Chamber and committees

Audrey Nicoll raises serious economic issues that are affecting the north-east of Scotland. The principal issue that she raised was Brexit and its implications on the supply of labour and on companies’ ability to trade effectively with markets with which they were very familiar up until the implementation of the Brexit deal. That difficulty has been added to by turmoil in the housing market, which has been severely damaged by the effects of the mini-budget, and the wider consequences that Audrey Nicoll highlighted. She has raised significant issues that are having a negative effect on the north-east of Scotland’s economy.

The Scottish Government is keen to support the north-east through the matching funding that we have provided for the Aberdeen city region deal and the £75 million that we have provided for the energy transition fund. We have also committed to the £500 million just transition fund.

We recognise the significant challenges that the north-east of Scotland’s economy faces. We must make a transition to net zero, and that must be done in a just fashion, so the Scottish Government is determined to work with the north-east and interested local authorities and parties to advance that agenda. However, the prevailing economic conditions are very challenging because of Brexit and the prevailing economic mood that has arisen from UK Government decisions.

Scotland is facing a cost of living crisis. A combination of the impacts of Brexit, the aftermath of the pandemic and the energy crisis that has been fuelled by Russia’s illegal invasion of Ukraine has sent prices spiralling. Inflation is at a 40-year high, and the pressure on the finances of households and businesses is acute. Public services are facing demands—entirely legitimate demands—to make significantly enhanced pay offers to their staff.

As a Government, we have a duty to respond, but our ability to respond is limited by the inactivity of the United Kingdom Government and the financial restrictions of devolution. The budget of the Scottish Government is largely fixed. We have no ability to borrow to increase our day-to-day spending, our reserve funding is fully utilised and our income tax powers do not allow changes to be made during the financial year.

In August, we announced that we would undertake an emergency budget review to identify every possible penny to support the people of Scotland through the cost of living crisis, while maintaining a pathway to balancing the budget. On 7 September, I set out to Parliament the first of the hard prioritisation choices that had already been made and, today, I provide a further update on our progress through the emergency budget review process.

Since September, the crisis has deepened further. The inactivity of the UK Government gave way to calamity. The UK Government’s mini-budget sent shock waves through the markets, driving up borrowing costs for Government, businesses and households. So disastrous was the package of unfunded and uncosted tax cuts for the rich that not only did the mini-budget not survive the month, but neither did its architects—the Chancellor of the Exchequer and the Prime Minister.

That utterly needless upheaval has created significant damage for individuals and great uncertainty for Scotland’s finances. Initially, the Scottish Government was told that we would receive an additional £660 million through the block grant adjustment. Now, with the new chancellor scrapping the plan to cut the basic rate of income tax in the rest of the UK, our funding will be reduced by £230 million over the period of the UK spending review. That represents a swing of almost £900 million in the space of less than a month. Now, under a new Prime Minister and a new chancellor, calamity is giving way to austerity, with deep spending cuts expected.

As members will be aware, I had intended to present the outcome of the emergency budget review to Parliament last week, but I paused that announcement while we awaited the fiscal statement of 31 October. However, that date has now been changed to 17 November. Although I would have preferred to see the Office for Budget Responsibility forecasts and the outcome of the UK statement prior to publishing the review, I have concluded that we can wait no longer. The scale of the challenge is so severe, and the impacts and uncertainties for people, households and businesses so significant, that the imperative consideration must be to provide as much stability, certainty and transparency as possible.

We now also, once again, face the prospect of tax changes from the UK Government. It is only right that we take the appropriate time and care to consider any impacts on our budget and devolved tax policies, so I will wait until after the UK Government’s next fiscal statement before deciding on the content of any tax discussion paper.

I cannot overstate the degree of challenge associated with undertaking this emergency budget review. I have said before that, in all my experience now and during my previous tenure as finance secretary, there has never been a time of greater pressure on the public finances.

Inflation means that, today, our annual budget is worth £1.7 billion less than it was worth when it was published last December. At the same time, demand for Government support and intervention is, understandably, increasing. I must balance the books, but I am committed to doing so in a way that prioritises funding to help families, to back business, to provide fair pay awards and to protect the delivery of public services. This emergency budget review delivers on those objectives.

The Scottish Government is determined to enhance pay and target support at the lowest paid, where possible, as a crucial part of our response to the cost of living crisis. That support includes offers in the region of 7 per cent for front-line workers in the local government non-teacher and national health service agenda for change workforces, which would increase salaries for the lowest-paid staff in agenda for change by more than 11 per cent.

Although some pay negotiations have still to conclude, I have already committed more than £700 million of additional resources to fund enhanced pay settlements. I am grateful for the efforts of employers and trade unions in facilitating those vital collective bargaining processes, but—and I make this absolutely clear—every additional penny for pay has had to be found from existing, previously agreed allocations elsewhere in the current finite Scottish budget. We have reached the limit of what can be done in terms of reprioritisation.

