Economy, Energy and Fair Work Committee

Meeting date: Tuesday, October 1, 2019

Official Report 722KB pdf

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European Union Exit (No Deal)

The third item on our agenda is evidence on leaving the European Union without a deal. We are again joined by Derek Mackay, Cabinet Secretary for Finance, Economy and Fair Work. I welcome to the meeting from the Scottish Government, Kevin Quinlan, director for international trade and investment, and Gary Gillespie, chief economist. I invite the cabinet secretary to make an opening statement.

The uncertainty around Brexit is already having a detrimental economic impact on Scotland. Instead of planning for Brexit, firms could be focusing on developing their business and working to increase productivity, which we discussed earlier today. Any form of Brexit will have a further detrimental impact on Scotland.

A no-deal Brexit will create an immediate dislocation in the economy, which has the potential to impact us in many ways, including through investment, uncertainty, logistics, trade, sterling, and regulatory, financial and fiscal channels, which will have an impact on individual businesses, sectors and communities. From analysis by the Scottish Government, alongside analyses by the Office for Budget Responsibility, the Bank of England and other independent forecasters, we know that having no deal will tip the Scottish economy into recession and reverse the recent gains in the labour market, which could see unemployment rise by up to 100,000.

Although we do not want to leave the EU, we, as a responsible Government, have to prepare for a no-deal Brexit. There are things that we can plan for, but there will also be many unknown unknowns. Therefore, we have planned a range of interventions that we can deploy in the event of a no-deal Brexit. We will need to be agile in determining which to deploy and when, based on an assessment of the situation as it unfolds.

I am clear that the funding for those interventions should have come from the UK Government. The Scottish budget has been agreed by Parliament and is fully committed. If resource is not forthcoming from the UK Government, we will be faced with the choice either to cut funding for public services, or not to deploy contingency plans in the way that we would want.

We have organised our response to Brexit in three phases: resilience, recovery and restructuring. On resilience, we are engaging with business organisations across Scotland and seeking to address their concerns as best we can. That includes providing bespoke information on how businesses can prepare for Brexit in supporting access to finance for businesses of all sizes. We are doing that primarily through the prepare for Brexit website, which has now had more than 100,000 visits. We have completed 6,000 company assessments. As recently as last week, I met the chief executives of our enterprise and skills agencies to take stock of our Brexit response and to ensure that we are aligned in our approach.

In all of that, we have three lines of defence. We are working closely with the banks, encouraging them to make funding available and signposting businesses to go to the banks in the first place. I am convening a meeting of the banking and economy forum later today and I will continue to impress on the banks the important role that they have in stepping up to the plate to help Scottish business post-Brexit. The second line of defence is to look to the UK Government to step up and provide support to businesses that are suffering as a result of Brexit, primarily through the British Business Bank. Finally, businesses will be able to access the current Scottish Government and agency support. We plan a range of interventions and options that we can deploy in the event of a no-deal Brexit. We need to be agile in determining which options to deploy, based on an assessment of the situation as it unfolds.

In relation to recovery, a revised and updated version of our economic action plan will be launched later in the autumn, setting out the wide range of activities and interventions that we are undertaking to help to deliver sustainable, inclusive economic growth.

As we know, Brexit impacts real people and our future skills action plan will help to ensure that Scotland has a skilled and productive workforce that is resilient to future economic challenges. We will continue to increase investment in R and D and our export plan, which seeks to ensure that we are not just fighting back against the impact of Brexit, but are targeting key markets and industries that have real growth potential. We will build on that through the Scottish national investment bank.

We aim to combat the potential fall in population as a result of Brexit with campaigns to ensure that European Union citizens know that Scotland is their home and that they are welcome here, and with efforts to secure an immigration policy that suits Scotland’s needs.

Finally, the third phase of our approach involves longer-term restructuring, which means looking further ahead to try to understand what the economy might look like in the future and prepare for that. Obviously, that is hard to do in the current uncertain political and economic environment that we find ourselves in, but we are ready and prepared to adjust our approach to whatever may come.

