UK Budget must deliver on promises

Finance Secretary Kate Forbes has written to Chancellor of the Exchequer Rishi Sunak ahead of the UK Budget, highlighting the key issues the Scottish Government wishes to raise, including:
•         income tax
•         Barnett consequentials
•         EU funding and the economic impact of Brexit
•         police and fire VAT
•         UK Comprehensive Spending Review
 
In the letter, Ms Forbes calls on the UK Government to deliver on the funding commitments made during the December 2019 General Election.
 
She also calls for continued constructive engagement in the response to the coronavirus outbreak, ahead of further discussions next week with UK and devolved administration finance Ministers, to shape a collective financial response to the outbreak.
 
The full text of the letter reads:

Dear Rishi

I am writing to set out the key issues that the Scottish Government wishes to raise ahead of your Budget on 11 March 2020. It is essential that the UK Budget at the very least delivers on the funding commitments made in respect of the Scottish Budget in the Conservative Party manifesto for the December 2019 General Election.

The context of your Budget is of course now also being influenced by the response to the coronavirus. While the Scottish Government’s most immediate concern is the direct risk to people’s health, the economic and fiscal impacts will also be important factors over the year ahead for our public services, economic output and public spending. I am keen to work constructively with you and the other devolved finance ministers to shape a collective fiscal response to the outbreak.

It would be helpful to discuss beyond the Budget itself how we can work effectively together to achieve this, in a way that enables us to address any disproportionate impacts that might arise in any part of the UK within a strong and unified overall response. I have also written separately to you regarding NHS pensions in the context of the response to coronavirus.

Income tax

As a result of the delay to the UK Budget, the Scottish Parliament has had to set income tax rates in Scotland in the absence of clarity on UK income tax policy. This has created additional and unnecessary risk to the Scottish Budget.

At UK Budget 2018 the UK Government committed to a cash freeze in the Personal Allowance and Higher Rate Threshold of income tax in 2020-21. Along with the Scottish Fiscal Commission and the Office for Budget Responsibility, we have used this commitment as a basis for policy planning and analysis for our Budget. The Personal Allowance is an important policy parameter that impacts our tax base, and it is regrettable that we have had to make assumptions around it when setting Scottish policy. Given your commitment on the Higher Rate Threshold, and our policy decisions, there will be no additional divergence in income tax for higher-earning taxpayers in Scotland compared to the rest of the UK in 2020-21. Making assumptions based on your commitments has been necessary this year due to the delays in publishing the UK Budget. To ensure stability in the Scottish tax system, I call on you to meet your commitments on both the Personal Allowance and Higher Rate Threshold for 2020-21.

Barnett consequentials

As you are aware the Scottish Government, in passing our Budget before the corresponding UK Budget, has been required to make assumptions about the Barnett consequentials that will accrue to Scotland as a result of UK Government expenditure. In the absence of any information from the UK Government, we have based these assumptions on the Conservative manifesto from the 2019 UK General Election.

These are conservative assumptions that have been made in relation to the promises made by your party to the people of Scotland, and the UK, in the last election. As an absolute minimum we expect these promises to be met in full, without corresponding reductions. Any shortfall in funding will have a material and detrimental impact on the Scottish Budget, and we will be clear where the responsibility for this lies.

Our approach has been discussed at an official level. It is important to note that your officials did not object to the assumptions we have used in preparation of the Scottish Budget.

Austerity

In every pre-budget letter since 2010 the Scottish Government has called on the UK Government to abandon its harmful and counterproductive austerity agenda. Scotland has suffered under a decade of austerity that has disproportionately hurt the poorest and most vulnerable in society.

As the Institute for Fiscal Studies recently noted, the decade of austerity has had a lasting impact on public spending as real terms day-to-day spending per person outside of health remains 26 per cent below its 2010 peak. For Scotland, the Spending Round of September 2019 did not reverse the cuts imposed since 2010 which to date have seen our discretionary resource budget fall by 2.8 per cent in real terms since then.

This budget must provide a definitive end to austerity.

EU funding

We have been clear and consistent in our position – we expect full replacement of EU funds from the end of December to ensure no detriment to Scotland’s public finances, and we expect the UK Government to fully respect the devolution settlement in any future arrangements.

With no agreed replacements in place, from 1 January 2021 onwards there will be no new money available for those currently funded under CAP Pillar 2, the European Maritime and Fisheries Fund, and Structural Funds. This would have serious consequences for those communities, individuals and organisations who rely on these funding streams. Whilst the Conservative Party committed to some replacement arrangements as part of its election manifesto, the UK Government has yet to discuss with the devolved administrations any crucial details on the exact amounts, operation of these funds, and when these will be provided.

Similarly, our participation in key EU programmes will also end in December. This outcome is unacceptable to Scotland. Scottish Ministers are deeply dissatisfied with the position that the UK Government has taken in its negotiating mandate, which goes completely against the position of the Scottish Government and indeed the other devolved administrations. Alongside Wales and Northern Ireland, this Government has consistently pressed the UK Government to ensure our views were taken into account on this matter, yet these have been ignored.

The UK Government must now provide urgent clarity on how it will guarantee that Scotland does not lose out from these vital EU funding streams from December 2020, and how it will ensure the views of the devolved administrations are fully taken into account. I am seeking specific assurances that final decisions will not be presented as part of the forthcoming UK Budget without the devolved administrations being appropriately engaged, and your commitment to engage with us moving forward. I also require assurances that the UK Government will ensure that Scotland and the other devolved administrations will be able to fully participate in EU programmes independently, should they choose to do so.

