Draft Budget 2017-2018: parliamentary statement by Finance Secretary Derek Mackay

Presiding Officer, it is a great privilege to set out to Parliament my first Draft Budget.

It is the first budget in which the Scottish Government will make use of powers devolved through the Scotland Act 2016, including income tax.

An historic budget, delivered in challenging economic and political circumstances.

The tax and spending proposals I will set out today will improve our public services, support our economy, and provide the foundations for future sustainable growth and prosperity.

Over the coming weeks, I will work with all parties – and stakeholders – to build support for these proposals.

Fiscal and economic outlook

The Scottish economy has grown over the past year in spite of weak global growth and the impact of a low oil price on our oil and gas sector.

Unemployment, while it varies from month to month, is down over the past year, and employment is now higher than before the 2008 financial crisis.

Looking forward, the UK Government's plans for a hard Brexit represent a key risk to Scotland's economy.

We are seeing the fall in the pound pushing up inflation. That puts pressure on household budgets and companies are re-evaluating their plans.

These risks are compounded by the UK Government's austerity programme. In the coming years we will face cuts to funding for public services and to social security.

Between the periods 2010 to 2011 and 2019 to 2020, Tory austerity will see our Fiscal Departmental Expenditure Limits (DEL) budget – which funds discretionary spending and capital investment – fall by over 9%, or £2.9 billion in real terms, with a share of a further £3.5 billion of cuts by the period 2019 to 2020 still to come.

As a result of these pressures, the economic forecasts I am publishing today, which underpin our tax projections, assume Scottish GDP will grow by around 1% in the period 2016 to 2017, and by 1.3% in 2017 to 2018.

To put this into context, Scotland's GDP has historically grown by around 2% a year. These lower forecasts reflect the impact of the Brexit vote.

This economic uncertainty makes it all the more important that this Budget provides support for the economy, for jobs and for household incomes, through a fair and balanced set of tax and spending proposals.

This government will not follow the same damaging approach of Westminster.

Scotland Act 2016 powers

The new devolved powers mean that more of the money we spend will now be funded from taxes set by this Parliament.

In addition to currently devolved taxes, we will introduce a Bill to devolve Air Passenger Duty to Scotland, to be known as Air Departure Tax.

That tax will be operational from 2018 and we will reduce the tax burden by 50% by the end of this Parliament, improving international connectivity and boosting tourism.

In all our tax proposals for 2017 to 2018, I am grateful to the Fiscal Commission for scrutinising the forecasts of receipts and endorsing them.

This Government is committed to a principles-based approach to taxation, particularly that tax should be proportionate to the ability to pay.

Our Land and Buildings Transaction Tax has already lifted 15,000 households out of tax compared to Stamp Duty in the rest of the UK, supporting people into home ownership.

Following the successful introduction of the tax, this Budget proposes to keep residential and non-residential rates and bands the same as this year – a tax freeze that maintains our progressive approach.

I also propose that Scottish Landfill Tax – which contributes to our environmental objectives – rise only in line with Retail Price Index (RPI) inflation.

In using the Scotland Act income tax powers for the very first time, we must have a balanced approach.

Let me be clear, I will not pass the costs of UK austerity on to the household budgets of the lowest income taxpayers.

So I can confirm that we will protect low and middle income taxpayers at a time of rising inflation by freezing the Basic Rate of Income Tax.

However, we cannot accept that, at this time of austerity, top earners should benefit from an inflation-busting tax cut. So I will limit the increase in the Higher Rate Threshold to inflation and not give a substantial real-terms tax cut to the top 10% of income earners.

The higher rate threshold will be set at £43,430 and, while I sympathise with those who have argued for an increase to the additional rate, I have had to balance that with the risk to our economy and am maintaining the current rate.

This Government's approach – endorsed by the electorate – is the right thing to do, for our economy, for jobs and our public services.