Thank you, cabinet secretary. Colin Beattie will ask the first question.

My overwhelming impression is that, across the whole of the United Kingdom, businesses, financial institutions and professional bodies have been communicating their concerns to the UK Government in respect of a no-deal Brexit. Is there any indication that the Government is listening to those concerns and addressing them?

With regard to the high-level political principle, if the Government was listening to business, it simply would not deliver a no-deal Brexit, because that would be economically catastrophic. Businesses are saying that it would be catastrophic, that it would cause business failure, a dip in exports and soaring unemployment and that it would undo the gains that we have made in the economy—that it would be incredibly damaging. Any form of Brexit will damage the economy—Brexit has a range of impacts that I think are well understood by the committee—but, even now, the approach could be different. It could be in keeping with what Westminster has approved with regard to trying to stop a no-deal Brexit. If the Government was listening, it would not allow a no-deal Brexit.

The Scottish Government has pursued an agenda of trying to stay in the European Union. The next best thing would be to have a compromise whereby we stay in the single market and the customs union, and, of course, Scotland has particular needs within that.

With regard to the worst-case scenario of a no-deal Brexit, we have had to rely on what are essentially leaks from the UK Government to enable us to understand what its preparations look like. It appears that the UK Government is not fully listening to what business is saying about the demands and pressures that it will face as a consequence of Brexit.

Of course, preparations are under way at the Scottish and the UK level, and we are trying to engage with the UK Government on what can be done to mitigate the impact of Brexit. However, let me say here at the committee that there is no way in which the Scottish Government can fully mitigate the impact of a no-deal Brexit on Scotland’s people and economy, if that is where the UK Government leaves us.

Obviously, the Bank of England is a respected institution, and the estimates that it makes with regard to an analysis of EU withdrawal without a deal indicate that UK gross domestic product could reduce by up to 10.5 per cent by 2023. There are various scenarios within that, which involve UK unemployment increasing to 7.5 per cent and inflation increasing to 6.5 per cent. Is it at all possible to mitigate that kind of scenario?

I have just tried to make the point that there is only so much that the Scottish Government can do. If there is soaring unemployment, there will clearly be a sense in which we are overwhelmed in terms of what Skills Development Scotland, colleges, universities, local authorities and other stakeholders can do in that regard.

The economic impact in terms of business failures, imports and exports and exchange rates would be catastrophic. I know the effort that my ministerial colleagues and I have made over the summer with regard to particular industrial interventions, but I can say that it is not possible to fully mitigate the impact of a no-deal Brexit. It will be incredibly harmful to our economy and, therefore, to our communities. There is a great deal of economic consensus that that will be the case. Even the Chancellor of the Exchequer struggled to quantify the negative impact on the UK’s economy. There is no positive impact of a no-deal Brexit; there is only a negative impact. It will be catastrophic and there is only so much that we can do to mitigate it, but we have plans in place to prepare for it.

I do not know whether you want further analysis of information on those economic forecasts—I have the Government’s chief economist and economic adviser with me.

It would be interesting to hear from him.

I will pick up on the Bank of England’s most recent forecast. It revised its forecast for no deal in light of the increased mitigation measures being put in place by the UK Government. However, as has just been said, it is still forecasting a negative impact on GDP, with the economy contracting by up to 5.5 per cent, and rising unemployment.

More interesting is the OBR’s July forecast, which is based on its fiscal risk report. It looked at a more benign no-deal scenario in which there would be mini deals for a number of sectors. Its projection suggested that even in that scenario the UK economy would contract through 2020 by about 1.4 per cent and that public finances would be hit by up to £20 billion.

The key point about the different modelling and forecasts is that the initial work that we published for the Scottish Government looked at the impact of Brexit on the economy up to 2030. Essentially, that is based on a transition, with sectors adjusting to the situation. Our work shows that, by 2030, the economy will be a percentage lower than it would have been under the status quo.

