UK Spring Budget 2024: letter to the UK Government

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

23 February 2024

Dear Chancellor,

UK Spring Budget

Last month in Edinburgh I had the opportunity to raise the upcoming UK Spring Budget with the Chief Secretary to the Treasury, when I outlined the Scottish Government’s priorities ahead of this fiscal event. I am expanding on these further in this letter.

Economic and fiscal context

The economic outlook for the UK continues to look uncertain and while inflation has fallen compared to a year ago, it is still high and this is continuing to place a considerable strain on both public sector and household budgets.

In Scotland, I am pleased that our economic performance continues to be strong. Earnings grew faster than any other part of the UK in 2023, and looking ahead our economy is forecast to grow by 0.8% in 2024-25, similar to the UK and indeed slightly faster after accounting for population. We continue to be the most attractive destination outside of London for inward investment.

However, we are also dealing with the continued fallout from Brexit, which we did not vote for, and which is increasing costs and complexity for our businesses. Recent modelling by the National Institute of Economic and Social Research shows the UK economy is now 2.5% smaller than it would have been in the European Union, a gap which could increase to 5.7% by 2035.

Investing in public services and infrastructure

When I presented the Scottish Budget for 2024-25 to the Scottish Parliament in December, I set out the challenging context in which we were having to make our decisions on tax and public spending. Our Block Grant has fallen by 1.2% in real terms since 2022-23 and our UK capital funding is set to fall by almost 10% in real terms between 2023-24 and 2027-28. I know similar pressures are faced by the other devolved governments.

In this context, there is a clear need for increased investment by the UK Government in public services and infrastructure, as has been recognised by the International Monetary Fund (IMF). The Resolution Foundation has also said the affordability of further tax cuts relies on the “fiscal fiction” of delivering current post-election spending plans for day-to-day public services which might require implausible real per capita spending cuts of up to 17% for unprotected departments by 2028-29. This would clearly be devastating for our public services and I would urge you to use whatever headroom may be available to prioritise investment in public services and infrastructure over tax cuts.

The cumulative effect of sustained high inflation over the past two and a half years has impacted heavily on the public sector and placed great strain on budgets, in particular in meeting the increased cost of public sector pay settlements. It is vital that the funding provided to devolved governments in the UK Budget reflects these increased costs. I am particularly keen to hear what provision you are making in 2024-25 for the costs of the 2023-24 NHS England Agenda for Change pay deal, as we have not yet been made aware of any consequentials for next year, despite these being recurring costs.

The cut to our capital budget and Financial Transactions (FTs) has meant we have had to take difficult decisions for the coming year’s budget as we do not have the funding to meet all our ambitions. Increased investment by the UK Government in capital projects will release Barnett consequentials for devolved governments, which would enable us to invest more in areas, such as the provision of affordable housing and health projects, where our budget is currently constrained. In this UK Budget there is a clear and pressing need to provide increased capital spending and clarity over future FT allocations.

I warmly welcome the return of the devolved institutions in Northern Ireland and recognise and support their need for additional investment in public services. However, the public spending and pay pressures that you are seeking to address through the £3.3 billion package for Northern Ireland also exist across these islands. I would urge you to make similar funding available, in line with the Barnett formula, to address the budget pressures that we are facing as a result of a Block Grant that is insufficient for our needs.

Tackling poverty and the cost of living

While inflation is not as high as it was a year ago, prices are still rising and living standards in 2024-25 are still expected to be lower than before the pandemic, placing household budgets under strain. Allied to this is the impact of high interest rates, with households seeing increasing mortgage costs and many more fearful of what will happen when fixed-rate deals come to an end.

We are doing all that we can with the powers that we have in Scotland to support people through these difficult times. In the Scottish budget for next year, we are investing a record £6.3 billion in social security benefits to support the most vulnerable in our society. This is £1.1 billion more than the UK Government provides to the Scottish Government for social security, demonstrating our commitment to tackling poverty. This additional investment includes our unique Scottish Child Payment, which we estimate will lift 50,000 children out of relative poverty in 2023-24.

However, as I have made clear to the Chief Secretary to the Treasury, and in my letter to you ahead of last year’s Autumn Statement, many of the powers to tackle the cost of living remain with the UK Government. The Spring Budget is an opportunity for you to take action to provide further targeted support for people who are struggling.

This should include legislating for an ‘Essentials Guarantee’, which would provide those who need it most with the most basic of necessities and benefit 8.8 million families. The Joseph Rowntree Foundation estimates that if the Universal Credit standard allowance were set at £120 per week for a single adult and £200 for a couple in 2023-24, this could lift 1.8 million people out of poverty including 600,000 children across the UK.

I also call on you to abolish the two-child limit, benefits cap, young parent penalty in Universal Credit, and the bedroom tax. The Scottish Government is doing what it can to mitigate these policies, including spending almost £75 million through Discretionary Housing Payments for people affected by the bedroom tax and almost £8 million to support those hit by the benefit cap. However, we cannot mitigate everything.

Reversing these damaging policies, which restrict the amount of support available to some of our most vulnerable people and disproportionately affect women and children, would help to not only lift people out of poverty, but importantly tackle the depth of poverty experienced. Analysis by the End Child Poverty Coalition estimates that almost 90,000 children in Scotland are impacted by the two child limit and ending it could lift 250,000 children – including 15,000 in Scotland – out of poverty across the UK.

