Chancellor of the Exchequer’s Economic Update

Part of the debate – in the Scottish Parliament on 9th July 2020.

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Photo of Kate Forbes Kate Forbes Scottish National Party

I welcome this opportunity to provide an initial response to the Chancellor of the Exchequer’s economic update yesterday. I will start by saying something positive: I welcome elements of the chancellor’s statement. Last week, I called for an £80 billion stimulus package from the United Kingdom Government to build a strong, green and inclusive economic recovery. That would be around 4 per cent of gross domestic product, matching the scale of Germany’s plan, and more in line with the Prime Minister’s rhetoric referring to Franklin D Roosevelt.

Although I support certain measures, not least the reduced rate of VAT for tourism and hospitality, which I had called for, much of the rest falls short of delivering what I believe is needed to boost the economy and protect jobs. For example, there is no extension to the furlough scheme for hard-hit sectors, there is no further support for households in financial difficulty and, despite us now being into July, there is silence on the question of reasonable fiscal flexibilities for this Government to allow it to respond appropriately to the pandemic.

Many of the initiatives are short lived. Rather than providing long-term certainty for businesses or households, they simply push the problems back towards the turn of the year, when we will also have to contend with the end of the transition period with the European Union.

The chancellor’s jobs plan may have a headline value of up to £30 billion, but we should be clear that that figure is contingent on demand, while some of the measures may prove to be poorly targeted. The figure also comprises the Prime Minister’s investment package that was outlined last week, which we know extends to future years and does not add new money this year. I say all that merely to clarify the facts and the context. I am sure that we can all agree that accuracy is important.

Another fact is that the chancellor’s jobs plan itself generated only £21 million for the Scottish budget, a position that was confirmed today by the Fraser of Allander institute. I appreciate that many of the measures are UK wide, and that the England-only spend is mostly recycled from existing budgets, but that disappointing figure is at odds with those that were being quoted by some parties yesterday. We cannot have both a UK-wide package and significant consequentials.

Granted, there was further detail published yesterday, separate from the jobs plan, albeit nearly all of it concerned previously trailed measures, such as Monday’s culture announcement and—belatedly—some of the long-promised funding for personal protective equipment. Those and other previously known measures that were separate from the chancellor’s statement were reflected in a figure of £800 million of consequential uplift, which was also quoted by some people yesterday. Although that is welcome, it includes only £27 million that we were not aware of beforehand. It is helpful to be clear about what the various funding amounts relate to.

For the record, the currently notified estimate of Covid-related consequentials for the 2020-21 Scottish budget is £4.6 billion. That is all resource, except for £10 million of capital and financial transactions. I reiterate that that is welcome. However, even with some simple analysis of the scale of the support that is needed, whether for businesses, communities or public services, it is clear that that is not enough to fund the recovery sufficiently and to balance the budget. That is why, together with devolved Government counterparts, I continue to have constructive dialogue with the Treasury. My expectation and my hope is that further information is yet to come on the consequentials position. I will of course continue to keep Parliament updated.

I stress that it is not only the funding amounts and the lack of flexibilities that matter here—the timeline and the process are crucial, too. It is intensely problematic for Scotland’s recovery that again we have had to await the culmination of the UK Government policy process and respond to announcements in this way, as our funding position is drip fed to us with limited engagement in advance on policies that interact with our devolved responsibilities. I was fully transparent with Parliament in the debate on 16 June when I said that this year’s resource budget was facing

“a shortfall of hundreds of millions of pounds.”—[

Official Report

, 16 June 2020; c 30.]

As time passes without the requisite certainty or flexibility from the Treasury, we now face the possibility of having to take some critical decisions at fiscal risk. I say that in the spirit of openness and working with the Parliament, as our collective efforts to budget more responsively and strategically are hampered without the prospect either of funding certainty or of any relaxations to the fiscal framework’s limitations.

I now turn from the fiscal position to the specific measures. In advance of yesterday’s update, I have been working since early spring to ensure that the UK Government is fully aware of our concerns and Scotland’s needs. Last week, I published a report on the UK fiscal path, which pressed the UK Government to avoid a return to austerity and adopt more flexible fiscal rules. Growing the economy and reducing inequality should take priority over deficit reduction until the economy has fully recovered. As I alluded to earlier, the report calls for a UK-wide fiscal stimulus package worth £80 billion. Such a package would generate funds to enable Scotland to shape its own investment response to the pandemic, as would temporarily loosening Scotland’s fiscal flexibilities and providing a guarantee against negative Barnett consequentials being applied to the Scottish budget in the current financial year.