With no deal, there will be a disorderly impact and the immediate change front-loads the risks. There will be an immediate dislocation of the economy through supply side constraints, whether that be transport, regulatory or in relation to the preparation of businesses, and through the demand side, with a collapse in confidence. All the forecasters are really worried about that immediate impact and the known unknowns of how that will play out.

I want to move on the discussion from the forecasts, which vary from time to time depending on who is providing them, to the specifics of what the Scottish Government is doing and has done to assist Scottish businesses with the consequences of a no-deal Brexit, in which we would be under World Trade Organization rules. To some, those rules might be advantageous; to others, they might be disadvantageous. What has the Government done to help companies prepare for that situation?

We have been engaging with business representative organisations and convening the banking and economy forum, because most companies will engage with their bank when it comes to any pressures that we face. We have been building up intelligence and responding to requests for support through the prepareforbrexit.scot website, where we can do the diagnostics and advise companies on anything that they might be able to do to prepare for Brexit. In my opening remarks, I gave figures relating to the website.

It is not just a website. Although everything is largely online, there is also a call centre, which is based in Clydebank, and a whole team brings together the different enterprise agencies to try to come up with a bespoke package of support for individual companies.

The call centre works to bring together different parts of Government to give support to individual companies and to advise that a diagnostic tool and financial support are available for businesses to prepare for Brexit. The enterprise agencies have been engaging businesses individually, too.

However, because the political outcome is unknown, it is fair to say that companies have been finding it difficult to prepare fully. Larger companies, particularly those that provide financial services, have reorganised their affairs. Although they might not like the situation, they might feel better prepared than many small and medium-sized businesses.

There is an issue about SMEs, because many of them do not have a plan for Brexit. Therefore, we have promoted the prepare for Brexit campaign and provided tools, advice, support and expertise; specific grants are available, too.

If we are in no-deal Brexit territory, we will have three phases: recovery, resilience and, ultimately, the restructuring of the economy, because some sectors will experience less growth or more of an impact than others as a consequence of Brexit.

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In the recovery phase, we would have an immediate triage arrangement to provide support. We would signpost and refer people to the banks, but we will also have Government financial products that can assist businesses. With regard to unemployment, Skills Development Scotland and our colleges would be involved in retraining and upskilling. The Scottish Further and Higher Education Funding Council would also help to ensure that resources are reorganised to provide support packages for businesses to enable them to adapt in respect of workforce and labour supply issues. We are concerned about the skills gap. The PACE—partnership action for continuing employment—team would be involved where there are redundancies, intervening to provide support in the usual fashion.

There is a range of options. The scale at which each option is deployed will be determined by the available resources, the UK Government’s own interventions and where the demand is at the time. As Gary Gillespie touched on, sectors will be affected differently so we have to tailor our approach based on the intelligence that we have at that point in time. We have an economic dashboard that helps us to understand what is going on in the economy and where we can best target our efforts.

With regard to the rural economy, agriculture will face its own specific challenges. I am sure that Fergus Ewing could tell you more about the rural economy and the issues in relation to support around farming. One headline on farming is that we have advanced the loan scheme to provide a fiscal injection by way of loan payments to the farming community.

That is a taste of some of the preparations that we have been making. We have also been engaging with the UK Government around reserved areas that will have an impact on devolved functions, not least transport and logistics.

Your officials may be able to help with this question. Have analyses been done of which companies will be affected? As you said, some will be affected more than others, depending on economic conditions. Are there analyses that could be shared with the committee?

Absolutely. Some have already been published, but I am happy to provide more information.

The Scottish Government published a no-deal Brexit analysis in February, and I gave evidence to the Culture, Tourism, Europe and External Affairs Committee in March on the impacts. To give you an example, we took on board Bank of England work on the sectors that are most likely to be impacted by a no-deal Brexit. Those sectors are either dependent on EU labour or affected by border issues, regulation or transport and logistics. The key sectors in Scotland that face potential impacts are agriculture, forestry, fishing, chemicals, food and drink and construction. We can provide that information to the committee.

