United Kingdom Spring Statement (Implications for Economy and Public Spending)

– in the Scottish Parliament on 19th March 2019.

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Photo of Kenneth Macintosh Kenneth Macintosh Labour

The next item of business is a statement by Derek Mackay on the UK spring statement and the implications for the economy and public spending. The cabinet secretary will take questions following his statement.

Photo of Derek Mackay Derek Mackay Scottish National Party

Last week, the UK Government delivered its 2019 spring statement, which provided us with the latest economic outlook for the UK. The Office for Budget Responsibility has downgraded its forecast of UK gross domestic product growth for 2019 from 1.6 to 1.2 per cent, which represents the slowest annual growth since the end of the financial crisis.

The OBR cites falling levels of business investment as underpinning much of the downgrade, noting that the UK has performed the worst on non-housing related investment, compared with other G7 nations, since the EU referendum in 2016. Its already downbeat forecasts assume that there will be an orderly withdrawal from the European Union on 29 March, with a transition period lasting until December 2020, which means that, in reality, the economic outlook could be even weaker.

The UK Government’s chaotic approach to Brexit has already caused investment to fall and the next phase of uncertainty will mean further damage. The OBR has stated:

“Uncertainty related to the Brexit process sees business investment fall for a second calendar year in 2019—its weakest performance since the financial crisis.”

I am clear that all forms of EU exit will harm Scotland’s economy, but leaving the EU without a deal could lead to Scotland’s economy shrinking by up to 7 per cent, exports dropping by up to 20 per cent and business investment reducing by £1 billion in 2019. Such profound economic impacts could result in an increase in unemployment of around 100,000 in Scotland, more than doubling the current record low unemployment rate, and could push the Scottish economy into a deep recession, similar in scale to that following the financial crash of 2008.

However, we do not need to await the final outcome on Brexit; we already know about the damage to our economy. The Institute for Fiscal Studies has said:

“There is a consensus that the economy would have been about 2% bigger had the Brexit vote not occurred”,

meaning that, without Brexit, the deficit would have been smaller, jobs and investment would have been higher and more funding would have been available for public services. Amid the deepening uncertainty, the Chancellor of the Exchequer should have used his spring statement to provide stimulus to the economy and clarity on future funding. Sadly, he did neither.

As we navigate a period of economic uncertainty, it is vital that we take bold action to support the growth of the Scottish economy. A significant milestone in the establishment of the Scottish national investment bank was reached three weeks ago, with the introduction of the legislation that will underpin it. The introduction of the bank will help to transform and grow Scotland’s economy and protect it from the consequences of the UK’s exit from the EU. However, I continue to await confirmation from Her Majesty’s Treasury that it will provide the bank with similar dispensations to those enjoyed by the British Business Bank and the Green Investment Bank, which would allow it to hold modest reserves and to operate at the level of ambition that we would expect.

It is equally disappointing that the chancellor failed to guarantee all future EU funding to Scotland, which would be worth over £5 billion in the current EU budget round. Due to the UK’s chosen route for exiting the EU, the UK will lose access to much of that funding and, to date, there is no certainty that such funding streams will be replaced, because commitments on agriculture, fisheries and structural funding all remain unclear. It is crucial that the UK Government urgently commits to replacing all EU funding streams in full and to ensuring that funding decisions that are currently taken by Scottish ministers continue to be taken by them in future. There must be no power grab from Westminster.

In 2018, the chancellor’s autumn budget promised an end to austerity, but last week’s spring statement confirmed that the UK Government has once again failed to deliver on that pledge and to invest properly in public services. Despite the chancellor’s boast that he had £26.6 billion-worth of fiscal headroom—up from £15.4 billion in the autumn budget in October—to increase spending and end austerity in 2020-21 while still meeting his fiscal rules, he has chosen not to invest any of that money in vital public services. Instead, he is holding the money back, wilfully depriving our public services of resources and compounding the economic harm of the UK Government’s self-inflicted mess that is Brexit.

The spring statement takes us no further forward in our understanding of the financial outlook for public spending in Scotland. The chancellor referenced his forthcoming 2019 spending review but committed to proceeding with it only if a deal on Brexit can be secured. He talked of an end to austerity but has offered only vague references to future real-terms growth in resource budgets that do no more than reiterate the same tired lines that we have heard before. He has offered nothing more than the funding that has already been committed to health and no expectation of real-terms growth in wider resource budgets to address the decade of almost 7 per cent real-terms cuts to the Scottish block grant. We know the scale of financial challenge that years of austerity have brought, that our public services seek additional investment and that the chancellor has headroom available; yet he still does not commit.

