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Medium-term Financial Strategy

– in the Scottish Parliament on 30th May 2019.

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Photo of Christine Grahame Christine Grahame Scottish National Party

The next item of business is a statement by Derek Mackay on the Scottish Government’s medium-term financial strategy. The cabinet secretary will take questions at the end of his statement, so there should be no interventions or interruptions.

Photo of Derek Mackay Derek Mackay Scottish National Party

I am pleased to set out the Scottish Government’s second annual medium-term financial strategy. When I made the equivalent statement a year ago, I noted that Scotland’s public finances were set in the context of continuing United Kingdom Government austerity, Brexit uncertainty and an inhumane, hostile approach to immigration. I am disappointed to say that those issues still set the context for our public finances.

This is a time of unprecedented austerity. At the end of last year, UK public spending as a share of national income had fallen for a ninth successive year—the only time that that has happened since the second world war. The Resolution Foundation has highlighted that that particularly affects low and middle-income households. Between 2010-11 and 2019-20, our block grant for day-to-day spending has fallen by £2 billion. The decision of successive chancellors to pursue a path of austerity means that over £12 billion less has been invested in Scottish public services over the past nine years.

Let me be clear: austerity is a choice, and it is not one of Scotland’s making. The UK Government’s policy of austerity is both unnecessary and counterproductive. Leaving the European Union is not in Scotland’s interests, either. It is also not Scotland’s will. Uncertainty is leading to subdued growth, and leaving the EU will compound that impact. The effect of leaving the EU is clearly seen in the economic forecasts for Scotland, with growth forecast to fall from 1.3 per cent in 2018 to 0.8 per cent in 2019.

The growth forecast has been downgraded, and the Scottish Fiscal Commission is clear that that is directly related to the on-going uncertainty created by the UK’s European Union negotiation process. The commission highlights that the uncertainty caused by Brexit has prevented it from revising up its outlook for the Scottish economy and that, as a result, it expects business investment to continue to fall in 2019 and 2020, limiting growth in the economy. Let that sink in for a second. The independent forecasters of our economy have said that, if it were not for continued Brexit uncertainty, they would be forecasting faster, not slower, economic growth. There is now no doubt that Brexit is hurting Scotland before it has even happened.

During the 2014 to 2020 EU budget round, Scotland is estimated to receive more than £5 billion in funding from the EU—supporting jobs, delivering infrastructure, sustaining rural communities and delivering research funding for our universities. The absence of firm commitments means that we cannot yet quantify levels of funding in the future or the impact that that will have on the Scottish budget. However, the Scottish Government has made it clear that, given that Scotland voted overwhelmingly against leaving the EU, funding levels should not be reduced as a result of the UK’s exit, nor should those funds be centralised in London.

Against that backdrop of UK austerity and uncertainty, we are committed to using our powers in a balanced and responsible way to stimulate the economy, protect public services and provide people and businesses with as much certainty as possible. Decisions made in the 2019-20 budget ensure that, in 2019-20, 55 per cent of income tax payers in Scotland will continue to pay less than people who earn the same income in the rest of the UK, although the revenue needed to support investment in the Scottish economy and public services will still be raised. Had we applied UK income tax policy in 2019-20, we would have had more than £500 million less to spend.

Growing and supporting the economy is essential for financial stability and for providing the resources for our public services. Our economic action plan sets out the actions that will deliver sustainable inclusive growth, improve wellbeing and attract investment across Scotland. More than £1 billion has been committed to city region and growth deals over the next 10 to 20 years, and the aim is to ensure that, through 100 per cent coverage, every part of Scotland will benefit.

We have recently introduced the legislation that will underpin the Scottish national investment bank—an institution that will help to shape our economy through mission-led, patient investments. Under the national infrastructure mission, annual infrastructure investment will be £1.56 billion higher in 2025-26 than the £5.2 billion that we are already investing in 2019-20. Today, I confirm that I have accepted the recent recommendation of the Scottish Futures Trust to adopt the mutual investment model as one means of supporting infrastructure spending, which will extend the range of tools at our disposal with which to provide crucial capital investment for Scotland.

