I welcome the opportunity to update Parliament on the provisional budget outturn for the 2018-19 financial year.
The provisional outturn results show that, once again, the Scottish Government has prudently and competently managed Scotland’s finances. These results are in spite of the on-going uncertainty that has been created by the disastrous decision to leave the European Union, the needless continuation of United Kingdom austerity and Tory mismanagement of the economy—I thought that I would start off on a consensual note.
The provisional figures that I am announcing today are set against an extended period of economic turbulence. The global economy is going through a sustained period of weakness. For Scotland, this is compounded by the continuing uncertainty around the UK's exit from the EU. Although leaving the EU without a deal is the worst possible outcome, even a Brexit with an exit deal will result in significant economic loss compared with remaining in the EU.
The UK Government’s decision to take us out of the EU single market and the customs union—the largest market in the world—presents a risk to economic growth, which in turn has an impact on forecast revenues to support our public services and invest in funding programmes, and an impact on migration and our population. Hence, the Scottish Fiscal Commission has downgraded its growth forecast for 2019, citing continued Brexit uncertainty as the cause.
The Scottish Government is using the limited powers at our disposal to mitigate as best we can the economic and employment impacts and to prepare for Brexit. This includes measures such as committing over £1 billion to support our cities and regions through city region deals, increasing capital investment by £1.5 billion per year by the end of the next session of Parliament and a wide range of other economic and social initiatives.
Despite the exceptional political uncertainty, Scotland’s economy enjoyed a positive year in 2018. Gross domestic product growth was 1.3 per cent, surpassing earlier lower SFC forecasts, continuing a pattern of stronger growth compared with 2016 and 2017. For 2019, the SFC predicts that our economy will grow by 0.8 per cent; it explicitly points to Brexit uncertainty as the reason for its more pessimistic outlook. I am sure that all members will welcome the 0.5 per cent growth in the first quarter of this year.
Scotland’s labour market has continued to perform well in the first quarter of 2019, with unemployment falling to a record low of 3.2 per cent, outperforming the UK unemployment rate of 3.8 per cent. Alongside that, labour productivity grew by 3.8 per cent in 2018, which is its fastest pace since 2010.
Despite the challenging environment, we are taking positive action to transform Scotland’s future through our economic action plan. Transformational projects include delivering the national manufacturing institute for Scotland and the Scottish national investment bank.
Scotland’s future budgets will of course be determined by a combination of Scottish and UK Government fiscal decisions. Our funding outlook for the medium term continues to be dominated by austerity at a UK level. The UK Government’s macroeconomic policy stance since 2010 has been characterised by austerity. In Scotland, we have protected key services despite austerity causing a real-terms reduction of £2 billion in the resource block grant between 2010-11 and 2019-20. [
.] Even Murdo Fraser now concedes that point.
The Scottish Government’s second medium-term financial strategy—MTFS—which was published on 30 May, explains the fiscal framework and the funding arrangements that the Scottish Government operates within. It outlines our approach to financial management and fiscal rules and sets out a range of possible funding scenarios for the Scottish budget over the next five years. It sets out our responsible approach to financial planning and fiscal rules, which will allow us to invest in the economy and protect essential public services.
Turning specifically to the provisional outturn, under the current devolution settlement the Scottish Parliament is not permitted to overspend its budget. As a consequence, we have consistently controlled public expenditure to ensure that we live within the budget control limits that apply. I can report that the provisional fiscal outturn for 2018-19 is £32 billion against a fiscal budget of £32.5 billion, resulting in an overall cash variance of £449 million.
That variance includes £148 million of Barnett consequentials funding that was provided very late in the financial year. The Treasury has confirmed that the Scottish Government is not required to carry that funding forward through the Scotland reserve. Rather, the funding will be held within UK reserves and reallocated to the Scottish Government in 2019-20.
The remaining cash variance of £301 million includes £5 million of additional income for devolved taxes that was secured over and above initial budget forecasts. I can inform Parliament today that the total provisional income from land and buildings transaction tax and Scottish landfill tax is £699 million, and the surplus of £5 million will be added to the Scotland reserve. The variance also includes £3 million relating to fees in respect of a financial guarantee, which will also be added to the reserve.
Of the £293 million variance remaining, £171 million is resource funding—all of which has already been committed in the 2019-20 budget—£1 million is in respect of capital and £121 million is financial transactions. Of course, financial transactions funding can be used only for loans to or equity investment in entities outside the public sector. Overall, the cash variance of £293 million represents less than 1 per cent of the total fiscal cash budget. All that funding is carried forward in full through the Scotland reserve and none of it is handed back to the UK Government, so there is no loss of spending power to the Scottish Government.
