Meeting of the Parliament

Meeting date: Thursday, May 25, 2023

Official Report 1102KB pdf

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Medium-term Financial Strategy

The next item of business is a statement by Shona Robison on the medium-term financial strategy. The cabinet secretary will take questions at the end of her statement, so there should be no interventions or interruptions.

14:30  

Today, I am publishing the sixth medium-term financial strategy and giving my first fiscal statement as Deputy First Minister and Cabinet Secretary for Finance.

It is very clear that sound public finances are key to ensuring that we can tackle poverty, build a fair, green and growing economy and improve our public services for the needs of future generations. However, I recognise that our current financial situation is among the most challenging since devolution. Scotland has faced a succession of economic shocks as a result of the Covid pandemic, the war in Ukraine and, of course, soaring inflation. All of those are driving significant pressures on the economy, society and the public finances.

To some extent, those are global challenges, but the impact of those challenges is felt more keenly in the United Kingdom as a result of the UK Government’s damaging decisions—not least a decade of austerity, Brexit and the disastrous autumn mini-budget, which sent borrowing costs to a 20-year high and led to the Bank of England having to intervene with a £65 billion package to stop pension funds collapsing.

Despite the increasingly challenging context, we have successfully balanced the Scottish budget every year while taking clear and decisive action to protect the most vulnerable. The Institute for Fiscal Studies has noted that

“the tax and benefit system in Scotland is considerably more progressive than in the rest of Great Britain.”

In this statement, I will set out our approach to meeting the challenges ahead. I turn first to the outlook for the Scottish economy and public finances. I extend my warmest thanks to Professor Graeme Roy and the commissioners of the Scottish Fiscal Commission for providing the forecasts that accompany the publication. The use of entirely independently generated forecasts on the economy and the Government’s funding outlook is one of the great strengths of the Scottish fiscal landscape. Where independent forecasts are not available, we are transparent and open about the assumptions that we have made.

Although the Scottish economy has proved to be more resilient than expected, the economic outlook remains extremely challenging. Despite the SFC and Office for Budget Responsibility forecasts projecting that inflation will fall sharply to 2.9 per cent by the end of 2023, inflation will still remain high, at 6.1 per cent on average throughout 2023. I welcome the announcement yesterday that inflation is now falling, but low inflation cannot reverse the increasing pressure on households. Indeed, real disposable income per person will have fallen cumulatively by 4.1 per cent from 2021-22 to 2023-24. Those are record falls in living standards, which are not set to recover to pre-pandemic levels until around 2026-27.

Although resource funding is projected to grow in real terms between 2023-24 and 2027-28, we still face a real-terms reduction in the resource block grant in 2024-25. At the same time, resource spending is projected to grow. That means that our resource spending requirements could outstrip our funding by £1 billion in 2024-25, rising to £1.9 billion in 2027-28.

In addition to inflation, the key drivers for that pressure relate to social security, the public sector pay bill and health and social care. Those also affect the current budget year. Since the 2023-24 budget was set, we have agreed pay settlements for teachers, firefighters and national health service staff, which, of course, recognise the impact that the cost of living crisis is having on our valued public sector workers. That will require us to carefully manage our limited resources, with any changes clarified via the autumn and spring budget revisions.

The pressures are more severe for capital spending, with the price of infrastructure projects having risen by 14.1 per cent this year, according to the Office for National Statistics. Combined with the UK Government’s failure to inflation proof our capital budget, we face a real-terms cut every year up to 2027-28. That challenge is particularly acute in 2024-25, when funding will reduce by 3.7 per cent in real terms.

On the current trajectory, we expect the divergence between capital funding and expenditure to grow to about £900 million by 2025-26. That is unsustainable, and we will need to reset both our capital and resource spending in the 2024-25 budget, to which I will return.

The MTFS sets out three pillars that underpin our approach to managing the public finances over the medium term. The first pillar is a laser-like focus on ensuring that spending is focused on achieving three critical missions. I will not back away from making tough choices relating to the decisions that I can control, but I will point out where the levers that are available to me are insufficient.