I want to make a point about the prepare for Brexit website. When I appeared before the committee in March, the site had been live for about a month, and we were seeing a spike in activity at that time; there were something like 32,000 visits to the site, and just over 2,000 companies had used the online assessment tool.

As of last week, there had been more than 100,000—approximately 106,000—site visits, and way over 6,000 businesses had completed the assessment. The need to think about the impact of a no-deal Brexit is really starting to penetrate among businesses based in Scotland, whether they are in the front-line trading sectors or supplying the economy within Scotland.

Cabinet secretary, do you think that the Prime Minister is seriously trying to get a deal in order to avoid a no-deal exit? The latest news this morning—I do not know whether you have had a chance to look at it—is the suggestion that there could be some kind of customs buffer zone in the north and south of Ireland to overcome the backstop. That plan has immediately been rejected by the Irish Government. What is your view? Do you think that there is a serious attempt to try to get a deal to avoid a no-deal Brexit?

I do not believe that there is a serious effort by the UK Government, led by Boris Johnson, to get a deal. I fear that Boris Johnson is about EU exit at all costs, and the collateral damage will affect the economy and communities across the whole of the UK.

As I understand the position this morning, the UK Government’s current proposition for addressing the issue in Northern Ireland—which is set out in what I believe it calls non-papers—has already been rejected out of hand. We have seen no evidence that it is genuinely trying to get a deal. Any form of Brexit would be damaging to the UK and Scottish economies, but a no-deal scenario would be particularly catastrophic, which of course is of great concern to us.

The UK Government’s own analysis shows how devastating a no-deal scenario would be for our economy, yet it still does not think that we should rule it out. Disruption to cross-Channel trade could lead to delays in UK food supply, 30 per cent of which comes from the EU. The UK is an island and so has to import certain foods and products. What questions should be asked about the potential for reduced availability of fresh food and a rise in prices, which could hit vulnerable groups; the application of petrol import tariffs, which could inadvertently lead to thousands of job losses and disruption to fuel supplies; and, most important, the fact that medical supplies might be vulnerable to severe, extended delays? Three quarters of the medicine that is used in the UK enters the country through the main Channel crossings. Many of my constituents have been prescribed drugs that are usually imported, so I am especially concerned about that issue. On food, yesterday I was talking to a chap who imports cheese and butter from Ireland, which currently costs him £1,200 per tonne. If Brexit goes ahead, the cost, including tariffs, will rise to £2,600 per tonne, which is more than double.

What is your view on that? Do we have any relationship with the UK Government when it comes to discussions on preparing for such situations and ensuring that there will be no supply chain disruptions? My concern is that, after 31 October, people will walk into shops only to find that the shelves are empty.

For the reasons that it has already given, the Scottish Government is concerned about the impact that a no-deal Brexit would have on our economy. However, the impacts would go much wider. Even in reserved areas such as borders and tariffs, issues will manifest themselves in devolved matters such as transport and medicines, as in the example that Richard Lyle has given. Such a shock to the economy is, of course, a concern, but there would also be issues in the medium and longer term.

I have to say that our relationship with the UK Government sometimes depends on which Whitehall department we are dealing with. Overall, I do not think that there has been proper engagement with the devolved Administrations. It has not been as good as it should have been—and especially since the new Prime Minister has come in. We are being involved a bit more now in some of the UK’s preparation infrastructure, and there has been sharing of information, but I reiterate that the position depends on which department we are dealing with.

Richard Lyle has legitimately expressed concern about transport and customs in that regard. If the UK Government’s transport, customs and ports strategy is not right, that will have an impact on supplies across the UK and to Scotland. That is why we are working intensively to try to prepare for that scenario, but we will be dependent on the UK Government’s approach.