Alongside the medium-term financial strategy, the Scottish Fiscal Commission has published new economic and fiscal forecasts. As I said, the negative economic impact of leaving the EU is clearly demonstrated in the forecasts, with economic growth forecast to fall from 1.3 per cent in 2018 to 0.8 per cent in 2019. However, the forecasts also point to a resilient Scottish economy, with employment rising further over the next five years, unemployment remaining at near record lows and earnings accelerating.

The SFC has also produced updated income tax forecasts. Relative to the SFC’s December forecast, those have increased in every year from 2018-19 over the forecast period. For 2019-20, the forecast of income tax revenues has risen by £20 million, driven largely by an improved outlook for earnings. However, forecasts for the block grant adjustment that is deducted from the budget each year have gone up by even more. That means that, on the basis of current estimates, the net contribution of income tax to the 2019-20 funding envelope is about £188 million smaller than was forecast in December. That position is indicative; the 2020-21 budget will be determined by the next round of forecasts by the SFC and the Office for Budget Responsibility, in the autumn.

In this medium-term financial strategy, I have set out a set of principles and policies that will guide the use of our borrowing and reserve powers. Decisions are guided by the principles of sustainability, stability, budget flexibility, intergenerational fairness, value for money and transparency. However, I should make it clear that the circumstances that determine the use of our powers will often depend on factors that are beyond our control. UK Government spending decisions continue to be the main factor that determines the Scottish budget.

On capital borrowing, the MTFS sets out plans to borrow £450 million this year and £350 million next year. Our policy is to borrow between £250 million and £450 million annually over the remaining period of the national infrastructure mission to ensure that overall investment increases year on year. To ensure flexibility to undertake capital borrowing when it might be most needed, a contingency of £300 million of the capital borrowing limit will be left unused. That strikes the right balance between supporting the economy and using prudently the restrictive borrowing powers that the fiscal framework contains.

I will turn to the framework for the spending review. The UK chancellor committed to a spending review this summer, but, given the continuing uncertainty over Brexit and the impending change of Prime Minister, it is unclear whether that spending review will take place—as is the case with most things that relate to the UK Government. Nonetheless, to reflect the importance of sustainable public finances, the Scottish Government plans to undertake reviews of spending beyond 2020-21. We will fulfil the commitment that we made during the 2019-20 budget to bring forward a three-year settlement for local government in 2020-21. In line with the national performance framework, the spending review will focus on creating a more successful country, with opportunities for all of Scotland to flourish through increased wellbeing and sustainable and inclusive economic growth. It will be driven by a strategic focus on addressing Scotland’s long-term challenges.

For resource, we plan to publish indicative budgets in December 2019 alongside the Scottish budget for 2020-21. However, if we do not have sufficient clarity from the UK Government on its spending plans, that might not be possible. We will expect resource spending proposals to focus on outcomes and to evidence, as far as possible, their impact on the challenges and opportunities that we face in securing sustainable and inclusive economic growth; improving national wellbeing; combating child poverty and meeting our statutory targets; and tackling climate change and the climate crisis. For capital, future budgets will be published by June 2020, to take account of the infrastructure commission’s findings, which are to be reported at the end of December 2019, and the Scottish Government’s next infrastructure investment plan, which will be informed by the commission’s advice.

It is clear from what I have said that the resources that are available to the Scottish Government will be constrained by continued UK austerity. We recognise that we will not be able to do all that we want to do or all that others want us to do. Prioritisation will be necessary to focus resource where it will have the biggest impact. Therefore, I look forward to a responsible debate on how best to deliver that outcome and I commend the medium-term financial strategy to the Parliament.

The Deputy Presiding Officer:

The cabinet secretary will take questions on the issues that his statement raised. I intend to allow about 20 minutes for questions.

Photo of Murdo Fraser Murdo Fraser Conservative

I thank the finance secretary for advance sight of his statement, although he redacted so much of the key data that it was of little value, to be frank.

The finance secretary makes a false statement in the foreword to the medium-term financial strategy. He says that there has been a

“£2 billion real-terms reduction to our block grant since 2010”,

but, as he knows perfectly well, that is untrue. According to the Scottish Parliament information centre, the block grant has gone up in real terms since 2010, so he should apologise for misleading Parliament in that statement.