I call again on the UK Government to increase capital funding in line with inflation and to provide additional funding to cover reasonable pay settlements for our public sector workers. However, I cannot rely on the UK Government to take action, so I am fully committed to prioritising our resources towards realising this Government’s strategic missions.

Our first mission is to tackle poverty, and I am proud of our record in that regard. Our expenditure on social security benefits is expected to grow from 10 per cent of our resource budget in 2022-23 to nearly 15 per cent in 2027-28. In fact, in 2027-28, we will be investing £1.3 billion more in social security than we will receive through the block grant adjustment. That money will support families with their living costs, help older people to heat their homes in winter and enable disabled people to live full and independent lives.

I will ensure the continuation of public sector reform in order to achieve effective, person-centred and fiscally sustainable public services. In order to prioritise the programmes that will have the greatest impact on delivery of our three missions, such as early learning and childcare, we will need to deprioritise programmes that make a less meaningful contribution to our central missions. Today, I commit to refreshing both our resource and capital multiyear spending envelopes as part of the 2024-25 budget, through which I will set out the Government’s plans to put our public finances on a more sustainable path.

Our policy choices and priorities will be clearly set out for all to see. If others disagree with them, they can, of course, bring forward alternative spending plans as part of the budget process.

Choices over tax policy and the strength of the Scottish economy are key to our ability to invest in public services. That is why generating economic growth by supporting businesses to invest and create jobs is the second pillar of our strategy. The Scottish Government has limited powers with which to pursue that objective—our borrowing powers are constrained and have been further eroded through this period of high inflation.

We also lack the powers to tackle Scotland’s historically slower population growth relative to the rest of the UK, such as powers over migration policy. We are trying to mitigate that as best we can through the creation of the talent attraction and migration service.

Even with limited powers, we are already making Scotland wealthier. Since 2007, while gross domestic product per capita has grown by only 5 per cent in the rest of the UK, it has grown by 9 per cent in Scotland. As we deliver our national strategy for economic transformation, we will prioritise the policies and actions with the greatest potential to transform Scotland’s economy. For example, we need to help parents to access more and better-paid work. Childcare provision has a vital role to play in that regard, particularly when integrated with other local services. Ensuring that we find the fiscal headroom to expand our childcare offer will be a key part of our approach.

That brings me to our third and final pillar: maintaining and developing our

“strategic approach to tax policy”.

The most recent forecasts show that tax devolution will add an extra £574 million to the Scottish budget in 2023-24, increasing to almost £1.7 billion by 2027-28. However, the tax policy choices of the Scottish Government are limited by the current devolution settlement. Revenue for the Scottish budget is heavily reliant on Scottish income tax, which is only partially devolved, so I currently do not hold all the levers necessary to make the Scottish tax system work in the most effective way.

However, there are choices for the Scottish Government around who and what to tax, and by how much. Scotland already has the most progressive tax system in the UK. Ensuring that the burden of taxation is placed on those who have the broadest shoulders will continue to be the cornerstone of our approach. I commit to publishing alongside the next MTFS an updated tax strategy, which will build on the principles that we set out in the “Framework for Tax: 2021”. In order to support that work, I will chair an external tax advisory group to ensure that our future tax strategy is informed by a broad range of views.

Finally, I recognise that this Parliament is at its best when we work together. Therefore, given the scale of the challenge, I wish to take the opportunity to invite colleagues from across the chamber to work with me in identifying how we can advance the three pillars of the strategy. These are incredibly challenging times, not helped by the limited levers at my disposal or the actions of the UK Government. However, I am committed to taking the tough decisions that are required to deliver focused, ambitious and affordable measures that protect our environment, promote business growth and improve wellbeing for the people of Scotland through the reduction of poverty.

The MTFS sets out how we will manage our public finances over the medium term in order to ensure that we deliver on the key priorities for Scotland’s people. In doing so, we will continue to make the very clear and compelling case for Scotland to have the key fiscal levers that other countries have in order to enable us to meet fiscal challenges now and in the future. I look forward to taking members’ questions.

