployment rate (%)	Scotland (SFC)	3.9	3.4	4.3
	UK (OBR)	4.2	3.6	4.3
Real average earnings growth (%)*	Scotland (SFC)	0.0	(4.4)	(0.8)
	UK (OBR)	2.9	(3.2)	(1.4)

*Both SFC and OBR real average earnings figures are calculated using their respective Consumer Expenditure Deflators

The UK economy has already begun to contract and the Scottish Fiscal Commission (SFC) is expecting the Scottish economy to follow the UK into recession in 2022, with GDP falling 1.8 per cent between Quarter 1 2022 and Quarter 3 2023. The SFC forecast the recession to be similar in Scotland to the UK.

With high energy prices expected to be sustained for several years, the economy is forecast to recover slowly from the shock, not returning to pre‑pandemic levels until the middle of 2025. Rising inflation also means that average real household disposable incomes fall back to 2013 levels, the largest fall since records began. They are also forecast to recover quite slowly, not returning to pre‑pandemic levels until 2027.

The labour market has been experiencing shortages as the economy has reopened from the pandemic, with vacancies at historic highs. This is expected to soften the initial impact of the recession on unemployment, as vacancies fall from their current levels before unemployment begins to increase. However, as the recession takes hold, unemployment is projected to gradually rise to reach a peak of 4.7 per cent at the end of 2024. In the medium term, the UK Government's fiscal tightening is expected to weigh on growth, with government spending growing more slowly than the wider economy.

By the end of the forecast, the OBR and SFC expect this effect to have disappeared, as the Bank of England loosen monetary policy in response. However, the new and diminished trading relationship with the EU is also anticipated to have a longer‑term impact on trade, with the OBR expecting that trade intensity will be 15 per cent lower under the new trade arrangements.

Internationally, the UK appears to be particularly affected, likely linked to the loss of access to the EU single market, including frictionless trade and free movement of labour. In their November Economic Outlook, the OECD forecast that the UK will see the worst economic performance in the G20 other than Russia in both 2023 and 2024.

The Scottish Government's independent expert panel, established in September 2022 to consider the impact of the UK's mini‑budget, have now published their final report alongside this Budget and we have drawn on this advice in informing our response to this economic downturn.

Outcomes and Equality

The Scottish Budget is underpinned by Scotland's National Performance Framework. This sets out a vision for a more successful country, where all of Scotland can flourish through increased wellbeing, and sustainable and inclusive economic growth. Alongside this vision, the Scottish Budget delivers against our eleven national outcomes:

Our Purpose

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.

Our Values

We are a society which treats all our people with kindness, dignity and compassion, respects the rule of law, and acts in an open and transparent way.

National Outcomes

• Children and Young People: We grow up loved, safe and respected so that we realise our full potential
• Communities: We live in communities that are inclusive, empowered, resilient and safe
• Culture: We are creative and our vibrant and diverse cultures are expressed and enjoyed widely
• Economy: We have a globally competitive, entrepreneurial, inclusive and sustainable economy
• Education: We are well educated, skilled and able to contribute to society
• Environment: We value, enjoy, protect and enhance our environment
• Fair Work and Business: We have thriving and innovative businesses, with quality jobs and fair work for everyone
• Health: We are healthy and active
• Human Rights: We respect, protect and fulfil human rights and live free from discrimination
• International: We are open, connected and make a positive contribution internationally
• Poverty: We tackle poverty by sharing opportunities, wealth and power more equally

Ministers are required by statute to review the National Outcomes within five years of their previous publication which means the next review must commence no later than June 2023. The Scottish Government is preparing for the next statutory review of the National Outcomes, set to start its public engagement in the coming months and conclude during Term 3 of Parliament (2023).

Recognising the disproportionate impact on many sections of our population, we have published an Equality and Fairer Scotland Budget Statement. This provides a focus on the main challenges that are faced across different portfolios, on the basis of the protected characteristics in the Equality Act 2010, and on the realisation of human rights. This also sets out the main ways that these challenges are being addressed through our budget decisions.

A balanced budget

The Scottish Government is required to set a balanced budget each year. This must also remain within the key control totals as set out below:

Table 1.01 Total Scottish Government Funding

Scottish Government Discretionary Fiscal Budget	2021‑22	2022‑23	2023‑24
	£m	£m	£m
Fiscal Resource	39,215	39,188	41,944
Non Domestic Rates	2,090	2,766	3,047
Capital	5,660	5,824	5,939
Financial Transactions	449	527	424
Total Discretionary Fiscal Budget	47,414	48,305	51,353

Scottish Government Non ‑ Discretionary Budget	2021‑22	2022‑23	2023‑24
	£m	£m	£m
Non‑Cash Resource Budget	1,378	1,103	1,015
UK Funded Annually Managed Expenditure (UKAME)	6,373	6,934	7,444
Total Non-Discretionary Budget	7,750	8,037	8,459
Total Scottish Budget	55,164	56,343	59,813

Notes: The prior year comparators throughout this document reflect the position as set out in the Scottish Budget as approved by Parliament for that year. The funding position shown is consistent with that original Budget allocation. The Budget position changes throughout the year and subsequent budget revisions are available from the Scottish Government website. Full analysis of the funding position is included at Annex A.

Some figures may not sum due to roundings (all Scottish Budget figures are rounded at Level 4; Level 4 tables are published alongside the Scottish Budget document on the Scottish Government website).

Table 1.02: Total Managed Expenditure by Budget Classification

2023 ‑ 24 Scottish Budget	Fiscal Resource	Non-Cash Resource (Ring‑fenced DEL)	Capital	Financial Transactions	Total	AME	Total
	£m	£m	£m	£m	£m	£m	£m
Health and Social Care	18,176	301	578	5	19,061	100	19,161
Social Justice, Housing & Local Government	13,765	67	1,333	85	15,250	3,047	18,297
Finance and Economy	595	50	577	258	1,480	6,921	8,401
Education and Skills	3,059	194	551	15	3,820	421	4,241
Justice and Veterans	3,006	156	203	–	3,366	–	3,366
Net Zero, Energy and Transport Portfolio	1,795	197	2,596	61	4,648	–	4,648
Rural Affairs and Islands	889	11	65	–	965	–	965
Constitution, External Affairs & Culture	304	17	26	–	347	–	347
Deputy First Minister and Covid Recovery	45	–	–	–	45	–	45
Crown Office and Procurator Fiscal Service	182	7	8	–	197	–	197
Scottish Government	41,816	1,000	5,938	424	49,178	10,489	59,667
Scottish Parliament and Audit Scotland	128	15	1	–	144	2	146
Total Scotland	41,944	1,015	5,939	424	49,322	10,491	59,813