I am pleased to set out the Scottish Government’s first medium-term financial strategy. This marks the first step of the new budget process that was proposed by the budget process review group and agreed by the Parliament. It is also an important step in the development of the fiscal responsibility of both Government and Parliament, following the Scotland Act 2016.
We must remember that Scotland’s public finances are set in the context of continuing United Kingdom Government austerity, Brexit uncertainty and an inhumane, hostile approach to immigration, all of which present unnecessary risks to our economy and our tax base.
Despite increased powers over taxation, the block grant remains our single biggest source of funding, and it continues to be cut. Between 2010-11 and 2019-20, our discretionary block grant for day-to-day spending is falling by £2.6 billion, or 9 per cent in real terms. In 2019-20 alone, we expect real-terms cuts of £410 million.
Let me be clear: the UK Government does not need to pursue this course. Austerity is a choice based on ideology, not on economic necessity. The Chancellor of the Exchequer is on course to overachieve his fiscal deficit target. The Office for Budget Responsibility confirmed in its economic and fiscal outlook for March 2018 that the chancellor has approximately £15 billion of fiscal headroom in 2020-21 alone. Rather than continuing his programme of cuts to public spending and tax cuts for the wealthiest, he should, as a minimum, invest the headroom available in vital public services and economic stimulus.
Scottish Government modelling suggests that the chancellor could provide additional investment in Scotland of around £5 billion between now and 2022-23, while still meeting the UK Government’s targets on structural deficit and debt reduction. UK austerity is a choice, and it is not one that Scotland has made. I continue to make the case that the chancellor should change course, end austerity and invest properly in public services.
Leaving the European Union is not in Scotland’s interests, either. It is also not Scotland’s will. Uncertainty is leading to subdued growth, and leaving the EU will compound that impact. The UK Government’s proposed approach on immigration could see real gross domestic product in Scotland 9.3 per cent lower by 2040, which would reduce tax revenues and threaten public services.
In the face of the damaging role of the UK Government in Scotland’s economy, our strategy sets out alternatives, and how the Scottish Government will deliver our ambitious programmes. The UK Government still has time to rethink its approach on austerity, on Brexit, and on migration—indeed it appears that this is the week for Tory reflection.
This strategy clearly lays out the consequences of UK choices that are imposed on Scotland, and how alternatives would mean a fairer deal for Scotland. Against the backdrop of UK austerity and uncertainty, our decisions have sought to ensure that we manage our finances responsibly and provide people and businesses with certainty, including through our actions on taxation.
Our approach to taxation is founded on the four key principles of certainty, convenience, efficiency and proportionality. Those principles have shaped our reforms to income tax and land and buildings transaction tax, which, taken together, will boost our spending power by almost £500 million a year by 2022-23. Our policy ensures value for money for our taxpayers and certainty for our vital public services during the turbulent and uncertain times ahead.
The Scottish Government will always be ambitious for Scotland, no matter what is happening elsewhere. Growing and supporting the economy is essential for financial stability and for providing the resources for our public services.
During the current parliamentary session, we will invest more than £20 billion in infrastructure.
The Scottish capital budget for 2018-19 is estimated to support around 40,000 jobs.
We will bring superfast broadband to every home and business across Scotland by 2021 through the R100 programme.
We will invest £1 billion to support city region deals for Glasgow, Aberdeen, Inverness, Edinburgh and the south-east of Scotland. We today secured the new deals for Stirling and Clackmannanshire, and we continue to work on the Tay cities deal, as well as other growth deals.
The low-carbon infrastructure transition programme will fund large-scale projects to deliver Scotland’s energy strategy.
This year, the economy, jobs and fair work budget increased by £270 million—a 64 per cent increase—forming part of our total investment of £2.4 billion in our enterprise and skills bodies.
We are committed to making Scotland a great place to do business by providing the most attractive package of non-domestic rates in the UK, including measures specifically designed to boost investment and support sustainable economic growth, such as the growth accelerator.
Alongside our economic focus is our support for the social contract. We will invest in our treasured national health service by adding £2 billion to the health resource budget over the course of this session of Parliament. We will protect local communities by maintaining the police resource budget in real terms each year. We will ensure the best start in life through our transformative expansion of early learning and childcare, nearly doubling funded provision to 1,140 hours per year. We will tackle the attainment gap with the £0.75 billion attainment Scotland fund. We will ensure that education is based on the ability to learn, not the ability to pay, by maintaining free tuition for university students. We will deliver dignity and respect for all by shaping and funding a distinct social security system in Scotland. Those commitments are at the heart of our social contract and at the heart of meeting the new national performance framework outcomes. Our strategy sets out funding estimates for what is needed to meet those commitments over the next five years.
Today, the Scottish Fiscal Commission will publish new economic and fiscal forecasts that suggest that economic growth will be lower in Scotland than in the UK over the next five years. However, when the effects of population growth are stripped out, Scottish growth is much closer to UK growth. That underlines the importance of this Parliament having greater control over immigration.
The SFC has also produced updated tax forecasts, which show a more subdued outlook on income tax revenues. That is largely due to its assessment of recent wage growth and its conclusion that earnings will grow more slowly in the years ahead than it thought in December that they would. As the SFC describes it, that is its main evolution in judgment since its previous forecasts.
The SFC also confirms that the costing of our income tax policy, which remains largely unchanged since the budget bill, shows that it is expected to raise over £210 million in 2018-19. Our strategy shows that income tax is projected to contribute over £400 million a year in net additional revenues by 2022-23.
Those forecasts are used in our strategy to create a central scenario of potential available funding. We then go on to set out potential upper and lower scenarios based on this central estimate. That provides an indication of what funding may be available to the Scottish Government. By their nature, the scenarios and the forecasts that underpin them contain a degree of uncertainty; as new data becomes available, they are likely to change.
As I have already set out, a significant degree of that uncertainty comes from the lack of clarity over the path that the UK Government intends to take on austerity and on Brexit. When we set the budget for 2019-20, we will have a further set of economic and fiscal forecasts from the Scottish Fiscal Commission, updated block grant adjustments from the UK Government, and the outcome of the UK autumn budget—all providing a more robust set of information on which we will make our budget decisions.
Similarly, we do not currently have any resource budget allocation from the UK Government beyond 2019-20. It is hoped that the UK spending review next year will offer sufficient future year budget information to allow the Scottish Government to develop multiyear budget allocations.
The medium-term financial strategy does not provide detailed budget allocations at this stage—that will form part of our annual budget process. However, on any scenario, we have to operate within the fiscal framework and UK funding policies. I have set out in the strategy our responsible approach to financial planning and fiscal rules, which will allow us to invest in the economy and protect essential public services.
I hope that this strategy informs a responsible debate on budget choices in Scotland and I commend it to the chamber.