The cabinet secretary will now take questions on the issues raised in her statement. I intend to allow around 20 minutes for questions, after which we will move on to the next item of business. Members who wish to ask a question should press their request-to-speak button now.

I thank the cabinet secretary for prior sight of her statement. Just a cursory look at the documents that accompany her statement is further proof, if any was needed, of the precarious situation that is facing the Scottish economy, most especially the significant gap between projected expenditure and income. It is yet more proof of the Scottish National Party’s utter failure to address the really big issues that have been flagged up by economists and forecasters for the whole of the past decade. All we get is an excuse that it is the problems of Westminster, which is simply not true. Measured against what Kate Forbes said in the same statement last year, the SNP has been failing to deliver on the imbalances in our labour market. It has failed to address Scotland’s persistently low productivity, to ensure that Scotland is far more competitive than is currently the case, and, worst of all, it has failed to boost economic growth.

I will ask the cabinet secretary three questions. Will she finally acknowledge the widespread concern of the Scottish business community that Scotland is the highest-taxed part of the UK, with the serious detrimental effect that that has had on innovation, jobs and growth? Secondly, she has said that the Scottish Government is commissioning a new tax group to look at future strategy. Given the urgency of the situation, what will the Scottish Government do to address the serious warnings that are contained in the Scottish Fiscal Commission’s sustainability report that we do not, and will not, have the necessary revenue to fund the Scottish Government’s projected expenditure? Thirdly, with regard to the proposed new tourist tax, which was flagged in the media this morning, what message does the cabinet secretary think that that sends to the hospitality, tourism and retail sectors when they are still reeling from the SNP’s failure to provide the same business rates relief that is available in the rest of the UK and is vital to Scotland’s economic recovery?

I will try to address those questions in turn. First, I do not know whether Liz Smith has seen the Scottish Tourism Authority’s comments in support of the introduction of a visitor levy. Ultimately, It is a choice for local government as to whether to use the levy, and each council will make that judgment. There is a pattern from the Scottish Conservatives: any and every lever, whether a policy in the Parliament or a lever that empowers local government, is opposed by them. In the current financial environment, that is incredible. I say to Liz Smith that, yes, the situation is challenging—I set out clearly in the MTFS the reasons for that challenge, many of which relate to inflation, which is the result of decisions and actions that were taken by her party’s UK Government.

I described the pillars that will underpin the action that we will take. We will absolutely focus on public spending that meets the needs of our ambitions to reduce poverty and grow the economy, and we will ensure that our tax policy is fair and sustainable, which is why I will establish the tax group that Liz Smith referred to.

I do not accept the characterisation that Liz Smith gave. The SFC has said that 52 per cent of taxpayers in Scotland will pay less tax than they would in the rest of the UK—that is the SFC’s analysis.

We must make sure that business taxation is fair. Liz Smith referred to non-domestic rates and hospitality but, as Tom Arthur said in the chamber yesterday, that point does not recognise the extensive package that responds to that sector’s number 1 call, which was to freeze the poundage. The small business bonus scheme is also the most generous such scheme anywhere in these islands.

In the week when the Tory UK Government has said that it wants to bear down on legal migration to this country, it is a bit strange that Liz Smith cites population growth. We want to have powers over migration so that we can attract people to live and work in Scotland and pay their taxes here. That is why we want such levers but, in the meantime, my colleague Neil Gray is taking forward the talent attraction and migration scheme, because we want to do what we can within the powers that we have.

I point out to everyone that we have about 20 minutes for questions and we have already used up nearly six minutes.

The most relevant part of the statement was the recognition that we are set to experience a record fall in living standards in Scotland. Average real disposable income is to fall by 4.1 per cent, and far too many people are seeing their lives diminished—they reach the end of the pay cheque before the end of the month. In that context, it is disappointing that there is almost nothing in the document about a strategic approach to growing wages and helping the vast majority of the population with household income.