For example, there has been stockpiling of medicines, but we must also have in place the necessary routeing arrangements to ensure that there will be adequate provision of category 1 supplies. At the moment, I feel as though we are all relying on the UK Government having plans for plans to deliver those. Of course, we have been posing the question whether it can guarantee that 100 per cent of supplies will be in place. It will be for the UK Government to answer how sure it is about that; so far, it has simply advised us that it plans to have plans. I am concerned about the timescales for having those in place. To take the example of medicines again, it must see not only that such plans are in place but that the pharmaceutical companies, distributors and suppliers know about them in time to ensure that there will be proper distribution across the country. The prospects of a cliff-edge scenario and a no-deal Brexit being delivered in a fashion that will cause so much disruption are, of course, of immense concern to us.

On the economy, perhaps Kevin Quinlan will say a bit more about how tariffs might affect Scottish business and trade, as there is a particular question around the sectors that will be impacted—especially agriculture—on which the committee might wish to be sighted.

There are areas that are within our control and areas that are not, and the setting of tariffs is not within our control. We have engaged with the UK Government in a concerted manner around that. I guess that there are a couple of issues. The first is the shock value of tariffs being introduced overnight and therefore having an immediate effect without private sector suppliers being able to adjust. Secondly, some of the tariffs that we are looking at are quite complicated. There are pages of schedules in the notes. If we look up the west coast fishing industries, we see that the figures are 12 per cent for langoustines, 18 per cent for prawns, 2 per cent for fresh salmon and 13 per cent for smoked salmon, so the regime is complicated.

There are some areas that we are able to do something about, and one of those is export health certificates in relation to the export of seafood products from the west coast. We have come up with a Scottish solution to that in order to ensure that some of the regulatory barriers do not impede things.

Overall, I think that the situation will have a very significant impact. The most important point is that, in the absence of a trade deal, Europe will not change its tariffs, so we will face the same tariff levels that we have now. The tariffs that the UK Government announced in April will mean that we have drastic liberalisation. I think that between 87 and 95 per cent of our imports will be subject to a completely tariff-free situation. The notable exceptions are sheep, where the tariff regime will be between 40 and 60 per cent—there will still be very significant competition there—and beef, where it will be 100 per cent.

Overnight, people in Scotland who export to Europe will pay between 2 and 12 per cent more.

Yes.

In addition, we as the public will pay more for stuff that comes in from Europe and elsewhere. I am concerned about that, but I will move on to another concern that I have.

There has been a long debate about EU nationals who live in the UK. They have been told that they can remain, that they cannot remain, that they need to pay and that they do not need to pay. I see people drifting away and going back to their countries, but I want them to stay. I welcome people coming to Scotland and living here.

My mother-in-law was Dutch and my father-in-law was Lithuanian. As I said in the chamber last week, if they had not come here, I would not have met my wife and I would not have had my kids or grandkids. It angers me that we have a situation where, basically, we are telling people to go home. I am sorry, but their home is here, and I want them to stay. What action are we taking against the UK Government basically driving people away from their home, which is Scotland?

I concur with what Richard Lyle has said. We have tried to create a political environment that is in sharp contrast with that of the UK, which has tried to create a hostile environment in relation to immigrants and immigration. In Scotland, we recognise the contribution that immigration has made to our communities, our diversity and our economy, and that is why we are encouraging people to stay. Scotland is their home, and if we are privileged enough to have people who have chosen to come and live here and contribute, we want them to stay.

We have been doing that at a political level, and we have also been running campaigns about staying in Scotland. People are welcome here. We have tried to show our pro-internationalist and pro-European credentials, and we have been working with the business community to project the message that we want people to stay. The UK has particular bureaucratic and administrative arrangements for settled status that require people to register, but we have been running campaigns to encourage people to stay in Scotland. We also welcome people to Scotland from the rest of the UK, of course. We will continue to run those campaigns to make the point that people are welcome to stay.