Economic growth – support for business

For the first time, there is now a direct link between Scotland's economic performance and public spending.

This government has consistently delivered a competitive environment for business and we have used our tax powers to support growth.

Not only have we ensured that smaller businesses pay zero or lower rates of non-residential Land and Buildings Transaction Tax (LBTT), large businesses enjoy a lower rate than the rest of the UK.

The introduction of the Small Business Bonus Scheme has saved business over £1 billion since its introduction in 2008.

I am pleased to set out today measures that confirm a highly competitive business rates regime for Scotland in 2017 and 2018, particularly for the thousands of small businesses in Scotland.

First, I will reduce the business rates poundage by 3.7 per cent to 46.6p.

Second, we will expand the Small Business Bonus Scheme by raising the eligibility threshold for 100% relief to a rateable value of £15,000 – lifting 100,000 properties out of rates altogether.

Third, while I have listened carefully to business, just as I cannot cut tax for the wealthiest individuals, I cannot cut the rate of the Large Business Supplement.

However, I will restrict the supplement to the very largest businesses by increasing the threshold to £51,000, reducing the tax burden on 8,000 businesses.

In addition I will match the Chancellor's recently announced rates reliefs for rural areas and intend to match reliefs for fibre infrastructure, subject to confirmation of the detail.

Finally, I come to the question of transitional relief following the revaluation. If we were to introduce such relief, it would place a significant burden on many of our smaller businesses. That is not the right way forward.

So, given that all businesses will benefit from the lower poundage I have announced today, I do not propose to run a transitional relief scheme.

The poundage cut, the Small Business Bonus extended, and the Large Business Supplement focused only on the very biggest businesses.

That is a good deal for Scottish business and a great deal for Scottish jobs.

But we will not stop there.

To help small businesses to grow, we will launch the £500 million Scottish Growth Scheme in 2017, offering financial support for business investment.

The three-year scheme, now approved by the Treasury, will provide investment guarantees, and some loans, to small and medium sized firms who would otherwise struggle to grow because of a lack of finance.

We will increase support for our new Innovation and Investment Hubs in Brussels, London and Berlin, building on the success of the Dublin Hub. And, we will double the number of people working for Scottish Development International in Europe to promote our exports.

We will support our rural economy through increased support for the food and drink industry and more than £100 million investment in digital connectivity, driving forward superfast broadband towards 100% access by 2021.

Substantial support for our Economy and Infrastructure

Today's Budget reaffirms this Government's commitment to infrastructure investment.

Over the next year, we will complete the combined M8/M74/M73 improvements – the 'M8 bundle', the iconic Queensferry Crossing and the Aberdeen Western Peripheral Route (AWPR). And, we will make progress on the A9 and the A96 among many others, transforming journeys on major routes and economic arteries.

We will also complete the electrification of the Glasgow to Edinburgh rail line, introducing longer, faster, greener electric trains as part of our £5 billion investment plans in Scotland's rail network by 2019.

Following recent performance issues, some in the Chamber have called for a rail fares freeze.

They claimed it would cost around £2 million. But the real cumulative cost of a one-year freeze – to the first break point in the franchise – would in reality be £58 million.

This would compromise the investment programme that is so vital to improving the performance of our rail network.

But we recognise that investment can mean disruption for passengers, as we upgrade lines and introduce new stations.

So I can announce today that in the coming financial year we will invest, not £2 milion, but £3 million in a package of targeted fare reductions, to ease costs for passengers and thank them for their patience. The Minister for Transport will set out more detail tomorrow.

Investment in our transport network is complemented by funding for City Deals for Glasgow, Aberdeen and Inverness.

We will continue to support city deals for Edinburgh, Dundee, Perth and Stirling, and are considering the scope for an Ayrshire Growth Deal.

I can also announce that I have signed, with Dundee City Council, the financial agreement to allow the Dundee Central Waterfront Growth Accelerator to go ahead, supporting economic growth in the area, and 500 jobs.

