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United Kingdom Budget

Part of the debate – in the Scottish Parliament at 4:45 pm on 25th March 2010.

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Photo of John Swinney John Swinney Scottish National Party 4:45 pm, 25th March 2010

I am grateful for the opportunity to set out the Scottish Government's response to yesterday's United Kingdom budget statement. I have also arranged for a paper to be placed in the Scottish Parliament information centre to provide members with a detailed analysis of the budget's implications for Scotland.

This year's budget comes at an important time for both the UK and Scottish economies, as we emerge from one of the deepest recessions in recent memory. The Chancellor of the Exchequer confirmed yesterday that the UK economy contracted by 5 per cent last year. That is the largest annual fall since the 1930s. Despite more positive signs in recent months, it is clear that the global recovery remains fragile.

Through our economic recovery plan, we have witnessed the whole of the public sector in Scotland aligning activity to support and accelerate the recovery. However, many important economic levers are reserved to Westminster. The chancellor had an opportunity yesterday to support the signs of recovery that we are seeing, yet by any measure his statement failed to provide the further support that the economy needs at this time.

The weight of opinion among the International Monetary Fund and others is that it is still too early for Governments to withdraw their economic support. The Prime Minister himself has warned that recklessly and rapidly withdrawing support would risk driving our economy back into recession. The chancellor also argued yesterday that to start cutting now risks derailing the recovery, yet—make no mistake about it—that is precisely what the chancellor has done.

Although the chancellor announced a small number of schemes aimed at helping youth unemployment and small businesses, the red book shows that the UK's fiscal stance in 2010-11 will be negative. That means that the UK Government's discretionary fiscal policy will act to tighten public spending and taxation relative to 2009-10. It will not provide a further stimulus.

Let me be clear on that point. Chart 2.5 in the budget document that the Treasury published yesterday illustrates that fiscal policy aimed at supporting the recovery will contract in 2010-11 relative to 2009-10. To quote one city analyst, despite all the warnings about withdrawing support too early, the fiscal stance will be tightened in 2010-11 by 1.1 per cent of gross domestic product. It seems that a budget designed to impress the city has failed even that test.

That is the wrong approach. Across the G20, only Argentina and the United Kingdom are withdrawing their discretionary fiscal stimulus measures this year. That will hinder the recovery and put us at risk of a double-dip recession. I believe that it is vital to keep the stimulus flowing while the recovery remains fragile and until we can be certain that there is enough strength in the private sector for it to sustain economic growth when the stimulus stops.

In that vein, I called for the chancellor to bring forward capital expenditure into 2010-11 to support the Scottish economy. Such targeted spend would, I believe, have the potential to provide a vital and cost-effective stimulus to the Scottish economy at a critical stage. Compared to what the chancellor has said he will deliver, the stimulus packaged demanded by the Scottish Government would have supported some 4,000 more jobs in Scotland, the majority of which would have been in the construction sector. That is the cost to Scotland of the chancellor's missed opportunity.

Although it is a mistake to provide no further fiscal stimulus, some of the chancellor's other announcements are to be welcomed. In particular, the commitment to provide further support for youth unemployment and to consult on tax breaks for the video game industry are a positive development, especially given Scotland's leading role in that sector.

The proposed green investment bank is also to be welcomed. Scotland is already a world leader in low-carbon energy, so it is critical that the funds that were announced yesterday are truly UK-wide. Given Scotland's pre-eminent strengths in low-carbon energy, we expect a significant proportion of such funding to be deployed in Scotland. However, the suggested funds are small compared to the scale of the opportunity and compared to other international examples. The initiative also contradicts the UK Government's hostility to allowing us access to the resources that are held as a result of the fossil fuel levy.

There was very little that was new in the chancellor's statement. In many areas, he has simply followed the lead that we have set in Scotland. On university funding, we are already supporting an additional 7,500 higher education students this year. We will continue to support them in the next academic year.

On business rates, small and medium-sized enterprises in Scotland already receive substantially more generous rates relief than will be provided under the temporary arrangements that the chancellor has proposed for England. Despite the chancellor's announcements, a small business in Scotland will continue to pay up to £3,050 less in business rates next year than it would in England.

Many of the tax increases announced by the chancellor will also be damaging for Scotland. Although the planned fuel duty rises are staggered, they will hit motorists and hauliers hard, and will be particularly painful for those who live in rural areas. I have repeatedly called on the chancellor to introduce a fuel duty regulator to help offset the higher costs of fuel that are faced by rural communities. The chancellor's decision to ignore those demands means that rural communities in Scotland will continue to pay some of the highest fuel prices in the UK.

The chancellor has also ignored the need for urgent reform of the alcohol tax system to directly link the rate of duty to alcohol content. The indiscriminate increase in duty that was announced yesterday will hurt premium products, such as Scotch whisky, and will fail to incentivise producers to make more low-alcohol products. Unlike minimum pricing, that tax increase is a blanket approach that puts up the price of everything but does not address the underlying problem of high-strength, low-price drinks. Dealing with only one drink, such as cider, does not address the issue.

Despite the UK Government's rhetoric about its ambitious efficiency programme, press reports today show that it is the UK Government that has taken two years to achieve savings worth 3.1 per cent of its budget, a target that the Scottish Government achieved in just 12 months.

I turn to the effect that the chancellor's budget statement will have on Scotland's public finances. The Scottish Government will receive consequentials of £76 million from next year's Scottish departmental expenditure limit budget. We will make proposals to the Parliament about how we intend to use those consequentials in early course. However, let us remember that, even after that adjustment, next year's Scottish budget will be 1.3 per cent lower in real terms than this year's.

I am also concerned that, despite repeated requests, the chancellor has failed to provide an explicit guarantee that, should he return to office after the general election, there will be no further cuts in the Scottish budget for 2010-11. The lack of clarity around the chancellor's so-called efficiency savings is such that no real comfort can be derived from yesterday's announcements. It is essential that we have stability in our spending plans for 2010 to ensure that all areas of the public sector can focus on supporting the economy. That is particularly essential for local authorities, which are now setting and applying their detailed budgets for 2010-11.

Further targeted fiscal support in 2010-11 is vital if we are to safeguard our economic recovery. However, that does not preclude the chancellor from setting out how he intends to reverse the deterioration in public finances in future years. A credible deficit reduction plan is yet to be announced. The chancellor has made vague promises about safeguarding elements of health and education from cuts but, yet again, he chose not to announce the overall size of the UK departmental expenditure limit budget after 2010-11. The Institute for Fiscal Studies believes that the four years beginning 2011-12 will be the most difficult period for spending on public services since the 1970s. That will represent a major adjustment to public spending, and such cuts will inevitably have an impact on our budget.

The chancellor himself said yesterday that the next spending review will be the toughest for decades. We are already planning for our next spending review, and are doing so prudently and effectively. However, we are doing that work in an environment in which the UK Government has yet to set out the resources that we will have at our disposal. I have repeatedly pressed the chancellor for greater clarity on future budgets and the importance of starting to plan now for the tighter spending environment that we will face. Given that we must legislate for our 2011-12 budget by next February, there is an urgent need for the chancellor to give a clear picture of future public spending. It is not good enough to delay that until after the election, because it is not just the level but the nature of the reductions in public spending that matter.

In closing, I reiterate that the chancellor's statement was an opportunity to help safeguard Scotland's economic recovery, support employment and set out a path for future public spending. Instead, his statement provided no additional economic stimulus and did not provide the required clarity on future spending. Members should be in no doubt that the chancellor's budget was a missed opportunity for Scotland.