The Scottish Government's Medium-Term Financial Strategy

Foreword by the Deputy First Minister and Cabinet Secretary for Finance

Good governance begins with sound public finances, and my number one priority is to ensure the Scottish finances remain on a sustainable trajectory so that we can deliver first class public services for our communities, improve equality by reducing poverty, and seize the opportunities of an economy that is fair, green and growing.

I am committed to balancing our budgets through maximising the value of public spending and putting robust policies in place to support and sustain effective public service delivery. Sound and responsible finances will provide the strong foundations from which we will deliver the three vital missions set out by the First Minister in our recently published policy prospectus 'A New Leadership – A Fresh Start'.^[1]

This Medium-Term Financial Strategy (MTFS) comes at a key moment as we recalibrate and refocus under the new leadership of the First Minister. It is my first fiscal statement as Finance Secretary, and I am setting out how this Government will maintain a sustainable financial position over the medium-term. In doing so, I am committed to being open and honest with the public about the financial position we face, and setting that out transparently in the MTFS.

The financial situation is, amongst the most challenging since devolution. Following on from a decade defined by UK austerity, over the past three years Scotland has faced a succession of economic shocks, with the Covid pandemic, the war in Ukraine, and the recent period of high inflation all driving significant pressures on the economy, society and the public finances. While these are challenges that all countries are facing, it is clear that decisions made by the UK Government, not least Brexit, have made things much worse with the UK one of the worst performing economies in the G7.^[2]

We are living through the biggest fall in living standards in decades, with the Scottish Fiscal Commission forecasting that average real disposable incomes are not set to recover to pre-pandemic levels until around 2026-27. The powers at our disposal to manage these pressures remain limited, with the Block Grant, still our largest source of funding, continuing to be tied to the decisions of the UK Government and subject to continued uncertainty. We face a real terms reduction in the resource Block Grant of 0.1% in 2024-25, and a small real terms increase of 1.1% from 2025-26 onwards. Whilst overall funding is projected to increase compared to what was set out in the last MTFS, this growth fails to compensate for the impact of the sustained rates of high inflation and the corrosive effect this has on the Government's spending power.

The pressures are even worse for capital, where we are facing a 7% real terms fall in our Barnett capital funding over the medium-term between 2023-24 and 2027-28. We also are due to face a large negative tax reconciliation (for the tax year 2021-22) in budget year 2024-25, one that outstrips the borrowing powers that we currently have to manage it.

We will continue to press the UK Government to provide sufficient funding to meet the scale of these challenges, and for more powers and necessary reforms to the Fiscal Framework through the forthcoming Review.

Despite these challenges and constraints, we will do all that we can to use the powers that we do have to their maximum, in order to deliver public services and improve the lives of the people of Scotland. The Scottish Government remains wholeheartedly committed to supporting the most vulnerable members of our society through our spending choices, and to ensuring we maintain a fair and progressive approach to tax policy. Even against the backdrop of a difficult fiscal outlook, we remain resolute in this approach to achieving the vital missions of this Government whilst remaining fiscally sustainable.

Today, I am setting out how this Government will address the challenges to the sustainability of the public finances. This strategy is anchored in three pillars:

• Strengthening how we manage public spending to ensure public money is fully focused on delivering government objectives, underpinned by necessary reform and prioritisation to maximise the impact of our available resources and capital investment.
• Increasing focus on economic policies and actions with the greatest potential to grow and strengthen Scotland's well-being economy and to grow the tax base to support the funding of our vital public services.
• Ensuring a strategic approach to tax policy, which considers the longer-term impacts of our tax choices on individuals and our competitiveness, and which has been developed through clear engagement with stakeholders.

Taken together, actions across all of these areas will ensure that this Government can deliver the vital public services that we all rely upon, and ultimately provide a more prosperous and fairer future for the people of Scotland.

Shona Robison MSP

Deputy First Minister and Cabinet Secretary for Finance