Scottish Spending Review 2011 and Draft Budget 2012-13

SECTION 1 STRATEGIC CHAPTERS

Chapter 1 The Strategic Context for the Spending Review

INTRODUCTION

The decisions taken within this Budget have been shaped by the Scottish Government's Purpose of creating a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth. Our Budget supports job creation in Scotland.

Our focus on delivering the Purpose is even more crucial in these tough financial times. It has helped guide not just the choices we have made for the next few years, but the strategic direction we have set for Scotland's public services in the medium to long term.

This Budget has been prepared within the context of a dramatic reduction in public spending imposed on Scotland by the UK Government.

Within the current constitutional framework, we face an overall budget settlement which is the product, not of choices made in Scotland, but of decisions made by the UK Government. This is wrong and Scotland urgently needs real economic and financial powers.

While we have been clear in our opposition to the scale and profile of the UK Government's spending cuts, we have also been open with the people of Scotland about their implications and the tough choices that we now face. At the same time, we have shown leadership in driving forward public service reform and delivering substantial efficiency savings to help absorb the worst impacts of the cuts.

In May, the people of Scotland recognised this Government's competence and demonstrated their trust in us to navigate Scotland through these challenging times.

Our fundamental priorities of this Budget are:

• to accelerate economic recovery, to create the jobs our people need and to secure new opportunities through the low carbon economy;
• to deliver an ambitious public sector reform programme with a decisive shift in favour of preventative spend; and,
• to deliver a Social Wage for the people at a time of acute pressures on household incomes.

THE SCALE OF THE CHALLENGE

Over the period of the UK Government's Spending Review to 2014-15, the Scottish budget is being cut by 12.3 per cent in real terms. Our capital budget - a key driver of economic growth - will bear the harshest reduction, with a real terms cut of 36.7 per cent.

Such cuts would be extremely difficult to manage in the best of times. As it stands, they are taking place at a time when the global economic recovery remains fragile, with concerns over the pace of growth in most major economies and uncertainty over inflation and job security acting to dampen economic confidence.

The recovery is in a much earlier and more fragile phase than the Chancellor initially hoped when he first announced his spending plans in October 2010. We have consistently called on the UK Government to change course - particularly with regard to capital investment - to boost growth, create jobs and secure the recovery.

While we recognise that action must be taken to restore the UK public finances to health, ultimately the best way to achieve this is through economic growth. Failure to secure growth will only lead to lower tax revenues and higher spending in the long-run.

Table 1 provides an overview of our Departmented Expendature Limit (DEL) allocations over the Spending Review period - including real terms figures at 2011-12 prices. In order to manage our budgets over the Spending Review period, we will make use of the Budget Exchange Scheme agreed with HM Treasury, whereby we can carry forward underspends within agreed limits and draw them down in the following year.

Table 1: Scottish Government Departmental Expenditure Limits 2010-11 to 2014-15

SG Spending Limits - Cash Terms	2010-11	2011-12	2012-13	2013-14	2014-15
	£m	£m	£m	£m	£m
SG Spending Limits - Cash Terms
UK Government SR Settlement - October 2010	29,224	27,907	28,262	28,248	28,484
Increased by UK Budget Consequentials and other agreed transfers		59	42	25	23
Total DEL	29,224	27,966	28,304	28,273	28,507
Revenue DEL	25,931	25,426	25,829	26,036	26,189
Capital DEL	3,293	2,540	2,475	2,237	2,318
SG Spending Limits - Real Terms
2011-12 prices*
Revenue DEL	26,683	25,426	25,199	24,733	24,224
Capital DEL	3,388	2,540	2,415	2,125	2,144
Total	30,071	27,966	27,614	26,858	26,369
Change Real Terms - year on year		-7.0%	-1.3%	-2.7%	-1.8%
Change Real Terms - cumulative		-7.0%	-8.2%	-10.7%	-12.3%

* Note - GDP Deflators (in 2011-12 prices) - source HM Treasury, forecast data are consistent with 2011 March Budget.

The scale of the cuts imposed by the UK Government mean that the impact on Scotland's public finances will resonate for years to come. As highlighted in the Government Economic Strategy, based on the plans set out by the UK Government in its 2010 Spending Review and the current constitutional and financial framework, it is estimated that it could take until 2025-26 for the Scottish Government budget to return to

2009-10 levels in real terms - an adjustment period of 16 years. Over the entire period, the cumulative amount forgone could be close to £40 billion.

Figure 1: Estimated Scottish DEL 2009-10 to 2026-27

Source: Government Economic Strategy, 2011

These cuts clearly present a significant challenge to Scotland - both to securing the economic recovery and maintaining our investment in our vital public services.

We are determined to meet this challenge. Our Programme for Government, the Government Economic Strategy and now our Spending Review set out our priorities and ambitions for Scotland. While these are tough times, there are also tremendous

opportunities for Scotland in the years ahead. By working together, we can build a more prosperous, fairer and better nation.

Programme for Government

The Scottish Government's overall vision and approach are set out in Renewing Scotland: The Government's Programme for Scotland 2011-2012, published on 7 September 2011.

The Government's Programme sets out an ambitious vision for Scotland which is grounded in three core ideals:

• building a shared vision for success with the people of Scotland;
• continuing to deliver effective government; and
• driving change by delivering creative solutions which support reform.

At the centre of our approach is a commitment that the Government's actions will continue to be aligned to delivering our overarching Purpose:

To focus the Government and public services on creating a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth.