The latest data shows that, despite Brexit, the UK’s economy has performed well—it has record-high employment and growth that exceeds that of Germany. According to the International Monetary Fund, growth in the next five years is projected to exceed the western European average. That is under a Conservative Government.

In contrast, under the Scottish National Party Government, a dismal picture has been painted this afternoon, which has projected that growth will lag well behind that of the UK and that the gap will grow between the average UK performance and Scottish performance. Are we in the area of a Scotland-specific economic shock? What will the cabinet secretary do to address that with the powers that are at his disposal?

The cabinet secretary announced a £180 million reduction in forecast income tax receipts according to Fiscal Commission figures. That is on the back of previous forecast income tax shortfalls of £145 million in 2017-18 and of a staggering £472 million in 2018-19. How will he fill the gap that is created by his policies? Will he increase taxes and, if so, on whom and by how much? Will he cut spending and, if so, where? People deserve to know the truth.

Photo of Derek Mackay Derek Mackay Scottish National Party

Presiding Officer, as you would expect, everything that I ever say in the chamber is true and will continue to be true.

Clearly, the Tories cannot make up their minds: when we have good economic indicators in Scotland, they think that they have responsibility in the Scottish economy; when they are less good, they think that it is nothing to do with them and it is all down to the Scottish Government.

In fact, on gross domestic product, Scotland is outperforming the rest of the United Kingdom; for example, it did so in the most recent quarter. Murdo Fraser mentioned unemployment—we have record low unemployment in Scotland right now and we are outperforming the rest of the UK in that regard also. I am sure that, when Murdo Fraser has the time, he will look through the SFC report in great detail and see that the reason for subdued growth in Scotland is Brexit, which is of course the fault of the Conservatives in the UK Government, who are damaging Scotland’s economy with mismanagement and the decisions that they are in control of.

On the accusation of underperformance, the SFC has shown that Scottish GDP growth will be slower than UK GDP growth over the forecast period, primarily because of slower population growth in Scotland. Who controls population growth in Scotland? The UK Government, which has powers over migration.

We have an economic action plan that will grow our economy, specifically in relation to income tax reconciliation. The scale of any reconciliation is uncertain until we have the outturn data. There will always be volatility—the SFC has admitted that, but it has forecast increases in income tax in Scotland over the forecast period relative to its December forecast. Cumulatively, it shows an increase of more than £430 million between 2017-18 and 2023-24, which is largely driven by an improved outlook for earnings.

The SFC notes that, due to historic forecast errors for such a large tax, there will be negative reconciliations. That should not be unexpected and we may see extended periods of positive reconciliations in the future. We have been acting to grow our economy, and there is vindication for putting some resources into the reserve so that any volatility can be managed. We have borrowing powers as well. However, we are confined and bound by austerity.

Murdo Fraser is only truly happy when he is utterly miserable. The Tory position in Scotland seems to be that it celebrates that Brexit will do less damage in England than it will in Scotland.

We have balanced the books and we will continue to do so, by using all the powers that are at my disposal in a responsible and sustainable way.

The Deputy Presiding Officer:

Before we move on, I say that I have been quite light so far, but that was a bit of a mini-statement and the cabinet secretary knows well that it was. Can we have crisp answers, please?

Photo of James Kelly James Kelly Labour

I thought that the cabinet secretary was getting to make another 10-minute statement there.

I thank the cabinet secretary for an advance copy of his statement, although the number of black marks on it is consistent with the theme of the black holes in Scotland’s public finances.

The bleak figures that were announced today, specifically the cabinet secretary’s indication that there is potentially £188 million less in the spending envelope for 2019-20, will worry those who care about what is going on in Scotland’s communities. People who have to wait hours for ambulances, families who have kids at schools and are seeing education resources having to be cut by councils, and people who are stranded on train station platforms on their journey to work because trains do not turn up on time will not welcome today’s statement.

What action is the cabinet secretary going to take through the medium-term financial strategy to address the gap in Scotland’s public finances and the gaping hole in Scotland’s public services?

The Deputy Presiding Officer:

Cabinet secretary, please be mindful of what I said previously.

