UK Autumn Statement 2023: letter to the UK Government

To: Jeremy Hunt, Chancellor of the Exchequer
From: Shona Robison, Deputy First Minister and Finance Secretary

Dear Chancellor,

UK Autumn Statement

We are pleased to have recently agreed an updated Fiscal Framework following negotiations with the Chief Secretary to the Treasury. The additional flexibility is welcomed, as was the cooperative engagement between HM Treasury and Scottish Government officials. I hope this positive cooperation continues as early engagement and information sharing is important in supporting the development of our own budget.

I recently met with the Chief Secretary to the Treasury at the Finance: Interministerial Standing Committee (F:ISC) in London and we discussed the upcoming Autumn Statement. I set out some of the Scottish Government’s aspirations for the Statement during that meeting and expand on them here.

Economic and Fiscal Outlook

The economic headwinds in recent years have been challenging for the UK and Scottish economies. Although inflationary pressures from the significant energy price increases over the last year are beginning to ease, prices are still around 20 per cent higher relative to pre-pandemic levels. When coupled with substantial increases in interest rates and the fact that nominal wage growth has failed to match the rate of inflation until only recently, it has resulted in real terms cut to household spending power, causing hardship for many families and businesses across Scotland. Analysis by the Resolution Foundation suggests that the current parliamentary term is on track to be by far the worst for living standards growth since at least the 1950s.

I understand that you too are facing difficult fiscal choices in the Autumn Statement. The UK faces a combination of low growth and high interest rates that will make meeting your fiscal rules challenging. However, the Autumn Statement must learn the lessons from last year’s ‘mini budget’ – it must not compound these problems with ill-timed tax breaks for the wealthiest in society, which would place even greater pressure on the public finances. Instead, I would urge you to focus on:

• Supporting public services and increased investment in capital infrastructure in the UK and Scotland, including increasing funding to the Scottish Government.
• Prioritising investment in Net Zero and a Just Transition, and tackling fuel insecurity.
• Supporting people with the ongoing cost-of-living crisis.

The Scottish Government is using the levers available to us to support people through this difficult time, for instance by increasing the Scottish Child Payment, but it is important that the UK Government uses its full range of reserved powers to address these challenges and support people and business across Scotland and the rest of the UK.

Supporting public services and increased investment in capital infrastructure

Our Medium-Term Financial Strategy, published in May 2023, set out the significant financial pressures that we are facing. Continued high inflation is impacting on public sector pay settlements and the wider costs of public service delivery.

We must balance the budget each year and we are committed to doing all we can within the powers at our disposal to ensure public finances are on a sustainable path. We remain focussed on delivering on our priorities and are working extensively to ensure funding is prioritised to those that need it most.

I am currently developing the Scottish Budget for 2024-25, which will be presented to the Scottish Parliament on 19 December. We continue to face significant funding pressures in the year ahead, at a time when costs continue to rise and the need to support people through these challenging times remains. I urge you to provide a funding settlement that enables us to invest in public services, vital infrastructure and fair public sector pay increases.

Scotland’s capital investment continues to be constrained by UK Government spending decisions, with our capital funding projected to fall in real terms by 6.7% between 2023-24 and 2027-28, and potentially more given sustained inflation. This limits the Scottish Government’s ability to deliver our capital projects and programmes at the required pace. We are also disappointed by the continued lack of clarity over future Financial Transactions as this restricts our ability to support key infrastructure priorities for the future of Scotland. I urge you to use the Autumn Statement to rectify both issues, providing assurance on future Financial Transactions funding and inflation-proofing the capital budget.

The Scottish Government, in direct response to the cost-of-living crisis, spent over £1.7 billion on pay uplifts, which secured continuity of vital public services by minimising industrial action. The Autumn Statement must deliver additional funding across the UK to fund higher public sector pay awards. This increased funding would relieve the funding pressures we face and enable the Scottish Government to respond further to the cost-of-living crisis through fair pay increases for the public sector.