When I set out the initial package of £560 million of savings for 2022-23, I was clear that additional savings would be required. Today, I have published an emergency budget review that sets out a further £615 million in savings, including £400 million from reprioritisation of spend within health and social care to provide a fair pay offer for NHS staff and to meet the extraordinary pressures of inflation and demand as the service begins to recover from the pandemic. That has included rephasing some social care spending in line with expected spending profiles and repurposing spend in other areas such as mental health.

Despite that, we continue to progress our work to deliver a national care service as well as commitments to fair work and adult social care, and we continue to provide overall increases in mental health spending as well as the delivery of dementia, learning disability and autism services and cross-cutting trauma work. Those are extraordinarily difficult choices that no Government wishes to have to make, but the full balance of health and social care reprioritisation will remain within the portfolio. A further £33 million of resource savings and £180 million of capital reductions have also been made, including reducing our marketing expenditure to below pre-Covid levels.

Taken together, those decisions and those already set out in September total almost £1.2 billion. They are not decisions that we would wish to make, but in the absence of additional funding from the UK Government, they are decisions that we are compelled to make. They ensure a path to a balanced budget, while prioritising fair public sector pay offers and recognising that that is critical to the delivery of key public services.

This Government will always do what we can to support those most affected by the cost of living crisis. I can confirm that we have identified and allocated the resources required to double the value of the December Scottish child payment bridging payment, benefiting around 145,000 school-age children who are registered to receive free school meals; to double the fuel insecurity fund to £20 million; to increase funding to local authorities for additional discretionary housing payment support to mitigate the UK Government’s benefit cap as fully as possible within our devolved powers; to introduce a new £1.4 million island cost crisis emergency fund; to introduce new payment break options to help protect those who have taken control of debt through the highly successful debt arrangement scheme; and to implement reforms to remove cost burdens for the most financially vulnerable.

In our efforts to support business, we have looked closely at regulation and how we can make it easier for businesses to thrive, and we have used today’s review to set out a range of improvements. After extensive engagement with business organisations, industry groups and individual businesses, including industry summits on energy and financial services, we will introduce a range of measures that are set out in the emergency budget review. They include building on the additional £300,000 provided to Business Energy Scotland this year by doubling the energy efficiency cashback element of the loan and cashback scheme to £20,000; protecting the small business bonus scheme, which is the most generous scheme in the UK and takes more than 111,000 business out of rates altogether; and establishing a joint task force with the Convention of Scottish Local Authorities, local authorities, our regulatory agencies and business to consider the differing impacts of regulation on business.

Alongside our counterparts in Wales and Northern Ireland, we have repeatedly called on the UK Government to do more, given the considerably greater flexibility available to it. The First Minister reiterated those calls to the latest Prime Minister, highlighting the essential need to provide further targeted financial support to low-income households, to urgently provide clarity on what support will remain available for both non-domestic consumers and households following the early end to the energy price guarantee next March and to make additional funding available so that devolved Governments can support people, provide fair public sector pay uplifts and protect public services.

The First Minister has also reiterated our deep concern about the risk of social security benefits not being increased with inflation in April. A permanent £25 uplift to universal credit should be introduced now, alongside the reversal of the two-child limit for universal credit and tax credits and the abolition of the benefit cap. We have been clear that an enhanced windfall tax should fund that support in place of increased borrowing or spending cuts.

We are now anticipating a package of eye-watering cuts and tax rises in the autumn statement. It will be evident to all members that the emergency budget review has involved extremely difficult decisions. Even when such decisions need to be made quickly, as is the case now, it is essential that we use the best available evidence and be as transparent as possible.

To that end, I thank the members of our expert panel for the consideration and advice that they have provided over recent weeks, and which I publish today. The panel has assessed the outlook that faces the Scottish Government in its budget and advises the Government to proceed with caution to achieve its objectives in these difficult days.

In addition, I have published a new analytical report on the impact of the cost of living crisis in Scotland alongside a high-level summary of the evidence on the equality and fairness impacts of the emergency budget review measures. The outlook for 2023-24 and beyond is clearly even more difficult than it was when we set out the resource spending review earlier this year, and measures of efficiency and reform in the delivery of our public services will be even more important.

Nonetheless, I assure Parliament that this Government remains firmly committed to and focused on continuing to support our public service recovery from the impacts of Covid, on tackling and reducing child poverty, on taking forward our net zero ambitions and on supporting strong and sustainable growth in our country.

I think that what Liz Smith was trying to get out at the beginning of her contribution was an acknowledgement of the difficulties created for me not just by the timing decisions but by the decisions of the United Kingdom Government. Allow me to complete that sentence for her.