There is no doubt that the Scottish budget will face very challenging decisions as part of the spending review if there is no real growth in our budget beyond the health consequentials. Even where funding has been announced from which Scotland might benefit, there is scant regard for our right to expect clarity on the implications for us. An announcement of £1.6 billion of funding for stronger towns was made, with details of allocations by region across England, but I have been unable to ascertain how the proposal is to be funded and what—if anything—it will mean for Scotland.

We will continue to push for our share of funding and will resist in the strongest terms any attempts by the Tories to bypass the Scottish Parliament and undermine the devolved settlement. Last week, I received no clarity on the impact on the Scottish budget of the UK Government’s spending announcements from the spring statement.

Further, we continue to see decisions from the UK Government that undermine and discredit the existing UK funding framework. In 2017, the UK Government provided an additional £1 billion to Northern Ireland as part of the confidence-and-supply agreement between the Conservative Party and the Democratic Unionist Party; recently, it allocated another £140 million in Northern Ireland’s 2019-20 budget; and, this weekend, the chancellor indicated that he could not rule out more money for Northern Ireland as part of the Brexit negotiations.

Those funds were allocated directly to devolved matters, and it is completely unacceptable that those decisions did not result in additional consequentials for Scotland. The UK Government’s actions mean that Scotland has lost out on equivalent funding of more than £3.3 billion. Although I do not begrudge Northern Ireland the exemption from austerity, it is not alone in facing fiscal challenges. Perhaps the Tories in this Parliament will explain why their party is exempting Northern Ireland from austerity, but not Scotland.

With only two weeks until the new financial year, we also still await confirmation from the UK Government of the detail and extent of the additional funding that we will receive to meet the increased employers’ pension contribution costs across public sector pension schemes. That does not allow public sector employers in Scotland adequate time to plan and manage the implications of the changes effectively. The changes are a direct result of UK Government policy and any shortfall will be, in effect, a further cut to the Scottish budget.

There is uncertainty around the outlook for Scotland’s public finances and economy, which remains no clearer following last week’s spring statement. It is clear that the views and interests of the devolved Administrations are not a primary consideration in the UK Government’s management of public finances or of Brexit. We cannot completely protect Scotland from the recklessness of the UK Government, but the decisions that the Scottish Government has taken and will continue to take will ensure that we protect what matters most to Scotland, and that is why the people of Scotland have entrusted us to focus on the delivery of our public services and the economy.

Photo of Murdo Fraser Murdo Fraser Conservative

I thank the finance secretary for advance sight of his statement. Despite the miserable picture that has just been painted, what the spring statement actually told us is that the UK public finances are in much better shape than anyone previously predicted, with tax receipts up and deficit reduction well ahead of target. For years, the Scottish National Party told us that the Government would fail in its financial strategy. Is it not about time that the finance secretary admitted that he got that wrong and congratulated the chancellor on the success of the UK public finances?

The finance secretary mentioned Brexit. Is not the way to remove uncertainty for the future for members of the House of Commons to vote for the withdrawal agreement? That is the advice that is coming from senior figures in the cabinet secretary’s own party—its former deputy leader Jim Sillars and his former cabinet colleague Alex Neil, whom I do not see in the chamber this afternoon. Should not the finance secretary be listening to the good advice of those elder statesmen in his party and getting behind the Prime Minister?

The spring statement tells us that Barnett consequentials of £68.5 million are coming to the Scottish budget, on top of £148 million in Barnett consequentials that came just in January. If the finance secretary cannot tell us today how that additional money will be allocated, when will he tell us?

Photo of Derek Mackay Derek Mackay Scottish National Party

First, I have had no confirmation of the Barnett consequentials, because they could be offset elsewhere; we are still waiting on the detail of that. Of course, I will inform Parliament by the usual channels.

On the UK Government’s performance on the UK economy, does Murdo Fraser not realise that the economic forecasts on GDP have been downgraded for the UK economy—and that is before we get to the chaos of Brexit at the hands of the UK Government?

On his point about voting for the Prime Minister’s deal, are MPs allowed to vote for it? Is it returning to the House of Commons? Has the Speaker changed his mind? As for supporting it, even the people sitting behind the Prime Minister do not support it, never mind anyone else.