Prioritising investment in Net Zero and a Just Transition and tackling Fuel Insecurity

I have raised the importance of the Acorn Carbon Capture and Storage Project with the Chief Secretary to the Treasury, and my predecessor John Swinney wrote to the Prime Minister about this following the Spring Budget. I urge you to confirm your decision on Acorn in the Autumn Statement and set out funding details and timescales for this which reflect real ambition for Acorn and the Scottish Cluster. This should include the selection criteria and funding for emitter projects, in order to provide clarity for Scottish industry, confidence for investors and opportunities for our workforce.

The Contracts for Difference programme has been very successful in supporting the deployment of renewables in Scotland. However, the failure of Allocation Round 5 to secure any offshore wind demonstrated an oversight from the UK Government in understanding the challenges the sector currently faces. Offshore wind plays a crucial role in the transition to net zero and we call on the UK Government to take steps to deliver a successful Allocation Round 6 to ensure these projects move ahead. This needs to include allocating sufficient budget to develop Scottish projects at scale, without which the UK Government’s target to decarbonise the UK power system by 2035 cannot be achieved.

Long duration energy storage (LDES) technologies will also be key to ensuring a reliable, flexible power system. There are currently 2.95 GW of pump storage hydro projects in Scotland awaiting construction that could provide vital flexibility to the GB grid. However, the lack of a dedicated support mechanism means that these projects have struggled to proceed at pace. It is important now for the UK Government to urgently accelerate the development of an appropriate market support mechanism so that these projects (and others like them) can deploy at speed to support our shared net zero ambitions.

The Scottish Government welcomes the recent independent report into electricity networks by Nick Winser. As I have said to the Chief Secretary to the Treasury, it is important for the Scottish Government to be involved as an implementation plan is taken forward.

A fairer, more progressive replacement for Fuel Duty is needed as we move towards net zero, given decarbonisation and the move to EVs will ultimately make it defunct. I urge you to engage constructively with the devolved administrations so we can collaboratively design a successor regime that works for everyone, including less affluent households and those in rural and island communities.

Fuel insecurity

Despite the fact that the energy price cap has dropped since earlier this year, many consumers are still paying significantly more than they were two years ago. We estimate that under the current price cap, there are around 830,000 fuel-poor households in Scotland – 33% of all households. This is an unacceptable reality in a country as energy rich as Scotland. It is essential that the UK Government reinstates the £400 Energy Bills Support Scheme, and also provides additional targeted support for those that need it the most, now that the subsidised support under the Energy Price Guarantee has ended for the majority of households.

Stakeholders have also called for clarity on what support will be made available to those consumers most in need this winter. This includes support for non-domestic consumers, like the hospitality and hospice sectors, who are facing significant challenges as a result of high energy prices. They have also highlighted the need to support those struggling with legacy debt carried over from last winter.

The UK Government must urgently introduce a social tariff scheme that would provide a much-needed safety net for priority consumers. We believe that a social tariff should be targeted and applied automatically as a means of additional support for those that need it the most, and should be funded by the Energy Profits Levy and general taxation. Equivalent support should be provided to off-gas grid priority households and those subject to non-domestic contracts.

We urge you again to review the scope of the Energy and Trade Intensive Industries (ETII) support to ensure that those businesses that rely heavily on energy to generate income, including small businesses, are able to benefit from desperately needed support. We also reiterate our previous calls to move green levies to general taxation rather than adding these back onto bills.

While these actions will reduce the impact of fuel poverty in the short-term, market-wide reform is needed to reduce costs in the longer term. This can be achieved by ensuring a level playing field for the deployment of more renewables in key areas such as Scotland, including by urgently reforming the Transmission Network Use of System charging regime and by reframing the wholesale electricity market so that volatile global gas no longer sets the price of electricity.