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I have also tried to support businesses in retaining their workforce, because that is a key point in relation to people who might choose to leave, as Richard Lyle mentioned. It might be the exchange rate or the more hostile environment that the UK Government has created, but I think that most people get that there is a point of difference, in that the attitude in Scotland is that we want immigrants to stay. Our future population growth is projected to come only from inward migration, so for economic and social reasons we want to encourage people to stay. That is why we have been running those campaigns and supporting businesses to make staying here as easy as possible.

There has, of late, been one victory in terms of UK immigration policy, which was the decision to allow people to stay on post-study work visas. That speaks to the point that our economic needs require inward migration. We want to see a much more welcoming UK immigration policy, and if the UK Government wants to change its policy, it should be sensitive to Scotland’s needs and give us the tools to create the right migration policy for Scotland. There is no doubt that with a shrinking working-age population we need more people to keep delivering our services and growing our economy in a sustainable way. The Scottish Government has done everything that it can to encourage people to stay, and that will continue.

I remind members that we are tight for time. We appreciate the cabinet secretary giving us his time, but we are running a bit longer than he will have anticipated.

I want to follow up on what the Scottish Government is doing for business. How much additional funding, in pounds, has been allocated to the enterprise agencies to prepare for Brexit?

We expect the enterprise agencies—and many other parts of the public sector—to recalibrate and ensure that energies are directed towards the Brexit challenge. To give some examples, promoting Scotland internationally received £1.4 million, the prepare for Brexit campaign received £1.1 million and the advice service and community-based support for EU citizens received £0.5 million. I included the prepare for Brexit campaign because of the specific question. Scottish Enterprise received £1.1 million to support that campaign.

So the ballpark figure, without being too precise, is that £2.5 million to £3 million pounds has been spent by the Scottish Government to—

Let me check all the figures, because you are asking me for budget lines now. The headline commitment through approved spend for the prepare for Brexit campaign is £1.1 million and, as I said, for promoting Scotland internationally it is £1.4 million.

So, out of a Barnett consequential of roughly £95 million from the UK Government for Brexit preparation, roughly £2 million has been spent by the Scottish Government to prepare Scottish business.

No. You asked me a different question. You asked how much was specifically given to Scottish Enterprise. The totality of support given to the business community as a consequence of Brexit will be greater than that. In fairness, you cannot expect me to have that figure to hand.

Do you have a rough idea of what it is?

I would rather check the detail and come back to the committee than give you a figure off the top of my head. You asked what Barnett consequentials had been given to the enterprise agencies to prepare for Brexit. The amount of support going to the business community as a consequence of Brexit will be much higher and I am happy to come back to the committee on that.

Thank you.

The EU market of 500 million people is very important to the Scottish economy, but the EU also has trade agreements with more than 70 countries. Has the UK Government had any discussions with you about what will happen at the end of the transition period in December 2020 when those agreements come to an end as far as the UK is concerned?

Again, I can ask Kevin Quinlan to cover that, because he works between ministers. Of course, Michael Russell is leading on UK Government negotiations.

I was to meet the UK Government business secretary next Monday—I imagine to discuss preparations for Brexit. Believe it or not, I was quite looking forward to that, but I understand that that meeting has been cancelled, which is unfortunate, because we should be engaging with the UK Government as much as we can in trying to prepare for Brexit.

Kevin Quinlan might want to say more about engagement with trade officials.

Such engagement is super important in the context of future trade access, and we have been engaging. The flow of information on the progress that was being made was pretty good in spring. Since then, there has been a leak in Whitehall—not in the Scottish Government—and the flow of information has dwindled to a trickle, although we still get an informal heads-up.

On what happens after the transition period, I think that, by and large, the Department for International Trade is working on the assumption that trade agreements will roll over, if and when they are signed, and any renegotiation would happen more slowly. There is a practical problem, in that the department faces the challenge of bandwidth to do any substantial renegotiation.

Thank you.

Cabinet secretary, you spoke about the Government’s position on a no-deal Brexit. If a deal is struck between the EU and the UK—and both parties agree to it—will the Scottish Government support it?