In essence, the spring statement has led to clarity that the UK’s economic performance is subdued, has been downgraded and is at extreme risk from a no-deal Brexit. Any Brexit will be damaging to Scotland’s economy, but it is clear that the UK Government is damaging to Scotland overall: it is ignoring our voice, undermining us and giving other parts of the UK competitive advantage, all at the same time as it is short changing and ripping off Scotland. On that subject, the Scottish Tories are totally silent.

Photo of James Kelly James Kelly Labour

I thank the cabinet secretary for advance sight of his statement. I agree with him about the prospect of a chaotic Brexit. It is a scandal of gigantic proportions—stemming from a failure of the Prime Minister’s leadership—that, 10 days from exit day, there is absolutely no clarity about what is going to happen about Brexit.

Previously, the cabinet secretary has indicated that a no-deal Brexit would mean that the Scottish budget would have to be changed, which would have dramatic consequences for spending lines that have been agreed by the Scottish Parliament. Will the cabinet secretary publish Scottish Government analysis of the position in different Brexit scenarios, in order that people are fully aware of the potential impact on the Scottish budget?

Photo of Derek Mackay Derek Mackay Scottish National Party

Mr Kelly asks a very fair question. It is my understanding that we have published the position in a range of scenarios in respect of the long-term economic impacts of the Prime Minister’s deal and the short, medium and long-term fiscal impacts of a no-deal Brexit. I am happy to look at what further information we have that the Labour Party might find useful, but all forms of Brexit would harm our economy. We have expressed how the Prime Minister’s deal would harm our economy and we have shown clearly how no deal would harm Scotland’s economy. Given that we enjoy record low unemployment in Scotland—a record low of 3.4 per cent, which I am sure the Labour Party welcomes—is not the prospect of unemployment more than doubling as a result of a no-deal Brexit worth considering?

I will look at what further information the Labour Party might be interested in. I know that James Kelly is united with us in trying to ensure that the people have their say, that we avert Brexit and that we take the mishandling of Brexit out of the hands of the Conservatives—I am sure that he needs no further convincing on all of that.

Photo of Patrick Harvie Patrick Harvie Green

I am still struggling to figure out what the point of last week’s spring statement was, buried as it was under the news of yet another cycle of Brexit chaos at Westminster. The cabinet secretary tells us that it takes us no further forward in understanding Scottish public finances, but even the chancellor himself did not have any clarity about how much fiscal headroom he is going to have, because he does not know what is going to happen in the coming weeks.

Given that the OBR has warned that the outcome of the next few weeks will determine whether there is a major or a catastrophic shock to the UK economy, are we not just going to be here again in a few weeks’ time, once we know whether there is to be a revoked article 50, a delayed Brexit, a no-deal cliff edge or whatever the other options are? Will we not be back here in a few weeks’ time, with the UK Government having to produce an emergency budget, or an update to its budget, and the Scottish Government having to respond to it?

Photo of Derek Mackay Derek Mackay Scottish National Party

Patrick Harvie’s rather depressing analysis is probably correct and true. The UK Government is in a chaotic mode right now and will probably have to return with an emergency budget if there is a no-deal Brexit. The UK Government does not know where it is going to be. The clarity that we have from the spring statement is that the DUP is probably heading for another bung, the chancellor has fiscal headroom that he could use to invest in public services now, the fiscal and economic outlook is subdued and, while other parts of the UK are being bought off with regard to the Prime Minister’s vote, Scotland is being sold out.

Photo of Willie Rennie Willie Rennie Liberal Democrat

The finance secretary rightly complains that Scotland has not received funds to match the funds for English towns and Northern Ireland. However, with 35 MPs and the heft of the Scottish Government, surely that begs a crucial question: why has the finance secretary been so ineffective at lobbying the UK Government on behalf of Scotland?

Photo of Derek Mackay Derek Mackay Scottish National Party

It is because of unionists such as Willie Rennie that our future is in the hands of the Conservatives in London, which we would rather was not the case. Instead of having to go with a begging bowl to Westminster, we would rather be making decisions here in relation to our finances, economic growth, a fairer social security system and staying in the European Union.

I would rather not have to plead with a right-wing chancellor; I would prefer to make the decisions here, in Scotland. It is the unionists who have put us in that position, and nobody else.