Supporting people with the cost of living

We are using our social security powers to deliver a system built on dignity, fairness, and respect. This year we are investing £5.3bn in Scottish Government benefits and payments which will reach around 1.2 million people, including our unique Scottish Child Payment. While the Scottish Government is doing everything that it can with its limited powers to ensure people receive the help they need, the majority of social security spend in Scotland remains reserved to the UK Government.

I urge you to commit to increasing working-age benefits by inflation next year to ensure that they retain their real-terms value for struggling families across the UK. Failing to increase working-age benefits by inflation would impose unnecessary hardship and destitution across the country, with the Resolution Foundation estimating that a benefit freeze would push 1.2 million people into poverty across the UK, including 500,000 children – threatening to undermine the progress we are making in tackling and reducing child poverty.

I echo the calls made in recent correspondence from the First Minister and Cabinet Secretary for Social Justice for the UK Government to legislate for an essentials guarantee. This would provide those who need it most with the most basic of necessities and benefit 8.8 million families. This approach would remove the discriminatory young parent penalty from Universal Credit which sees under-25s receiving considerably less, despite having the same outgoings as other people, especially with the added pressure of the current cost-of-living crisis.

I again point to the need to remove the two-child limit which has subjected over 2,500 women in the UK to the trauma of having to disclose details of rape to receive welfare support for a third or subsequent child, and which this year alone has negatively affected 80,000 children in Scotland. I also call on you to remove the benefit cap which has consistently dropped the real value of benefits and disproportionally affected women and children.

We have also called on the UK Government to end the ongoing freeze to Local Housing Allowance rates and restore them to the 30th percentile as a minimum. The Autumn Statement provides an opportunity to do this. The continuing cash freeze amounts to three consecutive years of cuts in real terms. Recent IFS analysis found that in the first quarter of 2023 just 5% of private rental properties in the UK were affordable for housing benefit recipients. As private rented housing becomes increasingly less accessible to low-income households, it substantially increases their risk of homelessness, which is unacceptable.

Now that the UK Government has greater flexibility over VAT policy. I am calling on you to use this flexibility to exempt sustainable and reusable period pants from VAT to encourage more women to use these products and stop the unfair disparity between period pants and other VAT-exempt period products.

The Scottish Government supports a tax system that ensures everyone pays their fair share of tax. In line with this, you must reconsider the appropriateness of the antiquated ‘non-dom’ arrangement and its impact on the integrity of the overall tax system, including for Scottish Income Tax. Similarly, I urge you to consider reforms to Inheritance Tax to create a fairer, more progressive system, as suggested by the Office of Tax Simplification before it was abolished. It is very concerning that the UK Government is suggesting that it may scrap Inheritance Tax, which would be an unfunded tax cut which that would benefit the wealthiest 1% in society. The UK Government should instead look to simplify Inheritance Tax and reform any reliefs to ensure they provide value for money.

Businesses across Scotland have faced various challenges in recent years, with many still recovering from the effects of the pandemic and the impact of high inflation. I encourage you to take action by using the reserved tax levers at your disposal to support them, including a VAT reduction on Small and Medium-sized Enterprises’ energy bills and reinstating the reduced rate of VAT for the tourism and hospitality sector, which is a vital part of Scotland’s economy.

Alongside this, businesses need certainty to plan for the future and confidence to invest. I welcomed your decision in the Spring Budget on full capital expensing, however, this must be made permanent as part of a coherent long-term plan to give businesses the assurances they need to invest and grow.

Respect for devolution

It is also very important that the UK Government respects devolution and the role of the Scottish Parliament. The Scottish Government is opposed to UK Ministers making spending decisions in wholly-devolved policy areas facilitated by the UK Internal Market Act, which the Scottish Parliament voted against. Funding should be allocated in the usual way via Barnett consequentials to respect devolution and the priorities of Scotland. I hope that you will adhere to this in the forthcoming Autumn Statement.

The Autumn Statement provides an important opportunity for the UK Government to support the Scottish Government to deliver the investment and services that Scotland needs, to demonstrate its commitment to net zero, and to provide support for people and businesses with the economic challenges they face.