To be clear, you are asking me whether I will support a deal in relation to which we have seen no evidence, no content, no understanding and no assessment. Would it be fair to say that—

I am asking whether, if a deal is struck that is agreeable to both the EU and the UK, the Scottish Government’s position will be to support that deal, given your comments on a no-deal Brexit.

We would not support a deal that damages Scotland. If there is a deal—not that there is any evidence that there is going to be one—and if it is Theresa May’s deal or a close variant of it, we know that it will damage Scotland; we did not support Theresa May’s deal.

A no-deal Brexit would be catastrophic. If a deal emerges, of course the Scottish Government will look at it. Our ambition is clear: ultimately, we want Scotland to stay in the European Union and inside the customs union and the single market. If some new political deal is reached, of course we will look at it, but if it would damage Scotland, why should the Scottish Government support it?

Are you saying that the withdrawal agreement that the EU was willing to agree to was damaging to Scotland?

That is right. That was Theresa May’s deal.

Well, I think that it was the EU’s agreed offer with her.

Okay. The EU deal with Theresa May was a deal that would damage Scotland.

If a new deal emerges between Boris Johnson and the European Union—but let us wait and see; I hae ma doots, convener—and the deal would damage Scotland, why should the Scottish Government support it, when to do so would be contrary to not just what the Scottish Government thinks but what the people of Scotland thought when they voted in the referendum to stay in the European Union?

We will move on from your doots to Jackie Baillie.

I share the cabinet secretary’s sentiments in his response to you, convener.

Mike Russell, the Cabinet Secretary for Government Business and Constitutional Relations, said in Parliament that a no-deal Brexit would

“generate a significant economic shock”.—[Official Report, 6 February 2019; c 3.]

Given its new fiscal powers to deal with economic shocks, will the Scottish Government seek to borrow additional money to address the crisis that we think that Brexit will present?

It is a fair question. I will attend the Finance and Constitution Committee later this week, but let me share with this committee that I have already engaged with Treasury to say that the current parameters around our resource borrowing powers are inadequate, partly because of the information that is coming to light.

If we consider, for example, the income tax reconciliation or what we might want to do with the Scottish national investment bank’s borrowing, and we add in the volatility around Brexit, the current parameters are inadequate. That is the straight-bat answer to the question. I do not think that the borrowing powers that we have around resource and capital are adequate, especially given the volatility and economic difficulty that we face on the back of a no-deal Brexit.

On resource borrowing, the Scottish Government has modest resource reserves of around £135 million. Borrowing limits are in place. However, as I said earlier, if the UK does not fund the execution of a no-deal Brexit plan, we will have to either re-prioritise from within or curtail our contingency plans to support our plans. That is a concern, and it is why the UK Government should fully fund the consequences of a no-deal Brexit.

On borrowing and the financial limits that we work within, I present information to the Finance and Constitution Committee at budget time. The UK Government is looking at the prospect of a budget. We thought that there might be an emergency budget, but there was not one. The UK budget is yet to be set. I will set out our funding plans at the Scottish budget, which will give our response to the situation. As I said, though, I already believe that the current parameters that we have around resource and capital borrowing and drawdown from the reserve are far too constricted for the realities that we now face in the fiscal landscape.

That does not quite answer my question, so I will pry a bit more. You have an additional fiscal power that was negotiated by the previous finance secretary with the UK Treasury that means that, in the case of economic shocks, you can borrow more money, which is a perfectly legitimate thing to do. In my view, those triggers will certainly be met in the context of a no-deal Brexit. I want to push you on whether you are likely to use that revenue stream that is open to you.

I tried to give a comprehensive answer, because it was a good question. I will certainly address it at the Finance and Constitution Committee and in the subsequent budget.