Economic impact of Brexit

It is clear that Brexit is already having an adverse effect on our economy. Independent analysis by the Fraser of Allander Institute shows that the prolonged period of uncertainty has cost the Scottish economy around £3 billion (2 per cent of GDP).

All forms of EU exit will impact Scotland’s economy adversely and result in lower household incomes than would have been the case had Scotland remained in the EU. In the long run our modelling shows that compared to continued EU membership, a Free Trade Agreement of the type the UK Government wants to negotiate could lead to a loss of up to 6.1 per cent of GDP in Scotland by 2030 – equivalent to £1,600 per person. But no future relationship deal has yet been agreed. An exit without a trade deal in December 2020 continues to pose a significant risk to our economy. No trade agreement by December 2020 (resulting in trading on WTO terms) could lead to a loss of up to 8.5 per cent of GDP in Scotland by 2030 – equivalent to £2,300 per person.

Given the extraordinary level of uncertainty and risks facing the economy and the public finances, I urge you to use your Budget to mitigate the damage that Brexit is causing to businesses and households. Ultimately, an economy which turns out smaller than expected can only support less public spending, not more.

Infrastructure investment

Investment in Scotland’s infrastructure is critical both to enabling inclusive economic growth that will benefit all of Scotland’s citizens, and for setting Scotland on the necessary path to reduce emissions and tackle the climate emergency. The Scottish Budget provides investment that will deliver on both those objectives, along with many others. However, delivering those investments is reliant on the UK Government providing funding to the Scottish Government at promised levels.

As a minimum I would urge you to use your Budget to honour the 2020-21 capital investment commitments made by the UK Government in the run-up to last year’s general election, and to ensure that Scotland receives its share of the capital consequentials flowing from those commitments. Looking beyond 2020-21, I would ask that as a matter of urgency you provide greater clarity on future capital budgets and spending plans, to provide the Scottish Government, and wider Scottish economy, with the certainty needed to manage and plan vital investment.

We would also look for UK Government capital investment to have the certainty and longevity that is required for planning and delivering major infrastructure projects, which can have long lead times. The late and unexpected clawback of capital in-year in 2019-20 at Supplementary Estimates is unprecedented and unacceptable. It has had a significant impact on our ability to effectively manage capital investment. This process is in need of urgent review, and we need assurances that in future the UK Government will not use the Supplementary Estimates process as an opportunity to cut the Scottish budget in-year.

City Region Deals

We would like to see the UK Budget deliver certainty for the Falkirk and the Islands Deals. We note that there remains only £57 million uncommitted from the Prime Minister’s statement in July 2019 and we do not consider that this is sufficient to deliver deals at the scale that will meet regional partners’ ambitions and have a material impact on regional economies. We would be prepared to invest up to £100 million across these two deals, and I urge you to match this so that we can progress on a 50:50 basis as we have done with other deals. The Scottish Government’s contribution would add to the £1.52 billion that we have already committed in deals to date, together with significant associated investment.

Fiscal rules and fiscal flexibilities

Infrastructure investment is central to the Scottish Government’s approach to economic growth. The revision of the UK fiscal rules presents an opportunity to further discuss the Scottish Government’s request to increase the limits on our borrowing and reserve powers, given the inherent volatility in the Fiscal Framework and to support the development of the Scottish National Investment Bank. It is my view that action is needed on this matter now, in advance of the wider review of the Fiscal Framework, and I would welcome your commitment to constructive discussions to resolve this issue in early course.

Funding allocations outside the Barnett formula

As you will be aware from previous correspondence, the Scottish Government considers that it is important that the UK Government revises its approach to exceptional funding allocations, which has seen Scotland placed at a financial disadvantage to other parts of the UK. There should be clearer criteria and better engagement with the devolved administrations in relation to such allocations, as well as a clearly defined dispute resolution process. All funding must respect the devolution settlement. With this in mind, I would welcome early clarification on any such allocations flowing from the UK Budget, and how any funding has been allocated in accordance with the Statement of Funding Policy, and the implications for the Scottish Budget. In particular, any update you are able to give following the 15 January announcement of additional funding to the new Northern Ireland Executive would be helpful.

Police and fire VAT

We once again request the return of the £175 million VAT paid to HM Revenue and Customs by the Scottish Police Authority and the Scottish Fire and Rescue Service between April 2013 and March 2018. This should be returned to Scotland to benefit community safety.

COP26

Continuing our positive dialogue on the COP26 summit in Glasgow in November, which has the potential to be a significant moment in our global efforts to tackle the climate crisis, I would welcome any further clarity on associated funding arrangements that could be made in the UK Budget.

Aggregates Levy and Air Passenger Duty

I understand that you will publish the conclusions of your reviews into the Aggregates Levy and Air Passenger Duty alongside the Budget. I have previously raised these reviews in discussions and correspondence with UK Ministers, and would take this opportunity to reiterate the importance of engaging the Scottish Government on their outcomes to ensure that any implications for devolution and the interests of Scotland are taken fully into account.

UK Comprehensive Spending Review

The absence of any indication of the UK Government’s Spending Plans beyond 2020-21 continues to present difficulties for the Scottish Government in undertaking our planning for future public services in Scotland. I hope that you will confirm the scope of your Comprehensive Spending Review and its intended date of publication as part of your Budget announcement.

I trust that you will consider the issues I have outlined above, and that you will reflect them in your Budget on 11 March.

KATE FORBES