Photo of Derek Mackay Derek Mackay Scottish National Party

The redactions in the statements are what was agreed by the Parliament protocols on sensitive data. That should not be news to anyone—that is how we have been doing it since we first had this sensitive data. A statement with a few redactions is better than the alternative budget that I got from the Labour Party—a total blank page.

We will continue to invest in the public services of Scotland, to oppose austerity and to try to mitigate the impact of Brexit, should it happen—there is still an opportunity to avert Brexit. If we were able to avert Brexit and end austerity, there would be a massive windfall to the public resources of Scotland and we would be able to invest where the Tories have constrained us.

Using the powers that we have, I have been balancing the books responsibly, allocating some resources to the reserve—that was opposed by the Labour Party—and being prepared to use the reserve borrowing powers, if required, in relation to the forecast error, if that comes to pass. We will have more data on that in the future. We will respond accordingly and in a way that ensures sustainability for our public services.

Photo of Patrick Harvie Patrick Harvie Green

I am grateful for the advance copy of the statement. I am pleased that the Green influence on tax policy has meant that more money is available for Scotland’s public finances than there would have been if we had not changed tax policy. Murdo Fraser is worried about who is going to be paying more tax next, but I would be very happy if he and his classic motor were next in line.

Has the finance secretary seen the SPICe analysis from about six months ago on the pipeline of capital investment, which foreshadowed the threat of a shift back in the direction of high-carbon capital projects in the current pipeline? How is that consistent with the Government’s commitment to continually shift capital spend away from high carbon towards low carbon? Why should we now believe that the cabinet secretary is right and SPICe is wrong?

Photo of Derek Mackay Derek Mackay Scottish National Party

For the reason that Patrick Harvie has just given: that report is six months old. We have to look at the current infrastructure investment pipeline. The First Minister has declared a climate emergency and our policies should shoot through that investment plan. The Infrastructure Commission will advise us and we will take the time to recalibrate our capital spending plans. We now have an opportunity to recalibrate capital spending including the principle that we set out in the budget negotiation to invest more in low carbon. We have made a commitment on the reduction in emissions and our spending commitments must follow that. There is now an opportunity to influence those commitments.

Photo of Willie Rennie Willie Rennie Liberal Democrat

Last year, there was a catastrophic forecasting error on income tax. The impact was initially only on the baseline, but the lower income tax forecasts are still expected to have an impact on the budget in 2020-21 and the following year. How much has the approximate scale of the negative reconciliation requirements—known as cuts to everyone else—for the following years changed since the news of the error by the Scottish Fiscal Commission and the OBR was released last year? He talks about £188 million-worth of change, but where does that leave cuts to the budget?

Photo of Derek Mackay Derek Mackay Scottish National Party

Willie Rennie should not conclude that there is one option for the budget, given that we have a range of levers that we can deploy when there is forecast error because of the SFC forecast, including the use of reserves and borrowing, as well as expenditure, which we might also have to look at. There is a range of tools that we can deploy in the knowledge that there will be a substantial variation in that forecast.

What has changed substantially is the OBR’s forecast—its forecast in relation to the block grant adjustment has changed. The SFC is just one part of the story. There are details throughout the SFC report and the medium-term financial strategy. Right now, we should prepare for that but also bear in mind that the outturn figures in July are critical, because those figures help us in the next round of forecasting, which is the one that sets the budget.

It is wrong to conclude that there are cuts to the Scottish budget when we have other economic levers to address that forecast error. However, as I said, those errors may well be substantial, which is why we need to look at the outturn data as well as the forecasts.

Photo of Bruce Crawford Bruce Crawford Scottish National Party

Murdo Fraser has cried wolf in financial matters so often that no one hears his bleating any more. As far as cars are concerned, I recently saw Murdo in a very good hybrid motor—

The Deputy Presiding Officer:

I would like to hear your question, Mr Crawford. Enough of cars.

Photo of Bruce Crawford Bruce Crawford Scottish National Party

Does the cabinet secretary agree that the indicative income tax forecasts are just that: forecasts? As we know, the one certainty about forecasts is that they are almost certainly wrong.