There is no answer to the central question in our public finances, which is about the £1.9 billion gap between the tax that we collect and the policy commitments that the Government has made. The cabinet secretary said that she will not back away from tough choices for the decisions that she can control, but she is not telling us about any of them in the strategy that is in front of us today, and an invitation has been given for other people to come up with those ideas. Part of the Government’s job is to set out how that gap will be addressed. Businesses and public services have to plan ahead and make decisions for the long term. How are they supposed to do that when the Government will not tell them how its plans will change?

By the looks of the document, the new First Minister’s much-talked-about tax policies are at least another year down the line. Given the gap that we see, that is astonishing. Labour looks forward to the tax consultation—

Mr Marra, could we get to your questions, please?

I shall do that, Presiding Officer. Who will be in the room and who will ask the questions?

It is little wonder that 58 per cent of Scots feel that things in Scotland are headed in the wrong direction. Does the cabinet secretary agree with them?

I recognise the impact on living standards that Michael Marra outlined; the main driver of that is the rampant inflation that has resulted from UK Tory economic mismanagement.

As for focusing on the economy and growing wages, that is exactly what NSET is about—it talks about a 10-year programme to grow the economy, grow wages and grow the sectors in Scotland that are most likely and have the biggest opportunity to grow. All of that has been set out.

Michael Marra asked me why I am not setting out the budget today, but, of course, this is not a budget; this is a medium-term financial strategy. The plans, the policies and what we will spend on what will be set out fully in advance of the 2024-25 budget. In advance of that, we will make the decisions around that targeting. The tax policy, of course, has to be set as part of the budget process, not during the MTFS.

Finally, I am happy to work with Michael Marra and his colleagues if they want to bring forward ideas. This is not about passing the buck on to anyone else. [Interruption.]

Members!

The responsibility lies with us to bring forward a balanced budget that sets out how we will meet the ambitions of our key missions, one of which is about tackling poverty. [Interruption.] When you look at the spend on social security here in Scotland, which is, of course, one of the drivers, of the financial pressures—[Interruption.]—I would hope that Michael Marra will not disagree—

Members! Cabinet secretary, please resume your seat.

I do not want all this chit chat. Also, we need to pick up the pace, with all respect, because we have 11 minutes or thereby and 10 more members are seeking to ask a question. I do not know whether you have anything to add to that answer, cabinet secretary.

No, that is fine.

Thank you. I make a plea for succinct questions and answers from now on; otherwise, I will have to drop members from being able to ask any question, which I really do not want to do.

It is clear that cuts are coming. There is a £1 billion hole in resource spending next year and £2 billion the year after, but the cabinet secretary has refused, twice now, to treat the members in this chamber and the general public like adults and tell us where those tough decisions will be taken and where those cuts will come from. The situation is, in large part, caused by sub-optimal GDP growth and low productivity. The Scottish Government has just cut £46 million from our world-class universities and colleges. [Interruption.] They are generators of growth. Can the cabinet secretary understand the anger that is felt at them being deprioritised, and now badged as making “a less meaningful contribution” to the Government’s central missions?

It has been made clear time and again that the reason for the £46 million that Alex Cole-Hamilton raises—which was unfortunate; of course no one wants to reduce funding to any area of public spending—was to help to fund the teachers’ pay deal. We heard over and over again in the chamber of the need to settle the teachers’ pay deal, and the Cabinet Secretary for Education and Skills said at the time that there would be implications, because that money had to be found from somewhere. We then set out where that money had to be found from. [Interruption.]

Members!

Unfortunately, that is the reality of having to find money in-year because of pay deals that have been settled and because those pay deals have been driven by inflation. We do not, of course, resent giving pay deals to public sector workers in a cost of living crisis, but the money has to come from somewhere.

We will set out our spending plans in detail in the forthcoming budget, because that is where the spending plans are set out and where the tax policy will be set out in order to pay for those spending plans. In making those decisions, we will make sure that we have a laser focus on targeting resources to those who need it most. I would have hoped that that would garner some support across the chamber.