I also wrote to the chancellor on Saturday with some further specific points. We need a national debt plan that promotes fairness as well as economic recovery in response to the significant and widespread increase in debt as a result of Covid-19, which affects all parts of society. For households, that means working with lenders to ensure that loan, mortgage and rent holidays can be extended to those experiencing financial hardship. For businesses, that could mean scrapping interest charges or converting loans to equity, managed by public policy banks such as the Scottish National Investment Bank. Young people have been particularly affected by the pandemic as they are more likely to work in industries that are affected by closure and less likely to be able to work from home. I recommended a jobs guarantee for young people to ensure that they have access to work, an apprenticeship or training that helps prevent the damaging effects of being out of the labour market at the beginning of their working lives, building on the success of the Edinburgh guarantee programme. To support consumer confidence, we recommended a temporary reduction in the standard rate of VAT to 15 per cent, coupled with targeted additional measures for vulnerable areas such as hospitality and construction to support businesses and boost consumer spending. That would help Scottish households and provide a stimulus to support business.

The different devolved Administrations share similar views on the general funding position and the need for fiscal flexibilities, and we have worked closely together for weeks to make a clear and consistent case to the UK Government. I have also worked with parties across the chamber to build consensus on the principle of further fiscal flexibility, as reflected in the Parliament’s resolution on 16 June.

To set the context I will quickly recap on measures the Scottish Government had already taken ahead of the chancellor’s statement. Colleagues will know that we have already committed a business support package that is worth over £2.3 billion, which includes reliefs that will continue over the course of the coming year. We have already moved to implement the £230 million investment package that was announced last month to help stimulate Scotland’s economy, which will create jobs in construction, low-carbon initiatives, digitisation and business support by providing a pipeline of work for business. We have also acted to support the oil and gas industry, which is a critical component of our economy and has a crucial role to play in the transition to net zero—specifically, we recently established the £62 million energy transition fund, which will support our energy sector and help us make significant progress as we move toward a net zero society. We also recognise the importance of boosting employability and have acted in response. We have already confirmed an initial £33 million for employability in 2020-21, to flex and enhance existing services so that support is aligned to the challenges that we face. We have also committed a range of support beyond our communities fund, including £30 million to provide laptops for disadvantaged children and young people so that they can study online.

The advisory group on economic recovery set out in its recommendations a proposal for a Scottish jobs guarantee for young people. We have acted at speed to address that. Last Friday, Sandy Begbie was appointed to lead on the implementation plan for that work, and he will report by the end of July. The group’s recommendation also set out the importance of industry leadership. Through our developing the young workforce programme, we have a network of industry-led groups that are well positioned to support the implementation of any guarantee.

We are clear that such jobs must be meaningful and must allow young people to develop skills that reflect the emerging opportunities. We must ensure that our young people are supported to make the best of such opportunities. We are clear that abiding by the principles of fair work and payment of the real living wage will be essential.

Given that much of the content of the chancellor’s jobs plan is new to us, my ministerial colleagues and I are still assessing its detail, but I will offer some initial thoughts on it. The incentive payment for employers to bring employees back from furlough is welcome for those that it supports, but the benefit could vary depending on different businesses’ prospects for a return to full operation, which might risk the scheme’s missing its target level of support.

On tax, I welcome the temporary cut in VAT for the tourism and hospitality sector. We have argued for that not just for weeks but for years, and I am pleased that the chancellor has heeded our calls. However, the statement missed the opportunity to cut taxes for employers. We argued that the stimulus package should finance a 2p cut in employers’ national insurance contributions to reduce the cost to businesses of hiring staff, but the chancellor has not taken action on that.

I turn to the chancellor’s announcement yesterday on stamp duty land tax. I have heard calls for me to replicate that change in Scotland, under land and buildings transaction tax. We have a strong track record on LBTT. Due to the reforms that we have previously carried out, our higher starting threshold of £145,000 in Scotland has meant that around half of all such transactions have resulted in the payment of no tax. We continue to focus support on first-time buyers and on assisting people as they progress through the property market.

