Chamber and committees

Today, I am publishing two documents that broadly set out how public finances will be managed in the next five years—the Scottish Government’s seventh medium-term financial strategy and our first fiscal sustainability delivery plan.

Today, the Scottish Fiscal Commission is also publishing an update to its independent forecasts, which underpin the strategy and delivery plan. I thank Professor Graeme Roy and the Scottish Fiscal Commission for their flexibility in working with us.

With the world facing profound economic uncertainty, this MTFS is being presented in deeply challenging circumstances. Those challenges have been exacerbated by the actions of the United Kingdom Government, whose decisions continue to have serious consequences for the delivery of our public services. For example, the Chancellor of the Exchequer has again failed to provide full funding for the additional costs of employer national insurance contributions, leaving public services in Scotland to face a £400 million shortfall. Furthermore, had the resource funding that is provided to the Scottish Government for day-to-day priorities matched the average increase for UK departments in the UK spending review, we would have £1.1 billion more to spend in the next three years.

Last week, the UK Government set out proposals that will deliver deep cuts to disabled people’s support, which will push more people into poverty, with a real-life negative funding impact in Scotland of £440 million by 2029-30, based on the Office for Budget Responsibility’s estimates.?

Given the situation that is developing in Westminster today, how exactly the UK Government will deliver its intended changes remains to be seen but, for the purposes of today’s publications, I will be using the numbers that the Treasury gave us at the UK spring statement. For Scotland, funding from the UK Government for day-to-day spending is only expected to grow by 0.8 per cent in real terms in the next three years, compared with a 1.2 per cent average growth for UK Government departments. Scotland’s capital block grant will be 1.1 per cent lower in real terms by the end of the UK spending review period.

Those allocations simply do not reflect the unavoidable realities of the demands that will be placed on public services by the demographic challenges that we face, not least through an ageing population. On capital, construction price inflation, which has been turbocharged by Brexit, continues to drive up prices, while the necessity to maintain and invest in new assets remains.

To ensure that public services are there to meet the needs of the people, we are introducing our reform and savings plans. The UK Government is taking similar action. Indeed, the chancellor has set out the approach to achieving fiscal sustainability for the UK, with all departments to deliver at least 5 per cent savings and efficiencies by 2028-29. Within that, there are reductions in administration budgets of at least 11 per cent by 2028-29 and 16 per cent by 2029-30 in real terms. We require to take similar actions as, without our doing so, the forecast gap between funding and spending in Scotland could reach £2.6 billion for resource and £2.1 billion for capital by the financial year of 2029-30.

Managing the impact of Westminster austerity is all too familiar but, in spite of that, we continue to invest in the people of Scotland by supporting a better paid public sector, delivering high quality public services, and providing welfare support that is not available in other parts of the UK. We have done so while delivering a balanced budget every single year since 2007.

We will reform and reshape our public services, using technology to embrace and drive forward new ways of working. That shift is critical to and underpins the first pillar of our strategic approach, which is to continue to increase value for the public purse, maximising the impact that we achieve through our investment. That is why, alongside the budget in December, I will publish a multiyear Scottish spending review and an infrastructure pipeline that will set out affordable and sustainable investment plans for the years ahead. A framework for that spending review is being published in the MTFS today.

As part of the second pillar, we will deliver efficiencies. That means improving productivity and making the most of every pound of public money that is spent on delivery. We will focus on business improvement to drive down the cost of service delivery, not only in corporate functions but across the whole system—as was set out last week by the Minister for Public Finance—while protecting outcomes. Business improvement will include the sharing of services and estates across our public bodies and the driving of efficiencies from collaborative procurement across the public sector.

We will set a managed reduction target for the public sector workforce to reduce staffing levels by an average of 0.5 per cent per year until 2030. That will be achieved through reforms to our public services, as has been set out in our public service reform strategy, through natural attrition and recruitment controls. By taking that action, we will protect valuable front-line services and continue to offer a progressive pay policy that recognises that our public sector workforce is our most valuable asset.