Scotland clearly has some very wealthy people, so I very much welcome the updated tax strategy that the cabinet secretary is promising. Can she say any more about the external tax advisory group? For example, would the Scottish Trades Union Congress be part of that?

We will set out in the next few weeks who will be involved in that group, but we clearly want a group that has a range of views on the best way forward for tax. It will include expertise from the tax profession but also from the varying interests in Scottish civic life on how we should go forward with our tax policy. I look forward to working with the group over the summer.

As can be seen from the strategy, average earnings are growing more slowly in Scotland than in the rest of the UK and they are now less than 92 per cent of the UK average. Does the cabinet secretary not understand that Scotland’s being the highest-taxed part of the UK is making that situation worse?

I do not accept that. As I said, 52 per cent of Scottish taxpayers will pay slightly less income tax in 2023-24 than they would if they lived elsewhere in the UK.

We have prioritised a fair and progressive approach to taxation that balances the need to raise revenue with the impact on households and the economy. If the Scottish Conservatives want a different set of tax proposals—that is, if they want to cut tax as Liz Truss wanted to do in her budget—they have to accept the impact on Scotland’s public finances. [Interruption.]

Members, we need to hear the cabinet secretary.

Quite often, Tory members come to the chamber asking for more money to be spent on Scottish public services. They cannot on one hand do that and on the other hand want to cut taxes—that just does not stack up. We will continue to have a fair and progressive tax system that balances the needs of households with the needs of public finances and the economy.

As has been noted, the Scottish Government has to balance its budget every year, which leads to challenges with demand-led budgets, such as social security, in year. What assessment has the Scottish Government made of its ability to manage demand-led budgets, and what specific fiscal levers would the cabinet secretary ideally want to be able to use to make that job easier?

The analysis of the funding position, which is set out in the MTFS, clearly shows that the volatility to which the budget is subject is greater than the levers—which Michelle Thomson mentioned—that we have available to manage it. The limits on our borrowing in reserved powers are clearly inadequate to deal with the changes in tax and social security forecasts that we need to manage. Moreover, those limits are fixed and the value is eroding over time, not least due to inflation.

The upcoming review of the fiscal framework really has to address that issue and needs to give us the tools that we must have to manage the volatility in demand-led areas such as social security and the budget more widely.

ONS data is very clear. In recent years, job growth and wage growth have been slower in Scotland than in not just all other UK nations but key comparator regions such as the north-west and south-west of England. Does the cabinet secretary have an explanation for that? Given the centrality of growth in per capita income tax receipts in the fiscal framework, why was there no mention of that in her statement whatsoever?

Recent evidence suggests that economic performance is improving. The latest forecast of the net position for income tax in 2023-24 has improved, rising from £325 million at the time of the Scottish budget to £411 million in the latest forecast. That improvement is due to a number of factors but, most importantly, to significant shifts in the underlying forecast of relative earnings in comparison to the rest of the UK.

Provisional in-year pay-as-you-earn tax data for the first 11 months of 2022-23 suggests that Scottish PAYE income tax receipts have outperformed the rest of the UK, and the SFC forecasts that nominal earnings in Scotland will go through a period of higher growth relative to the growth of earnings that the OBR has forecast for the rest of the UK over the next five years, supporting our tax base. Surely, that is something that Daniel Johnson would welcome.

Last year, a number of Tory MSPs in the chamber were calling on the Scottish Government to replicate Kwasi Kwarteng’s catastrophic plans for tax cuts for the rich, following the UK Government’s disastrous mini-budget, which ended up crashing the economy to the tune of—we are told by some commentators—£74 billion, Scotland’s share of which is around £6 billion. There was not a word of comment from the Tories about that £6 billion that was lost to the economy. Can the Deputy First Minister advise what the likely impact would have been had those tax cuts been implemented by a Tory Administration, and what the effect of the Tory spending cuts for Scotland would have been?

Keith Brown is absolutely right. If we had matched the Tory calls on tax policy over the past year, we would have been worse off by up to £500 million. Cutting taxes for the wealthiest in society when many vulnerable households are facing hardship would have made no sense from an economic or, indeed, a moral standpoint. It is for the Tories to explain how their defining mission of slashing taxes and running down our public services is an attractive proposition for this country.