In relation to the national care service, we have a very high level of delayed discharge in our hospital system, and it is putting enormous strain on the delivery of the national health service. We have to recognise and acknowledge the necessity of reform, because the current arrangements are not working. Therefore, we have had to take steps to establish a national care service for two reasons: first, to ensure that members of the public in all parts of the country are assured about the quality and range of care that will be available to them, and, secondly, to ensure that we are able to support the sustainability of the national health service. That is why that expenditure is required.

As for the question about the constitution budget, I suspect that that was code for Government’s commitment to spending £20 million on a referendum on independence. I point out to Liz Smith that that expenditure does not arise in the current financial year, and it is the current financial year that I am wrestling with to the greatest extent.

Lastly, in relation to productivity, I have announced a set of savings that are being made, but at the same time, I am protecting very significant levels of public expenditure on skills, universities and the college sector to ensure that we can invest in developing the capability of individuals in our society to maximise their economic contribution.

The biggest single thing that would help with productivity in this country is having a sensible approach to population growth and migration, but that has been abruptly halted for us by the total folly of Brexit. If I could appeal to Liz Smith and the Conservatives about anything—

Let me address two points that Mr Cole-Hamilton made. Local authorities will get significantly more resources, as a consequence of the reprioritisation exercises that I have gone through, to support very strong pay deals that are assisting local government employees on low incomes. I am sure that Mr Cole-Hamilton welcomes that.

I acknowledge the significance of the question on mental health. Indeed, in my dialogue with the health secretary we have both been determined to ensure that we protect mental health services as much as we possibly can. What has been announced today will mean that the resources allocated to mental health are not increasing as fast as we had planned; they will still grow, but not as fast as we had hoped. I am not going to minimise the significance of that decision, but it came about because I have limited options at this stage in the financial year and it is an indication of the severity of the situation that we face in public expenditure that I have had to take decisions of that type. As I said in my statement, I would prefer not to take that decision, but I have to fulfil my duty to balance our resources in this financial year and to ensure that I can support employees—particularly those on low incomes—in dealing with the cost of living crisis that they all face.

We have taken forward a number of discussions with business and trade unions. I have held round-table discussions with businesses and I met a range of trade unions to hear their views and perspectives on those questions, which have informed the conclusions that we have come to.

Mr Gibson made a key observation about the limited scope that I have to take a different course of action, because the budget for each financial year is largely fixed unless the UK Government changes its position—obviously, I have made the case to the UK Government to recognise the unprecedented effect of inflation in this financial year. There has been no financial year under devolution in which we have come anywhere close to the inflationary pressures that we face now, and that merits an intervention, which I have asked the UK Government to undertake.

I have to do that, because I have to set tax rates on an annual basis, so that will be undertaken. If there are particular propositions that Mr Sweeney would like me to consider, I would be very happy to receive them in writing, or I could meet him and hear the points that he would like to put to me.

Clearly, there are constraints on what we are able to do, because our budget is largely fixed, due to the nature of the arrangements that we face. Mr McMillan makes the fair and reasonable point that there is a range of other powers and responsibilities that could be used to provide us with much greater flexibility in the challenges that we face.

As I explained in my answer to Alex Cole-Hamilton, the issues will vary in different budget lines. In relation to mental health, the budget will not be increasing as fast as we wanted it to. In relation to some of the work around primary care, we will ask for reserve funding that is held by health and social care partners to be used as an early priority rather than it being retained while further strain is carried by public funds.

I point out to Mr Stewart that we are having to do that because of the severe financial pressure that is being applied to us due to the UK Government’s mismanagement of the public finances and the economy, with inflation having been allowed to rage rampant across our society.

Those are the hard choices that we have to address as we deliver on the expectations of members of the public. In relation to the impact on members of the public, we have published an equality impact assessment that addresses many of the issues that Mr Stewart raises.

I think that that would help members of the public who are facing acute challenges. Obviously, we have taken decisions to boost the support that is available to families facing financial hardship, and I encourage the UK Government to do likewise.

Annabelle Ewing puts her case powerfully, as I would expect. The constituents she represents in Cowdenbeath will be significantly affected in a negative way by a further programme of austerity and, in her case load, Annabelle Ewing will be dealing with the consequences of the last round of austerity from the UK Government.

The Chief Secretary to the Treasury has promised me dialogue in advance of the statement on 17 November. I will obviously commit myself to that at any occasion, in the hope of influencing the agenda in order to avoid a further round of austerity, which would be damaging for Ms Ewing’s constituents and members of the public around the country.

I point out that there was no interaction with the Scottish Government before the mini-budget in late September. There was absolutely no dialogue—indeed, not even the courtesy of an advance phone call—which is a breach of the normal protocols of dialogue. The current Chief Secretary to the Treasury has assured me that the normal protocols of interaction have been restored, and I will hold him to that, because it is vital that the Scottish Government and the Welsh Government—my colleagues in Wales and Northern Ireland are just as livid about this as I am—that we are properly engaged with to ensure that we can put forward the concerns and the views of members of Parliament and, in particular, of constituents such as those of Ms Ewing, which she has put to me today.