Scotland's economy and public spending: implications of UK Spring Statement

Finance Secretary Derek Mackay updated the Scottish Parliament on the implications of the UK Government Spring Statement on Scotland’s economy and public spending. He said:

Presiding Officer.

Last week the UK Government delivered its 2019 Spring Statement, which provided us with the latest economic outlook for the UK.

Economic Outlook

The Office for Budget Responsibility has downgraded its forecast of UK GDP growth for 2019 from 1.6% to 1.2%, representing the slowest annual growth since the end of the financial crisis.

The OBR cite falling levels of business investment as underpinning much of the downgrade, noting that the UK has performed the worst on non-housing related investment, compared to any other G7 nation, since the EU referendum in 2016.

These already downbeat forecasts assume that there will be an orderly withdrawal from the EU on the 29th March, with a transition period lasting until December 2020. 

This means that, in reality, the economic outlook could be even weaker.

Brexit Implications

The UK Government’s approach to the UK’s EU exit has already caused investment to fall and the next phase of uncertainty will mean further damage.

The OBR have stated that: “Uncertainty related to the Brexit process sees business investment fall for a second calendar year in 2019 – its weakest performance since the financial crisis.”

I am clear that all forms of EU exit will harm Scotland’s economy, but leaving the EU without a deal could lead to a potential shrinking of Scotland’s economy by up to 7%, a drop in exports by up to 20% and reduced business investment by £1 billion in 2019.

Such profound economic impact could result in an increase in unemployment of around 100,000 in Scotland, more than doubling the current unemployment rate, and push the Scottish economy into a deep recession, similar in scale to the financial crash of 2008.

However, we do not need to await the final outcome on EU exit, we already know that it has already damaged our economy. 

The Institute for Fiscal Studies have said that, “there is a consensus that the economy would have been about 2% bigger had the Brexit vote not occurred” – meaning that without EU exit, the deficit would have been smaller, jobs and investment would have been higher and there would be more funding available for public services. 

Amid this deepening uncertainty the Chancellor should have used the Spring Statement to provide stimulus to the economy and clarity on future funding. Sadly he did neither.

As we navigate a period of economic uncertainty, it is vital that we take bold action to support the Scottish economy to grow.  

A significant milestone in the establishment of the Scottish National Investment Bank was reached three weeks ago with the introduction of the legislation that will underpin it.

The introduction of the Bank will help transform and grow Scotland’s economy, and help to protect Scotland from the consequences of the UK's exit from the EU.

However, I continue to await confirmation from HM Treasury that they will provide the Bank with similar dispensations enjoyed by the British Business Bank and Green Investment Bank, to allow it to hold modest reserves and operate at the level of ambition that we expect.

EU Funding

It is equally disappointing that the Chancellor failed to guarantee all future EU funding to Scotland – worth over £5 billion in this current EU budget round.

Due to the UK’s chosen route for exiting the EU, the UK will lose access to much of this funding. To date there has been no certainty that these funding streams will be replaced - with commitments on agriculture, fisheries and structural funding all remaining unclear.

Presiding Officer, it is crucial that the UK Government urgently commits to replacing all EU funding streams in full, and ensure that funding decisions currently being taken by Scottish Ministers continue to be taken by Scottish Ministers in the future.

Ending Austerity

The Chancellor’s 2018 Autumn Budget promised an end to austerity, but last weeks’ Spring Statement confirmed that the UK Government has once again failed to deliver on this pledge and to properly invest in public services. 

Despite the Chancellor boasting that he has £26.6 billion worth of headroom – up from £15.4 billion in the Autumn Budget in October – to increase spending and end austerity in 2020-21 whilst still meeting his fiscal rules, he has chosen not to invest any of that money in vital public services. 

Instead the Chancellor has chosen to hold this money back, wilfully depriving our public services of resources and compounding the economic harm of their self-inflicted mess of Brexit.

Public Spending Outlook

 The Spring Statement takes us no further forward in our understanding of the financial outlook for public spending in Scotland. 

The Chancellor referenced his forthcoming 2019 Spending Review, but only committed to proceeding with it if a deal on Brexit can be secured.

The Chancellor talks of the end to austerity but offers only vague references to future real terms growth in resource budgets that are no more than re-iterating the same tired lines we have heard before.

This offers nothing more than the funding already committed to Health and no expected real terms growth in wider resource budgets to address the decade of near 7% real terms  cuts to the Scottish block grant.

We know the scale of financial challenge that years of austerity have brought; we know our public services are seeking additional investment; we know the Chancellor has headroom available; and yet he still does not commit. 

There is no doubt that the Scottish budget will face very challenging decisions as part of the Spending Review, if there is no real growth in our budgets beyond health consequentials.

Even where funding has been announced from which Scotland might benefit there is scant regard for our right to expect clarity on the implications for us.  The announcement of £1.6 billion of funding for Stronger Towns was made, with detail of allocations by region across England, but I have been unable to ascertain  how this proposal is to be funded and what that means for Scotland - if anything. 

We will continue to push for our share of funding and will resist in the strongest terms any attempts to by-pass the Scottish Parliament and undermine the devolved settlement.

Other Funding Disputes

Last week, I received no clarity on the impact of the UK Government’s spending announcements from the Spring Statement on the Scottish budget. And we continue to see decisions from the UK Government which undermine and discredit the existing UK funding framework.

In 2017, the UK Government provided an additional £1 billion to Northern Ireland as part of the confidence and supply agreement between the Conservative Party and the Democratic Unionist Party; recently it allocated another £140 million in Northern Ireland’s 2019-20 Budget; and this weekend the Chancellor indicated that he could not rule out more money for Northern Ireland as part of the Brexit negotiations.

These funds were allocated directly to devolved matters and it is completely unacceptable that these decisions did not result in additional consequentials for Scotland.

The UK Government’s actions mean that Scotland has lost out on equivalent funding of more than £3.3 billion.

While I do not begrudge Northern Ireland the exemption from austerity, Northern Ireland is not alone in facing fiscal challenges.

With only two weeks until the new financial year, we also still await confirmation from the UK Government on the detail and extent of the additional funding that we will receive to meet the increased employers’ pension contribution costs across public sector pension schemes.  

This does not allow public sector employers in Scotland adequate time to plan and manage the implications of this change effectively.

These changes are as a direct result of UK Government policy and any shortfall will be effectively a further cut to the Scottish budget.

Conclusion

Presiding Officer, the uncertainty around the outlook for Scotland’s public finances and economy remain no clearer following last week’s Spring Statement.

It is clear that the views and interests of the devolved administrations are not a primary consideration in the UK Government’s management of public finances or in its management of Brexit.

 We cannot completely protect Scotland from the impact of the UK’s EU exit, but the decisions that Scottish Government has taken and will continue to take, ensures that we protect what matters most to Scotland.

And that is why the people of Scotland have entrusted us to focus on the delivery of our public services and the economy.