Given that the fiscal framework requires the cabinet secretary to take heed of the forecasts, can he set out his thinking on whether the current borrowing powers and limits that exist in the fiscal framework are sufficient to deal with the risk of forecasting error?

Photo of Derek Mackay Derek Mackay Scottish National Party

That question partly relates to Willie Rennie’s point.

If substantial reconciliation is required, it might well be that the parameters of the borrowing powers and use of reserves—b ecause of the level of drawdown being capped—are inadequate to address the scale of adjustment that might be necessary for reconciliation. There is good reason to reconsider the drawdown limit so that we are not constrained in our actions in addressing the reconciliation that might be required because of forecasting error at the hands of the OBR and the SFC.

Photo of Dean Lockhart Dean Lockhart Conservative

Let us be clear—Scotland’s economic underperformance long predates Brexit.

In fact, over the past 12 years, we have seen annual economic growth of just 0.7 per cent. That economic stagnation is set to continue: the cabinet secretary has laid out a growth forecast of just 0.8 per cent next year, compared to 1.2 per cent for the UK economy—

The Deputy Presiding Officer:

A question, please.

Photo of Dean Lockhart Dean Lockhart Conservative

Is it therefore not time that the cabinet secretary recognised that his economic policy is creating a low-growth, low-productivity and low-wage economy?

Photo of Derek Mackay Derek Mackay Scottish National Party

Since I have been economy secretary, GDP has outperformed the forecasts, unemployment is at a record low and is outperforming that of the rest of the United Kingdom, exports are up by more than they are in the rest of United Kingdom, and business enterprise research and development is outperforming that of the rest of the United Kingdom. I think I’m doin no bad.

Photo of Maureen Watt Maureen Watt Scottish National Party

The fiscal framework sets out, on page 13, how the Scottish Government’s block grant is adjusted to account for the proposed VAT assignment. Can the cabinet secretary further explain his view on that proposal, the risks that are involved, and the potential volatility that could impact on the Scottish Government’s spending plans?

Photo of Derek Mackay Derek Mackay Scottish National Party

I have appeared before the Finance and Constitution Committee and have written to the Chief Secretary of the Treasury, saying that I am concerned about volatility and the lack of data that informs the proposal. A 1 per cent error in the data could cost the Scottish budget £100 million. We therefore have to get this absolutely right and not add volatility to the Scottish budget. That is why I am reflecting on the position in respect of VAT—which is not a power, but an assignation.

Photo of Mark Griffin Mark Griffin Labour

Given that it is a five-year plan, can the cabinet secretary say where in the strategy are the billions of pounds that are needed for an income supplement that will cut child poverty and meet Parliament’s interim target in just four years, in 2023?

Photo of Derek Mackay Derek Mackay Scottish National Party

The plan is not intended to be a mini-budget or to set out individual spending commitments, so I have not done that in the process. However, we will consider that matter as we approach the budget.

As the Cabinet Secretary for Social Security and Older People, Shirley-Anne Somerville, said just moments ago, there will in June be a report to Parliament on child poverty. I am sure that Mark Griffin, who has a keen interest in the subject, will look forward to that update.

Photo of John Mason John Mason Scottish National Party

Does the cabinet secretary feel that the Scottish Fiscal Commission is being overly cautious in its forecasts, and how does it compare with the OBR, as far as accuracy is concerned?

Does he agree that there will always be variations in forecasts, and that variations are not errors?

Photo of Derek Mackay Derek Mackay Scottish National Party

I am not particularly keen to give a personal judgment. We have two sets of economists giving us their forecasts; I do not propose to add a third in the form of a view from the Scottish Government. We have to follow both sets of forecasts—that is the agreement and that is what we are doing. Although errors are inevitable, how we manage them and approach reconciliation is a matter for us, which is why I am considering the matter carefully.

Different methodologies, forecast assumptions, timings and fiscal events lead to differences between the two organisations’ forecasts.

Photo of Bill Bowman Bill Bowman Conservative

The cabinet secretary speaks at length about the choice of UK austerity.

Andrew Wilson’s growth commission predicted £27 billion of austerity over 10 years. Does he agree that the better choice is to remain part of the UK?