We will focus on how to process and deliver benefits with dignity, fairness and respect, while driving important efficiency savings and ensuring that people access the support they are entitled to. We will continue our targeted programme of efficiency and productivity improvement within the national health service. We will seize the opportunities that are presented by the rise of innovation, digital and advances in treatment. We will commit to working with NHS boards and staff, ensuring that the use of core resource is optimised and that best value is secured across NHS Scotland.

As part of the third pillar, we will drive forward service reform to improve the way in which we deliver services. We must integrate support and empower the front line to bring together all the resources that people and families need to thrive. Lastly, we will focus on prevention, investing in the most impactful preventative spend to reduce demand on services in the medium to long-term. In order to improve lives, we will deliver the technical and cultural change that is needed to go further in tackling the root causes of poor outcomes. For example, through the “Best Start, Bright Futures” breakfast club delivery plan, we will continue to drive forward cross-Government action on eradicating child poverty.

Through the actions to maximise value from public spending and drive efficiency and reform that are presented in today’s delivery plan, we expect to generate total cashable savings of £2.6 billion by 2029-30. That equates to 4.4 per cent of the forecasted resource budget for that year. Growing the economy is a top priority for the Government. By boosting business activity, driving wage growth and creating employment opportunities for more people, we can broaden the tax base, alleviate pressure on public finances and generate income tax revenue to support fiscal sustainability in the medium to long term. That is the focus for the second pillar of our strategy.

Our plan for increasing Scotland’s economic activity centres on creating a dynamic and flexible business environment, improving skills provision and supporting people to secure higher paying jobs, creating opportunity for people to enter or take on more or better work, attracting investment, and promoting entrepreneurship in the industries of tomorrow. However, the levers that are available to us to stimulate economic growth are limited. For example, the UK Government’s current approach to immigration harms Scotland by failing to address our demographic and economic needs, thus exacerbating labour supply issues. Despite those constraints, this Government will continue to take action and make the most of Scotland’s strengths and opportunities to boost our long-term economic prospects.

Our overarching economic strategy sets out our vision for a fair, green and growing economy, and we are prioritising the delivery of the actions that are outlined in our programme for Government to deliver growth that will help people to enjoy more prosperous lives now and in the long term, and protect the public services that we all rely on.

The third pillar of our approach focuses on delivering a strategic approach to tax policy decisions. Despite limited tax powers, we have taken bold, necessary action in recent years to ensure that our vital public services are prioritised.

Our decisions on income tax since devolution are helping to protect investment in public services. Scottish income tax is forecast to raise a record £20.5 billion in 2025-26, with the latest SFC forecast showing a positive contribution to the 2025-26 Scottish budget of £616 million, with the total tax net position to be £2.3 billion by 2029-30.

Our delivery plan sets out further the range of actions to improve the operation and performance of the existing tax system. For example, we are implementing new devolved taxes, including the UK aggregates levy in 2026 and the building safety levy in 2027, and we continue to work in partnership with local government to ensure that local taxes are fair and sustainable. We will also take forward work on considering future reform to the tax system, including through developing our thinking on longer-term issues such as wealth taxation.

Fiscal sustainability is about more than balancing the books: it is about delivering value, driving reform and making strategic choices that support long-term growth. By focusing on efficient public spending, modernising services, growing our economy and taking a strategic approach to tax, we can build a stronger, fairer Scotland. Meeting the challenges that face our public finances will require a collaborative effort across the public sector and beyond any single parliamentary year.

Our strategy and action plan set out a clear path. I invite my colleagues across the chamber to work with me to deliver them and to ensure that our public finances stay on a sustainable footing.

On a point of order, Presiding Officer. I could not connect. I would have voted yes.