We have achieved the £1 million fiscal capital underspend while prudently borrowing less than originally planned. The 2018-19 drawdown of £250 million is lower than the £450 million that was initially planned in the published 2018-19 budget. That followed a full assessment of a range of influencing factors including additional capital funding confirmed in-year and only making funding available to match the actual demand from the projects that were confirmed in the original 2018-19 budget.
In finalising arrangements, I also gave careful consideration to building a staggered debt maturity profile. The borrowing in 2018-19 has been undertaken over 10 years, in contrast with the borrowing over 25 years in 2017-18. Although the shorter repayment period pushes up the annual repayment, that is balanced by the lower amount that was borrowed at a lower interest rate and a lower cost of borrowing overall and it is affordable in the context of the sum that was set aside for repayment in the 2019-20 Scottish budget. It also ensures that greater borrowing capacity will be available when it is needed to support the national infrastructure mission.
In 2018-19, we had the first year of operation of the Social Security Scotland agency, which provided over £185 million of support to the people of Scotland. That included more than £35 million of additional support as the first payments of the carers allowance supplement and the best start grant pregnancy and baby payment were made. This year, four new benefits will be implemented to help young carers and low-income families.
Finally, and in addition to the above, there is a provisional non-cash underspend of £142 million. The non-cash budget is used for technical accounting adjustments such as depreciation and impairments, and it cannot be used to fund public services. That represents no loss of spending power to the Government.
In conclusion, the cash underspend is entirely retained by the Government, is less than 1 per cent of the budget, makes the contribution that was planned for the 2019-20 budget and contributes to the reserve, which is prudent, particularly in light of the SFC income tax reconciliation forecasts that are detailed in the MTFS.
The figures that I am reporting to Parliament today remain provisional, as they are subject to change pending completion of the 2018-19 audits. As usual, finalised figures will be reported in the annual Scottish Government consolidated accounts and a statement of total outturn for the financial year 2018-19 later this year.
I commend today’s figures to Parliament.
I thank the finance secretary for advance sight of his statement, although we had the customary five minutes of blaming everybody else for the state of the Scottish economy and public finances before he got to the substance.
The finance secretary is always complaining that he does not have enough money to spend, but we learned today of an underspend from last year’s budget of nearly half a billion pounds. That is a substantial proportion of the overall sum.
In the meantime, the finance secretary has been hiking taxes on Scottish families. We learned today from the Fraser of Allander institute that the £500 million in extra taxes that he has taken from Scottish families has been completely offset by the relatively weaker performance in the Scottish tax base, so Scottish public services have had no net benefit from the extra taxes that everybody has had to pay.
I am surprised that the statement contained only passing mention of the Scottish Fiscal Commission’s income tax reconciliation forecasts—the projected £1 billion black hole in the public finances that will hit over the next three years. In the light of that, will the finance secretary clarify how much of the underspend in total will be put into the Scotland reserve and at what level the Scotland reserve will stand?
Murdo Fraser really asked only one question, which was about the level of resource reserve. The fiscal resource reserve, which could be deployed to address income tax reconciliation, will be £135 million—that is the published figure.
Murdo Fraser said that I bemoaned the state of the Scottish economy and blamed others, but I was actually trying to take the credit for the positive state of the Scottish economy, which is enjoying growth, record high exports, record low unemployment levels and record high employment levels. We are enjoying those strong economic indicators all because of the Scottish Government’s actions. However, I sound an alarm and give a warning—I am sure that all members look forward to seeing the chief economist’s state of the economy report tomorrow—about the threat that Brexit poses to this country and our public finances.
The resource figure is £135 million. In the same remarks, Murdo Fraser said that it was terrible that the finance secretary had an underspend and then went on to ask why the finance secretary was not putting more money aside to address the medium-term financial strategy and income tax reconciliation. He is totally inconsistent even in the questions that he poses.
In truth, we cannot overspend our budget. If the last-minute Barnett consequentials are discounted, the variance is less than 1 per cent—it is 0.6 per cent. The underspend has been deployed for this year’s budget, and a modest amount has been set aside to address the issues that were raised at the Finance and Constitution Committee. That is the responsible thing to do.
I thank the cabinet secretary for advance sight of his statement.
Three hours ago, in exactly the same spot as Derek Mackay is in now, the First Minister told us in response to a reasonable request from Richard Leonard for proper funding for the Scottish welfare fund that
“Every penny of this year’s Scottish budget is accounted for.”
However, she did not tell us that £449 million was being held back in a Scottish Government slush fund. When child poverty is rising to scandalous levels, national health service patients are in pain while languishing on waiting lists and rail passengers are stuck on platforms suffering multiple cancellations and delays to services, the public will find it astonishing that that money has been kept back in the Scottish Government’s bank account.