Let us separate out the two issues. First, before we come to the economic-shock resource borrowing limits, the question is whether I would be able to borrow more to fund no-deal preparations. I tried to say in my previous answer that I would be very limited in my ability to do that given the Scottish Government’s budget and its approval by the Scottish Parliament. Unless extra resource came to Scotland, we would not be able to fully fund the no-deal plan. I believe that I have said that the volatility that we face because of a number of matters already suggests that the UK Government should be more flexible in relation to our borrowing powers. I tried to give an honest answer on that and analyse the situation. It is a fair question to ask how we could fund the no-deal Brexit preparation and indeed the no-deal impact if the UK Government is not going to do that, which would curtail what we could do in mitigation.

Separate to that, I note that we have not yet met the criteria for that component part of resource borrowing as a consequence of the economy. The Scottish Fiscal Commission makes a judgment on that as well. If there was divergence from the rest of the UK, it would call into question the ability to borrow against that economic divergence point. The fear might be that the UK would be in recession as well, so its GDP might be impacted as well as Scotland’s, whereas the fiscal framework’s parameters are about the relative position between the UK and Scotland. I think that that gives Treasury further cause to look again at the parameters around resource and capital borrowing that will allow us to deal with an economic shock.

The arrangements were set out in such a way that they refer to a Scotland-only shock, whereas I think that the point that Jackie Baillie is driving at is that an economic shock is an economic shock, and the question is how we can have more tools and levers to use in that scenario. It would not be just Scotland that was in economic shock, so to speak; it would be the UK as well. That is why I have tried to open up the debate with Treasury. There is a new Chief Secretary to the Treasury. I know that he is catching up with his brief at present, but I tried to engage with Treasury at the first meeting that I had—at the finance ministers quadrilateral—to try to take the issues forward.

The first call on the UK Government was to fully resource Brexit preparations and then the impact of Brexit to try to ensure that there would be no net detriment to Scotland’s finances in terms of both what Government can do and its responsibility to intervene to protect the economy. It is a fair question and I hope that the UK Government will consider the requests.

11:45  

Can I pursue the issue of the money that has already been allocated for Brexit? There was £37 million in 2018-19 and £55 million in 2019-20, and the Chancellor of the Exchequer announced another £40 million on 31 July. Will you provide the committee with the full breakdown for 2019-20 by portfolio? You gave me a breakdown in answer to a question about 2018-19, but you said that you could not provide a breakdown for 2019-20. That strikes me as rather strange. I am happy for you to write to the committee with that breakdown. In that written response, will you separate out, if possible, the money that has been spent on no-deal preparations as opposed to general Brexit preparations?

Finally, I am supportive of your bid for a further £52 million from the contingency fund, but will you tell us how that is broken down?

I will try to be as helpful as possible. First, it is true that Brexit consequentials have been allocated to support preparedness. However, if there is a no-deal Brexit, the consequentials so far will not come close to resourcing the response to that. I can itemise the resources for those areas, but not right now. I do not think that we have time for that anyway, given what the convener said to me earlier. However, preparedness resources have been allocated for, for example, police numbers, Brexit support, businesses and fair share funding, which will help to tackle food insecurity. There are a range of areas in relation to the current Brexit consequentials, and I can return to them and show how they have been resourced. Of the £98.7 million European Union exit consequentials that were received between 2017-18 and 2019-20, we have already spent or committed £92 million.

On the request for the £52 million from the UK Government’s £1 billion operational contingency fund, which is to help us to prepare for a no-deal outcome, there were strict and tight criteria for that and we worked at pace to produce a bid. The request includes funding to tackle the disproportionate effect of a no-deal Brexit on rural communities, including to ensure that medical support reaches those areas; funding for increased demand for Marine Scotland compliance activities around Scotland’s coastline; funding for additional communications to EU citizens who live in Scotland; funding for increased demands on Police Scotland; and funding for poverty mitigation measures to support financially vulnerable households. That is the nature of the £52 million bid, which is in with Treasury at present.

Thank you very much for coming in, cabinet secretary. That concludes our evidence session. I will suspend the meeting to allow a changeover of witnesses.

11:48 Meeting suspended.  

11:52 On resuming—