Photo of Derek Mackay Derek Mackay Scottish National Party

Austerity and the notional deficit that we experience are because we are part of the UK. The UK is not the remedy; independence is the remedy for subdued economic growth. The growth commission, of which I was a member, has shown a pathway to delivery of sustainable economic growth that will grow public services and public investment in real terms.

Photo of Emma Harper Emma Harper Scottish National Party

We know that in order that the Tories could remain in power they reached an agreement with the Democratic Unionist Party, to the tune of more than £1 billion so far. What does the cabinet secretary think would be the fiscal picture for Scotland today if that money had—as it should have been—the subject of .Barnett consequentials calculations?

Photo of Derek Mackay Derek Mackay Scottish National Party

We would be £3.3 billion better off.

Photo of Neil Bibby Neil Bibby Labour

I agree with the finance secretary that Brexit is having a significant impact on economic growth in Scotland and the UK. A downgrade in growth will affect jobs and living standards.

The Scottish Government is proposing a citizens assembly to discuss the constitution again, because that is its number 1 priority. Given the urgent need to grow our economy, why does the Scottish Government not instead convene a summit of industry, trade unions and economic experts to agree an urgent plan to boost Scotland’s economy and the finances that support our public services?

Photo of Derek Mackay Derek Mackay Scottish National Party

That is because I already meet all those people. That is why we are already seeing growth in GDP, record low unemployment, record investment in business enterprise research and development, and a plan in respect of internationalisation that has seen us enhance our exports, as well. We are doing more around innovation and inclusive growth—

Photo of Derek Mackay Derek Mackay Scottish National Party

What we are doing is working, as seen in the indicators that I have just mentioned. It is absolutely working. What is subduing—

Photo of Derek Mackay Derek Mackay Scottish National Party

Even members who have clearly not read the SFC report will know that the independent forecasters are saying that the reason for subdued growth and a downgrade in performance is Brexit. Maybe the Labour Party could help us to avert Brexit. There is an idea.

Photo of David Torrance David Torrance Scottish National Party

The fiscal framework was originally due to be reviewed after UK Parliament and Scottish Parliament elections in 2020 and 2021, respectively. Obviously, a lot has changed in the years preceding them. Given everything that has come to light so far, does the cabinet secretary foresee the possibility and benefits of an early review of the framework?

Photo of Derek Mackay Derek Mackay Scottish National Party

We .agreed in the fiscal framework to allow one full parliamentary session of use of the powers in order to inform the review and debate. The number of issues that Parliament and I have been raising with the Treasury suggest that we should look at the agreement to see whether there can be further flexibility .and concession in it, because the issues will have an effect on the public finances of Scotland.

Photo of Murdo Fraser Murdo Fraser Conservative

On a point of order, Presiding Officer.

Could the Presiding Officer and Deputy Presiding Officers reflect on provision of information to members of the Opposition parties in advance of statements such as today’s. I have just seen it being announced by the Scottish Fiscal Commission

The Deputy Presiding Officer:

Can I ask you to sit down just now? I think that I was sitting here when the cabinet secretary said that there is a protocol around sensitive information. I do not want to repeat what he said: it is on the record. I ask you to look at what is on the record first, and then to return with a point of order, if you feel that that is necessary?

The Deputy Presiding Officer:

This is not a discussion. Are you referring to the redacted parts of the statement?

Photo of Murdo Fraser Murdo Fraser Conservative

I am grateful, Presiding Officer.

I was not referring to redacted information, but to the Scottish Fiscal Commission forecasts, which are integral to the statement that has just been made but were not made available to Opposition parties before the statement. The Scottish Fiscal Commission has said in the past few minutes that its reconciliations anticipate that, due to income tax reconciliations, the budget for next year will be reduced by £229 million, and that the budget for the following year will be reduced by a staggering £608 million. Had that information been made available to Opposition members prior to the statement that we have just heard—

The Deputy Presiding Officer:

Can I ask you to sit down just for a moment? I hear what you are saying. I do not want to open the matter up to a debate at the moment, but we will reflect on that and, if necessary, return to the point that you have raised. I am sorry that I anticipated what you were going to say; I thought that you were going to talk about the redacted points.