Specifically, when faced with the prospect of the hideous Tory two-child cap, why did the cabinet secretary not use the powers and finance at his disposal to provide £69 million to alleviate that policy and bring much-needed relief to many families across Scotland?
I appreciate that James Kelly does not need to be consistent because he is in the Opposition and not the Government, which I suspect will probably be the case for some time. However, the Parliament needs to be more mature and responsible in these finance debates. Only last week at the Finance and Constitution Committee, I was rightly asked what the plan is to address the potential income tax reconciliations. One way of addressing that is to put a modest amount aside for that purpose. It is absurd to ask me that question last week and then to criticise me for doing so this week.
Non-cash depreciation or financial adjustments cannot be deployed to front-line services. That is clear to anyone who reads the briefing papers and the paperwork and who understands how Scotland’s public finances are funded. Another part of the half a billion pounds that James Kelly referred to is financial transactions, which cannot be deployed to front-line public services, either. It is only the fiscal and capital resource that can be deployed and I have explained that the variance in that regard is 0.6 per cent, if we exclude the last-minute Barnett consequentials. Largely, the underspend is being deployed from last financial year into this one to protect our public services and deliver the policy commitments for Scotland.
James Kelly said that there was a reasonable request from the Labour Party, which was yet another fiscal ask. Labour members change their fiscal asks as often as they change their socks. I cannot keep up with their fiscal demands, but I can deliver a balanced budget for Scotland.
We will move to the open questions. There are a lot of them, and the front-bench questions and answers have taken far too long, so I ask members to be a bit more concise.
Phrases such as “black hole” and “slush fund” do not elevate the debate at all, but there are serious questions that the cabinet secretary will have to answer. For example, if the Scotland reserve is depleted to £135 million, it is clearly inadequate, even with the previous year’s underspend, to meet the Scottish Fiscal Commission projections if they are accurate. Will he tell us what his plan is for dealing with that? Is it through borrowing, taxation or spending? What are the mechanisms?
Here is the nature of Scottish politics: James Kelly says that I have put too much in the reserve and Patrick Harvie says that I have put too little in it. However, in the budget negotiations, Patrick Harvie rightly demanded that we spend more. He secured concessions, but then he complains about the level of resources that are being deployed to deliver commitments that the Green Party and the Scottish National Party happen to share.
I will of course set out my proposition as to how we deal with income tax reconciliations as part of the budget process, which I went over in detail—it was for more than two hours, if I remember correctly—at the Finance and Constitution Committee. I am happy to return to the committee but, as I explained then, there are a range of moving parts and it is a complex system with a range of factors, not least of which is the UK’s fiscal position on spending, austerity and taxation, which impacts the decisions that the Scottish Parliament and Government take.
I am just pointing that out for awareness. Willie Rennie rightly raises issues about rail but, for completeness, I point out that the underspend is not in expenditure on railways or the rail franchise. Clearly, there have been issues with financial penalties that have been incurred because of performance issues that should be addressed by Abellio.
Some of the transport underspend, which it is right to focus on, is due to the delivery of projects. Some of the issues there will be regulatory and some will be to do with the nature of contracts, particularly on some of the road infrastructure projects. However, overall, the variance on capital at outturn is £1 million, which is a pretty substantial achievement.
I think that I am correct in saying that the only two taxes over which we have complete control are land and buildings transaction tax and Scottish landfill tax, which are devolved. Will the cabinet secretary spell out how much money those taxes raised in relation to the budget?
The cabinet secretary refers to Tory mismanagement of the economy. Will he explain why economic growth in Scotland in the year to date is at 1.4 per cent, compared with growth of 1.8 per cent in the UK economy as a whole? Why has Scotland underperformed against the UK economy for the full 12 years of his Government? Does he take responsibility for that?
I take responsibility for record high employment in Scotland. Gross domestic product growth was at 0.5 per cent in the first quarter of the year, and, in many quarters, Scotland’s GDP growth has outperformed that in the rest of the United Kingdom. We are outperforming the rest of the United Kingdom in relation to exports; unemployment is lower than it is in the rest of the United Kingdom; productivity is improving more quickly than it is in the rest of the UK; there is more investment, proportionately, in research and development than there is in the rest of the UK; and we are second only to London and the south-east of England in attracting foreign direct investment.
There are two key reasons why Scotland’s economy could be seen, on some measures, as underperforming. First, the UK Government focuses all its economic attention on London and the south-east of England—or it used to, but Brexit will destroy the Conservatives’ economic credibility.