The freeze to Local Housing Allowance (LHA) rates has also had a significant effect on households in Scotland. In August, LHA rates did not cover the rents of over 40,000 households in Scotland. Of these, the average shortfall for those on Universal Credit was nearly £1,500 per year. While LHA rates are being raised in 2024 and the Secretary of State for Work and Pensions has committed to review LHA rates annually, we note that there is no commitment to link the rates to the 30th percentile. I call on you to end the uncertainty that households have when taking out a tenancy and commit to ensuring that the LHA rates will be sufficient to meet even these basic rent levels in future years.

Many people are still struggling with the cost of their fuel bills, and much of the UK Government support has now ended. I reiterate our call for you to introduce a ‘Social Tariff’ to provide a much-needed safety net for priority consumers, and to review urgently the support needed for businesses who are continuing to struggle with bills which are too high.

The VAT regime can also support business in the face of cost increases. We have called for a reduced rate of VAT for Small and Medium-sized Enterprises’ energy bills, who have been hit hard by recent economic difficulties, as well as the reinstatement of a reduced rate of VAT for the tourism and hospitality sector.

To date, these calls have been ignored, but I urge you to reconsider your position and use your powers over VAT to support businesses still recovering from the impact of the pandemic and energy price rises. Alongside this, I encourage you to listen to industry calls regarding the reinstatement of VAT-free shopping.

The removal of this policy is likely to be having a detrimental impact on retail businesses and may be discouraging tourists from visiting the UK. EU countries continue to offer tax-free shopping for non-EU visitors which may make them a more attractive tourist destination. This may disincentivise tourists from making purchases in the UK and impact the Scottish retail and tourism sectors.

Support for the transition to Net Zero

VAT is also a powerful fiscal lever at your disposal that can reduce the impacts of climate change and help us meet our respective net zero targets. The VAT discrepancy between new build construction compared to the renovation and refurbishment of existing buildings has been highlighted by the Scottish Government previously, and is a concern shared by stakeholders from across the construction sector. While welcome steps have been taken to reduce the VAT on some energy saving materials, you must go further to ensure existing buildings can be retrofitted and our architectural heritage is preserved. Bringing parity to the VAT rates in construction will not only help to reduce emissions – both from demolition and improving insulation – but will incentivise repurposing buildings for other uses, including housing, and help with our joint ambition to revitalise our town and city centres.

The UK Government retains significant powers necessary to support the transition to net zero, including legislation and regulation relating to electricity networks. We welcomed the UK Government’s response to Nick Winser’s report and the proposals to accelerate the deployment of transmission infrastructure in the Transmission Acceleration Action Plan (TAAP). The TAAP makes it clear that changes to the consenting regime in Scotland are necessary to accelerate the determinations process. These reforms must be taken forward urgently to ensure the grid does not become a barrier to net zero.

The Review of Electricity Market Arrangements (REMA) presents an opportunity to ensure the wholesale electricity market serves the best interests of consumers and delivers net zero. It is vital that GB electricity market reform supports our draft Energy Strategy and Just Transition Plan goals of reaching net zero, delivering safe and secure supply, a just transition and generating economic opportunities – in a way that provides confidence for investors and developers, and fairness for consumers. We will continue to engage with the UK Government and stakeholders, and it is crucial that electricity market reforms meet Scotland’s needs and interests.

Impact of any tax changes on the Scottish Budget

As I have made clear, my firm view is that public spending should be prioritised over tax cuts. However, I am mindful of recent reporting on the possibility that changes to 2024-25 devolved Income Tax policy could be announced at the Spring Budget. UK devolved Income tax policy affects the Scottish Government's funding via the Block Grant Adjustments (BGAs) that apply to the Scottish Budget.

An exceptionally late policy change would be difficult to accommodate within our Fiscal Framework, owing to the fact that the Scottish Budget is usually based on forecast BGAs calculated alongside the UK Autumn Statement. We could face a scenario where Scotland’s 2024-25 Income Tax Block Grant Adjustment (BGA) is due to change in line with UK Government policy but, as a result of the exceptionally late change in UK tax policy, the impact to the Scottish Budget is not applied until three years later via reconciliation.

I have separately written to the Chief Secretary to the Treasury to highlight this issue and ask that, in the event you announce changes to UK devolved Income Tax policy at the Spring Budget, the Scottish Government is then given a choice as to whether to apply the updated Income Tax BGA to its 2024-25 budget. While this scenario may not materialise, I think it prudent to agree contingency arrangements and would welcome clarity on this matter in
advance of the Spring Budget.

There is also a pressing need for engagement between our governments regarding the current interactions between devolved and reserved tax powers and the unintended consequences resulting from partial devolution of tax powers to the Scottish Parliament. As you will be aware, the Upper Earnings Limit for Class 1 National Insurance contributions is aligned with the Higher rate threshold for UK Income Tax. As the Scottish and UK Higher rate thresholds have
gradually diverged under devolution, this has led to some Scottish taxpayers facing a higher combined marginal tax rate than taxpayers earning the same amount in the rest of the UK.

The most effective way of addressing this would be to devolve powers over National Insurance Contributions to the Scottish Parliament. This would allow us to better design a tax system that works more efficiently for people and businesses in Scotland. However, should this not be forthcoming I would appreciate engagement at the earliest opportunity on possible solutions that would address this anomaly of the tax system within the confines of the current devolved settlement.

The UK Spring Budget is a key opportunity to increase funding for our vital public services and the infrastructure that supports our economy and communities, as well as supporting people with the cost of living and investing in our net zero future. I urge you to rise to this challenge.

I am copying this letter to the Rt Hon Laura Trott MP, Chief Secretary to the Treasury.

Shona Robison