Daniel Johnson asks some very important questions. First, because of the scale of the challenge in recent years and across the medium term, the health service will receive a 3.3 per cent real-terms increase in funding. That is important. However, like the health service in England, the NHS in Scotland will require to undertake reform and make efficiencies. In England, about £9 billion will have to be saved by 2028-29, which is about 4.4 per cent of the NHS budget. We are requiring the health service in Scotland to undertake reform, with a particular focus on back-office and corporate costs, in order to protect front-line services.

I have set out that the no compulsory redundancies policy will be maintained as the default position. However, as a last resort, once all steps have been taken in relation to voluntary severance and redeployment, and there is no other route and no jobs for the people involved, compulsory redundancy can be considered, but only at the end of that process. I have been engaging with the unions and the Scottish Trades Union Congress on that, and we believe that the reductions can be made through natural attrition and voluntary severance. Only in that extreme position would compulsory redundancy be enabled, and we do not see that happening in very many cases.

Again we hear hyperbole from Craig Hoy rather than anything about the detail of the plans that I have produced today. [Interruption.] Let me take Craig Hoy through a couple of facts. Our funding is determined largely by Westminster, and I set out the impacts that are driving the gap in 2029-30—there are three in particular. One is the cuts to disability benefits, which will impact the Scottish budget by £440 million. The cost of mitigating the UK Government’s two-child cap could be offset if the UK Government decided to do that. There is also the impact of employer national insurance contributions, with a gap of £400 million. Then, of course, we have the very low rate of funding growth, which is 0.8 per cent lower than the average for UK funding departments.

It sounds to me like Craig Hoy wants to defend the Labour Government’s spending review instead of defending Scotland’s public finances and funding. That is a political decision for Craig Hoy to make. [Interruption.]

Let me explain—probably for the fourth or fifth time—a point that Craig Hoy seems to have misunderstood. The Scottish Fiscal Commission has produced an illustrative policy-only income tax net position, but that is not supposed to represent what the income tax policy could raise for the Scottish budget—I have told him that time and again. More importantly, Professor Graeme Roy of the Scottish Fiscal Commission has told Craig Hoy that. Perhaps he needs to start listening a bit more, rather than talking.

Michael Marra has outdone Craig Hoy’s hyperbole as usual. Let me give Michael Marra some facts. First, the Chancellor of the Exchequer is also delivering savings: 5 per cent savings and efficiencies by 2028-29 and an 11 per cent real-terms reduction in administrative budgets by 2028-29, rising to a 16 per cent real-terms reduction by 2029-30. Why is it okay for Michael Marra’s Labour UK Government to make those reductions in corporate costs and back-office costs—[Interruption.]

I agree with Christine Grahame on that point. The analysis was, I think, that the national insurance increase would cost the third sector more than £80 million—which will, of course, be a cost to the services that that sector provides. We will work with the third sector, in the absence of UK Government movement on exempting it, to look at multiyear funding, for example, because certainty of funding is something that it would greatly welcome.

In my letter to the committee, I recognised that the situation was less than ideal, but it was driven by the fact that we needed to see the numbers in the UK spending review. It is as well that we waited to see those, because, compared with the actuality of the UK spending review, there has been a deterioration on the forecasts that we and the SFC made. That was my whole reason for delaying. I would have thought that it was better to have accurate figures as the number 1 priority.

We will set out our spending review at the end of this year. It is up to the other parties in the Parliament, whether the Tories or Labour, to set out their spending plans. The envelope is the envelope, and it will be very interesting to see whether they would divert from our spending plans and, more importantly, what they would cut from those spending plans. We will wait and see what they bring forward.

Let me start on a point of agreement, which is that it is important to get people back to work. Our employability schemes and our investment in employability are important ways to do that.

There is also our focus on growing the economy through investment in the Scottish National Investment Bank, investment through Scottish Enterprise and delivery through our enterprise agencies. We also have incredible levels of direct investment into Scotland. There are some underlying strengths in the Scottish economy.

Yes, there is more to do. We look forward to working with Jamie Greene and his colleagues on some of the additional measures that we can take, particularly around employability and what works to get people back into the labour market.