Our top priority is therefore securing economic recovery and creating jobs. By building a more dynamic and faster growing economy we will increase prosperity, be better placed to tackle Scotland's health and social challenges, and establish a fairer and more equal society.

Government Economic Strategy

Scotland is a country rich in economic potential. The Government Economic Strategy sets out how we will harvest this potential and deliver on our Purpose.

The Government Economic Strategy continues the journey we started in 2007. The fundamental principles of our approach, and our commitment to seeing it succeed, remain as strong as ever.

Our actions are targeted toward six Strategic Priorities which drive sustainable economic growth and develop a more resilient and adaptable economy:

• Creating a Supportive Business Environment;
• Transition to a Low Carbon Economy;
• Learning, Skills and Wellbeing;
• Infrastructure, Development and Place;
• Effective Government; and
• Equity.

We believe that government has a positive role to play in supporting the Scottish economy and that all parts of the public sector have an important contribution to make. The Government Economic Strategy ensures that the public sector is fully aligned in this effort.

OUR PRIORITIES

Together, the vision set out in the Programme for Government and the Strategic Priorities of the Government Economic Strategy have shaped our spending plans, providing firm foundations on which to make progress on delivering our ambitions for Scotland.

We have also ensured that equality has been incorporated in the development of the budget. The approach we have taken and the assessment of the main equality impacts of our spending plans are outlined in the accompanying Equality Statement.

As both the Programme for Government and Government Economic Strategy make clear, money is only one of the tools available to government. How we use legislation and broader policy developments to deliver outcomes is just as important.

Chapter 2 of this document sets out the actions we are taking to accelerate the recovery and to put in place the foundations for long-term sustainable economic growth. This includes a relentless focus on economic growth and tackling any barriers that people, particularly our young people, face in realising their economic potential.

The transition to a low carbon economy offers tremendous potential for Scotland. Our enviable natural resources, research expertise and industrial base provide us with strong foundations to capitalise on the industries of the future, such as renewable energy and sectors which promote energy and resource efficiency. We are determined to grasp this opportunity and meet our ambitious emissions reduction targets. Chapter 3 outlines how we are prioritising low carbon spend and investing to ensure that Scotland is well placed to take advantage of this transformational change.

Capital investment is central to our efforts to accelerate economic recovery. Chapter 4 sets out our plans to maximise investment in Scotland's infrastructure, within the constraints of our fixed spending envelope. This includes a commitment to deliver key priority projects (such as the Forth Replacement Crossing), to switch over £200 million a year from resource spending to capital investment, and to roll out innovative sources of funding such as our £2.5 billion Non-Profit Distributing Model (NPD) programme to help offset the worst effects of the UK Government's cuts.

Chapter 5 sets out in more detail the approach we are taking to public service reform and how it relates to our spending decisions. The Government has published, in parallel reports, how it is responding to the recommendations of the Christie Commission on the Future Delivery of Public Services and the McClelland Review of ICT Infrastructure. We will also deliver on our commitment to establish a £250 million Scottish Futures Fund, with a focus on investment in jobs and infrastructure, to be delivered over the lifetime of this Parliament.

The portfolio chapters - Chapters 7 to 16 - contain greater detail on our specific spending proposals. In most if not all cases, spending in one particular area contributes to more than one objective of the Government. A key priority has been our focus on increasing preventative spend. Spending allocations have also sought to maximise multiple objectives across portfolios with specific regard to supporting the economic recovery, the transition to a low carbon economy and improving public services.

In line with our commitment to the people of Scotland, we will protect NHS spending by allocating Barnett resource consequentials from the UK settlement to our health budget. This is part of our Social Wage and our promise to deliver on core economic and social commitments. Our funding allocation and agreement with COSLA will enable local authorities to freeze council tax to March 2015 while ensuring the delivery of shared commitments on key public services - such as maintaining teacher numbers in line with

pupil numbers. We are funding Police Boards to allow them to maintain 1,000 additional police officers. Our settlement for universities will support their international excellence while ensuring that participation is determined by ability to learn and not ability to pay. Our Next Generation Digital Fund will optimise public sector investment in broadband infrastructure and leverage maximum private sector investment to improve broadband coverage in Scotland, particularly in our rural communities.

LOOKING TO THE FUTURE

This Spending Review sets out the priorities to be taken forward by the Scottish Government to build the best future for Scotland in a tough financial climate.

However, the current financial climate highlights, perhaps more clearly than ever before, the urgent need for reform of the financial powers of the Scottish Parliament.

It cannot be the summit of the ambition of anyone in the Scottish Parliament to rely upon a block grant from the UK Treasury for most of its spending power or simply to administer UK Government cuts as efficiently as possible. However, any reform must be more than simply an accounting exercise but, rather, something that offers a genuine advance in financial and economic responsibility.

The Scottish Government therefore remains disappointed with the unambitious proposals of the current Scotland Bill. Beyond the very modest capital borrowing powers, the proposals fail to provide any meaningful new economic levers to promote growth or create jobs. Approximately 85 per cent of Scottish tax revenues would continue to be set by the UK Government, without reference to economic circumstances in Scotland, or the preferences and needs of Scottish households or businesses.

We need reform which gives the Scottish Parliament and the Scottish people a greater and more direct stake in the economic performance of Scotland.

Independence would provide full access to job creating powers. It would put us on par with other successful independent nations and allow us to take decisions in the best interests of our economy and the people of Scotland.