I have listened to calls for me to raise the starting threshold for LBTT to help to stimulate housing market activity and the economy. It is important, though, that any change that is made in Scotland is focused directly on the particular needs of the Scottish economy. I therefore announce that I will increase the starting threshold for residential LBTT from £145,000 to £250,000. Because of the time required to prepare legislation and for Revenue Scotland to be ready to collect and manage the tax, the change will not come into force immediately, but I will work to enable it to be introduced as soon as possible. The rates for the additional dwelling supplement and non-residential LBTT will remain unchanged. That approach means that eight out of 10 people purchasing a property in Scotland will be taken out of LBTT—excluding the additional dwelling supplement—and that every home mover who purchases a property valued at above £250,000 will be £2,100 better off.

Although changes to LBTT offer support to all those purchasing a home, making them is a blanket measure that might not help first-time buyers. I am also heeding this morning’s warning from the Institute for Fiscal Studies that first-time buyers are

“a group that might actually be made worse off by the policy”.

Therefore, I am pleased also to announce further targeted support for those who may be most concerned about making such an investment at this time.

The Scottish Government’s first home fund was launched in December 2019. Even prior to the outbreak of Covid, it had been welcomed by stakeholders and take-up of it had been high. As a result of pent-up demand having been released following the end of stay-at-home measures, and reflecting the more limited availability of higher loan-to-value mortgages in the market, demand for support is likely to outstrip current funding. In this financial year, I will therefore provide an additional £50 million directly to support first-time buyers with their deposits, recycling underspend in the Scottish Government’s financial transactions budget. That will support an estimated additional 2,000 first-time buyers’ purchases and lift the total funding for that targeted measure to £200 million.

By taking a distinctive approach in Scotland to raising the starting threshold under LBTT, I am able to target further support elsewhere, and to do so where the UK Government has failed to provide funding to devolved Administrations.

The chancellor’s announcement yesterday of support for the economy and jobs resulted in just £21 million of consequentials for the Scottish Government. Although, clearly, UK-wide schemes will apply in Scotland, our assessment is that much more support is required for the labour market.

That is why I am today committing to make available an additional £100 million for targeted employment support and training this year, in order to help keep people in work or to help them retrain. Even alongside the chancellor’s youth employment scheme, that is unlikely to be all that we will need to do to support employment and skills over the next year, but it is a first step. The Cabinet Secretary for Economy, Fair Work and Culture will set out the policy details to Parliament soon.

Beyond those initial actions, we will consider the UK Government’s announcements and their impact on Scotland more closely and respond more fully. I welcome contributions on the detail from across the chamber.

I continue to seek to engage Parliament at every step of our fiscal response to Covid-19, reflecting the Government’s route map and the evolving challenges for businesses, communities and public services. Following the summer budget revision, which set out more than £4 billion of spending to address Covid, I will continue with the collaborative approach in looking ahead to the autumn budget revision and, of course, the 2021-22 budget process.

The chancellor’s economic update provided an opportunity for the UK Government to explain how it will support the Scottish economy, along with the rest of the UK economy, to recover from the impact of the Covid-19 outbreak. Although the update showed that the UK Government is willing to act, we will continue to press for action that better meets the needs of Scotland in the areas in which the Scottish Parliament does not have the power to act.

The Scottish Government’s ambition is to work towards the elimination of Covid-19 in Scotland, and for the Scottish economy to return to delivering prosperity and growth. In order to achieve that, I have set out to the UK Government the additional focused, limited and temporary fiscal flexibilities that we seek. We will continue to liaise constructively and in the hope that it will heed those calls.

As I said, under the current arrangements, our budgeting approach and timetable in response to the crisis continue to be heavily contingent on those of the UK Government. The fiscal powers that we are seeking would enable the Scottish Government to respond to Covid-19 more effectively and to reboot our economy. They are relatively limited powers—I am still not quite sure why we are debating them—but they would ease some of the immense pressures on our budget and give us more tools to kick-start our recovery.

It is also essential that the UK Government provides early clarity on its plans for the spending review and the budget this autumn in order to enable us to plan and contribute. Yesterday, the chancellor outlined measures worth up to £30 billion, but most of that bypasses devolution and does not provide the Scottish Government with the funding that we need to enable us to tailor an economic response that meets Scotland’s needs.

Like all Governments, we are facing huge spending pressures, but we do not have the tools that others have to meet them. Along with the Governments of Wales and Northern Ireland, we have set out a reasonable and proportionate set of new financial powers that would enable the Scottish Government to respond more effectively. This Parliament has voiced its support for that principle, and I dearly hope that the UK Government will listen and act.