Photo of Angela Constance Angela Constance Scottish National Party

The cabinet secretary has outlined the various bungs that the DUP has received from an increasingly desperate Tory Government. Does he agree that it is utterly shameful for Ruth Davidson’s Tory MPs to back money for Northern Ireland in order to keep themselves in office while they repeatedly vote to deprive Scotland’s public services of the funding that they need?

Photo of Derek Mackay Derek Mackay Scottish National Party

I absolutely agree with that. For absolute clarity, the figure that Scotland would be entitled to if the formula had been used properly—the equivalent funding that we would gain—is around £3.3 billion. That is a substantial amount, and that is by how much Scotland is being ripped off.

Photo of Dean Lockhart Dean Lockhart Conservative

In his statement, the cabinet secretary mentioned cuts to public services and an uncertain future for Scotland’s economy. However, if he gets his wish of independence, he will have to cut spending in Scotland by £13 billion a year. For the sake of certainty, can he confirm where those spending cuts of £13 billion will be made?

Photo of Derek Mackay Derek Mackay Scottish National Party

The growth commission, of which I was a member, has shown how we could stimulate and grow our economy if we had all the levers of an independent country. There would be reductions in spending in certain areas, such as on Trident nuclear missiles—yes, this Government would choose not to spend resources in that fashion.

We set out a comprehensive paper detailing how, with the powers of independence, we can grow our economy and enjoy the benefits that other independent countries have. The Tories do not even know how they are going to get through next week, never mind the prospect of an independent Scotland.

We can deliver those advantages for Scotland, and, even within the devolved settlement, try to stimulate our economy and provide stability and certainty, too. However, all of that has been undermined by the UK Government mismanaging the finances and putting our economy at risk through the way that it has handled Brexit. It has led us up the garden path and it is short-changing and ripping off Scotland while deploying bungs for everyone else.

Photo of Stuart McMillan Stuart McMillan Scottish National Party

According to the OBR, the UK Government is deliberately delaying moving people on to universal credit through managed migration in order to avoid costs that are associated with transitional protection. Does the cabinet secretary therefore think that forcing people to move over to universal credit through natural migration is a Department for Work and Pensions cost-saving exercise at the expense of low-income families?

Photo of Derek Mackay Derek Mackay Scottish National Party

That analysis is correct. I understand that it will save the UK Government around £200 million over the next five years, while clearly harming many of the most vulnerable in our society. Of course, that money should have been invested in supporting low-income families in the fashion that Stuart McMillan has suggested.

Photo of Pauline McNeill Pauline McNeill Labour

The Equality and Human Rights Commission has published new research showing that, by 2021, the combined impact of changes to tax, social security and local authority services will result in 80,000 more children living in poverty. With only 0.1 per cent of the budget being targeted at low-income families, what is the Scottish Government’s big idea to prevent that further rise in child poverty?

Photo of Derek Mackay Derek Mackay Scottish National Party

We are using the tax system in a more progressive way. Actually, the report that Pauline McNeill refers to acknowledges that the Scottish Government and the Parliament have been trying to mitigate the decisions coming from Westminster. There has been mitigation in tax policy and in social security policy. My point is that we could go further towards building a better society if we were not beholden to the UK Conservatives, who, as I have just pointed out, are not giving us the necessary extra resources but are, in essence, deploying the resources to buy off others in relation to the vote in the House of Commons.

We have a range of policies that are tackling child poverty, including expanding childcare, investing in housing, bringing about a real-terms increase in funding for local government, building a new social security system and implementing a fairer and progressive tax system that does not involve passing on tax cuts for the richest in society. There are a range of specific measures around low-income families, as well.

That package of support shows that we can mitigate so far but that we cannot mitigate completely the UK Government’s ravages of the most vulnerable in our society, because we have neither the resources nor the competences, in some areas, to do it. We need full competence over tax and social security so that we can protect the most vulnerable in our society.

Photo of Emma Harper Emma Harper Scottish National Party

I have written to the people who are involved in discussions on the Borderlands growth deal, the funding for which was announced in the spring statement, to ensure that the Galloway and West Dumfries area of my South Scotland region is not left behind and benefits from the inclusive growth deal. Will the Scottish Government confirm that Galloway and West Dumfries has been part of the discussions for projects outwith the principal five projects, such as the waterfront redevelopment in Stranraer?

Photo of Derek Mackay Derek Mackay Scottish National Party

As I said earlier, it would certainly be welcome if the UK Government allocated more for the Scottish end of the Borderlands growth deal.