Instead, we have continued to take a responsible approach to our tax policy, making it work to support revenues for public services. Our approach carefully balances the policy’s impact on households and the economy with the need to raise revenue to support our vital public services, including our NHS.

We know that, since 2014, the Scottish economy has grown, on average, at around one half the rate of the UK economy. What assessment has the Scottish Government made of the additional tax revenues that would have been generated for it if we had at least matched UK average growth during the period since then?

As I set out in an earlier answer, tax performance is improving, as is economic performance. Murdo Fraser wants to criticise the Scottish Government—[Interruption.]

Cabinet secretary, please resume your seat for a second. Members, the question has been asked and we need to hear the cabinet secretary’s response. If members have something else to say, they must not say it from a sedentary position.

I say to Murdo Fraser that recent GDP growth in Scotland is better than in the rest of the UK. That might not be something that he wants to hear—he is shaking his head because he does not like to hear anything positive about the Scottish economy. This is a fundamental point: Murdo Fraser comes to the chamber to ask us questions about what we are doing to grow the Scottish economy, but he then refuses to support us in getting the fiscal levers that we need to help us in our mission to grow the Scottish economy.

In the MTFS statement that I have just made, one of the key pillars that I set out is growing the Scottish economy by using the NSET and the levers that we have at our disposal and by investing in childcare and other measures, because we know that that will help to grow the tax base, which will help the Scottish public revenues.

I welcome the comments in the strategy on public sector reform and the DFM’s offer to work with others in addressing the challenges that we face. I will certainly be delighted to take up that offer, even if, apparently, the Opposition parties will not.

The spend on non-front-line costs across the public sector is significant, running into billions. The spend on core Scottish Government costs alone is now in excess of £700 million, with significant increases in recent years. What assumptions has the Government made about the value of resources that will be freed up and deployed to front-line services as a result of the public sector and Government reform work that the DFM is taking forward?

I welcome Ivan McKee’s offer. I want to work with members from across the chamber and to look at any ideas that members have to support this work.

A programme of reform will support all aspects of public services to change within the overall envelope and move to a position of greater sustainability. That means that reform must be more than transferring resource to the front line of our public services, and it is about transformation in both the back office and front-line functions.

Our programme of reform includes a laser-like focus on securing the sustainability of public services. There is no particular predetermined savings target, because we want public bodies to do what they can to be more efficient; to look at exhausting and testing all options for efficiency savings; and to focus on making those savings as soon as possible. It is a vital area, and it is one that I will take forward on behalf of the whole Government to drive progress as quickly as we can.

We are in a dire financial situation and our options are limited. However, I am glad that the Scottish Government acknowledges that it cannot just cut its way out of the situation. Does the Deputy First Minister agree that this is the time to be bold with tax policy to ensure that the wealthiest are paying their fair share, for example through a new income tax band for people who earn between £75,000 and £125,000?

Ross Greer will appreciate that we are in the early stage of looking towards the 2024-25 budget and the tax policy that will underpin that budget. I have agreed to chair a group over the summer to hear a wider range of views on the direction of travel.

When it comes to progressive taxation, we have strong foundations to build on. Progressive taxation has made a huge difference to the Scottish budget. Without it, we would not have had hundreds of millions of pounds to spend on public services. Going forward, we will make sure that we balance the needs of taxpayers and household incomes against the needs of our public services.

The social contract is very important to taxpayers in Scotland. It means that they get public services that are way, way ahead of what is offered elsewhere in the UK. Those services include free tertiary education, free prescriptions and, of course, a childcare offer that is much better than that anywhere else in the UK. I think that we should be proud of that.

I apologise to the members whom I was not able to call. I indicated at an early point that that would happen if the questions and answers remained at the same length. Obviously, I must protect the time for the next item of business.

There will now be a short pause to allow the front-bench teams to change position, should they so wish.