The second reason relates to migration. Migration affects overall economic growth and is an issue, given Scotland’s working-age population. Who controls migration? It is the UK Government, which is trying to end freedom of movement and create a hostile environment for migrants. That is having an impact on our economy.
However, we are reaching the point of convergence with the UK on GDP growth per head of population. We are raising more per head of population, which shows Scotland as the success story that it is.
The cabinet secretary will be well aware that many of our constituents across Scotland are struggling with the cost of living. Increasing the welfare fund, freezing rail fares and giving young people free bus travel are just three policies that could help. Does the cabinet secretary agree that the Government should not sit on significant sums of money when people are struggling? Will he commit to looking at ways of using the money that is available to help people with the cost of living crisis?
In the previous budget, we committed to spending £42.5 billion, but the Labour Party voted against record investment in education, the economy, the environment and the national health service. It voted against extending policies, including those in relation to social security payments, and many other things. The Labour Party has failed to produce competent alternative budgets. It has a list of demands but not a clue about how it will fund them.
Despite all the predictable doom and gloom that is being peddled by Opposition members, will the cabinet secretary confirm that income tax take in Scotland is increasing, that Scotland’s economy has experienced strong growth, that unemployment is at a record low, that we have record high employment and that, in many other areas, the Scottish economy is outperforming the economy of the rest of the UK? I would like to hear Derek Mackay repeat some of the excellent things that he mentioned earlier.
Given that Derek Mackay’s income tax changes raised £500 million and that the underspend is £449 million, why is it necessary for my hard-working constituents in Dundee and the north-east to have their income tax increased at all?
I do not know what accountancy courses some members have been on. The member should know that income tax is resource and that resource is different from capital. For example, he should know that money from depreciation cannot be deployed in front-line services, whereas what we raise in income tax is resource, which can be spent on day-to-day services.
Murdo Fraser asked about the point of Scotland having income tax powers, and Bill Bowman has followed that up. We want to have those powers so that we can make our own decisions that are right for Scotland. That includes creating a fairer and more progressive income tax system that helps those at the bottom, rather than giving constant tax cuts to the rich, which is the trend in the right-wing Tory party, and is about to be compounded with the potential election of Boris Johnson as the new Brexit-crazy Prime Minister.
It compares well, which is an achievement when we consider the growth and increased complexity of the Scottish Government’s budget. If the last-minute Barnett consequentials from the UK Government are excluded, the budget underspend of 0.6 per cent where every penny is retained—which is also part funding the 2019-20 budget—shows competence, prudence and forward thinking on the part of the Government, if I do say so myself.
The cabinet secretary will be aware that councils’ reserves across Scotland are fast running out, because they are using them to offset some of the worst of Tory austerity and the cuts that are passed on by him. Will he look at services such as education, health and social care, which are heading towards crisis unless more resources go into them
? When will he start to engage other parties in the budget preparations for next year?
That is a strange question to come from Alex Rowley, who was the only Labour member who approached me with a budget proposition, which was to cut everything else by 3 per cent in order to give money to local government. That is a fair proposition, but it was not supported by the rest of the Labour Party—never mind the Parliament. Mr Rowley also complained that local government is having to use its reserves, but moments ago, the Labour front bench finance spokesperson said that we should not hold any reserves and that we should spend them all immediately. What a strange contrast from the Labour Party.
For completeness, I have outlined those figures, which are also in the MSP briefing that has been published. The Scotland reserve is £233 million, which is £135 million in resource and £98 million in financial transactions. Local governments’ reserves are far greater than that figure, but when it comes to setting budgets, only this Government has been delivering real-term increases to local government, because of the decisions that we have taken, against opposition from the Labour Party, which failed to give any credible alternative.
Essentially, we were able to see through the capital projects that we had committed to. There were last-minute Barnett consequentials on capital that we were able to deploy, and I took decisions on interest payments and other factors to ensure that we can get on with our capital programme but in a prudent way. That gives us further financial flexibility for future years, and I am sure that the whole chamber will welcome that.
The cabinet secretary will not be surprised by just how many members in the chamber think that we can increase the budget at a stroke. Will he confirm that under the current devolution settlement, the Scottish Parliament is not permitted to overspend its budget, and that his statement demonstrates a consequence of that: we are in a position of having to manage budgetary expenditure so that we live within the budget control limits that apply?
I confirm that, and it is important because previous Labour-Liberal Executives actually handed money back to the Treasury. I never propose to do that. We will fully allocate the resources and carry forward any underspend to fund the current year’s budget and to prepare for the income tax reconciliation. We will stay within the parameters that have been set out, and we will engage with the UK Government on further flexibility on the fiscal framework, because surely it has already recognised that it is absolutely inadequate for the financial complexity that we face.