The Cabinet Secretary for Transport, Infrastructure and Connectivity leads on the issue. I understand that there are on-going discussions with local partners about taking forward specific proposals and signing heads of terms by late June or early July. Therefore, I think that there is still room for further discussion, to ensure that projects are included.

Photo of Bill Bowman Bill Bowman Conservative

The cabinet secretary said that the spring statement offered

“no expected real-terms growth in wider resource budgets to address the decade of near-7 per cent real-terms cuts to the Scottish block grant.”

Is that correct? The Scottish Parliament information centre has confirmed that the UK block grant for Scotland has gone up by £1 billion since 2010, not including non-block grant funding such as the Tay cities deal funding. Does the cabinet secretary accept that his figures are wrong and acknowledge that the block grant for Scotland has been increasing over the past decade?

Photo of Derek Mackay Derek Mackay Scottish National Party

It might not surprise Bill Bowman when I say that my figures are absolutely accurate and correct. It is true to say that Scotland’s resource discretionary block grant has been reduced by around £2 billion. There has been that rip-off for Scotland, which has been expressed time and time again.

I recently welcomed the increase in Barnett consequentials for the national health service, but the truth is that that increase has been offset by reductions in other portfolios, which gives us a challenge in funding other services.

My figures are absolutely correct and I ask Bill Bowman not just to revisit the figures but to start to lobby his masters in London to ensure that Scotland gets a fair deal.

Photo of Kenneth Gibson Kenneth Gibson Scottish National Party

Will the cabinet secretary say what Barnett consequentials the UK Government should deliver and will deliver in relation to the stronger towns fund? Will he also say how much comparable EU funding—which the Tories are desperately trying to end—is invested in Scotland?

Photo of Derek Mackay Derek Mackay Scottish National Party

It is important to say, first, that the UK commitment to the towns that are beneficiaries is somehow to compensate for leaving the European Union and losing the structural funds that they would have enjoyed, which I have to say are substantially more than the sums that the UK Government is committing to those areas.

I confirm that we have had no detail of any consequentials coming to Scotland from the stronger towns fund. We want to see the detail, to ensure that Barnett has not been bypassed and that we get our fair share. As things stand, I have confirmation of nothing in relation to the stronger towns fund.

As I said, when we look at the UK context, we see that the sums are far less than the sums that areas would have enjoyed through the structural funding that came from the EU. I will continue to press the UK Government for clarity on the matter and on the need to ensure that Scotland gets a fair share of resources.

Photo of Neil Bibby Neil Bibby Labour

In “Scotland in 2050: Realising Our Global Potential—Final Report”, which was published today, the Fraser of Allander institute points to positives in the economy but warns that Scotland will continue to lag behind competitors unless we focus more on exports and infrastructure investment.

The institute also, rightly, identifies that action is required to address the low level of productivity and the skills gap. It wants to see a national strategy that focuses resource and investment on activities with growth potential, and it calls for

“policy”— at all levels—

“that is longer-term in its objectives.”

Does the cabinet secretary agree with the Fraser of Allander institute? What will the Scottish Government do to address the issues that it has raised?

Photo of Derek Mackay Derek Mackay Scottish National Party

I agree with the themes that the member mentioned, which is exactly why we are focusing on them.

On exports, we are about to launch our exports strategy. On infrastructure, we have made a commitment to raising levels of infrastructure spend. In the budget, of course, we committed to record sums of infrastructure spend in the context of housing, transportation and connectivity, for example.

On productivity, I have set out a range of actions that will support progress on productivity, such as working in a productivity club if it is the private sector. Many of those are features of the economic action plan that I want to get on with, which is why there is dedicated funding in the budget that was agreed to recently.

Photo of John Mason John Mason Scottish National Party

Does the cabinet secretary agree with the Joseph Rowntree Foundation that the spring statement has failed in the area of continuing the benefits freeze? It is leaving children and families £560 worse off, on average—the equivalent of three months’ food shopping for an average low-income family.

Photo of Derek Mackay Derek Mackay Scottish National Party

It is unfair that the most vulnerable in society are again paying the price of the economic mismanagement by the UK Government. The benefits cap and the freeze are unnecessary when we know, as was announced in the spring statement, that the chancellor has the financial headroom to lift the cap. It is a pernicious policy to continue with it; it is damaging communities and is very hurtful to those who are facing the household pressures of having their benefits frozen. It is now a wilful choice in the hands of the chancellor rather than a fiscal necessity. He can change course.