I will be inviting proposals from councils for two further Tax Incremental Financing projects in the coming year, leveraging private investment in infrastructure.

This Budget invests heavily in Housing. We delivered our target of building 30,000 affordable homes in the last Parliament.

Looking forward, we will deliver at least 50,000 new affordable homes, including 35,000 for social rent, over the life of this Parliament.

Today's budget confirms capital funding of around £470 million for housing in 2017 and 2018, coupled with other funding mechanisms, to help deliver this commitment.

Presiding Officer, this Budget secures infrastructure investment of around £4 billion.

That investment will underpin productivity growth and support an estimated 30,000 jobs.

That is a major commitment to growing the Scottish economy.

Investment in housing also helps tackle climate change, by improving the efficiency of our housing stock. And today's budget will help us meet our climate change targets.

I have protected resources for zero waste and sustainable and active travel. I have increased funding for Woodland creation, peatland restoration and the Sustainable Action Fund.

And I can confirm today funding of more than £140 million in 2017 and 2018 to support energy efficiency programmes, as part of our commitment to invest at least £500 million over this Parliament.

Longer-term inclusive growth

Delivering long term economic growth requires investment in people as well as business.

Closing the attainment gap, reducing child poverty and ensuring equality of access to higher education, will generate long term benefits for our economy and public finances.

That is why we are prioritising education and this Budget provides the resources to match.

We will invest in skills and training, building on the success of our Opportunities for All initiative and extensive consultation on the Apprenticeship Levy.

Revenues from the levy mean that Scotland will receive £221 million in 2017 and 2018. Let me be clear, it has been suggested that this a new fund of £221 million. It is not. The UK Government has given with one hand and taken away with the other. For the most part, the levy replaces existing funding for apprenticeships and related activity.

However, I can confirm today that £221 million will be committed to interventions that support skills, training and employment in Scotland.

The period 2017 to 2018 will see the next stage in our expansion to 30,000 Modern Apprenticeship new starts a year. And we will also respond to the needs of employers by establishing a Flexible Workforce Development Fund. Details of funding have been published today and the Minister for Employability and Training will set out further information tomorrow.

This Budget also funds the expansion of early learning and childcare to 1,140 hours by the end of this Parliament, providing an initial £60 million to support the first phase of workforce and infrastructure development. Future years will see significant additional investment as we deliver on our commitment to transform childcare in our country.

The defining mission of this government is to raise educational attainment in our schools.

At the election we pledged £750 million over the course of this parliament to the Attainment Fund. And, in a radical departure, we said that £100 million pounds per year from that fund would be spent at the discretion of Scotland's schools to help close the attainment gap.

The revenue we identified to fund this new stream of direct support was the increase in the Council Tax that will be paid by those in higher band homes.

I know that many MSPs did not agree with that proposal. Parliament debated, Parliament voted and I have listened to Parliament's views.

However, I will not sacrifice the educational chances of Scotland's poorest pupils. I will not abandon our radical plan to give schools direct control over significant new resources.

Instead I can announce today that I will not simply make good on our pledge. I will go further.

Next year, instead of £100 million pounds going direct to schools, £120 million pounds will be spent at the discretion of head teachers.

This £120 million will fund a new pupil equity scheme. Schools across the country will be allocated around £1,200 for each pupil in P1 to S3 eligible for free school meals.

And what is more, I will not fund this from the Council Tax. Instead I will use the Scottish Government's own resources.

Councils will keep the full value of the revenue from Council Tax re-banding – every penny raised locally will be spent locally as councils see fit.

And we will deliver our pledge to help schools close the attainment gap from central funds.

We have listened. We have acted. And we will deliver for Scotland's poorest pupils.

Presiding Officer, we will not stop there.

At a national level we will also:

• provide central funding for closing the attainment gap of £50 million,

• maintain the pupil-teacher ratio following this week's increase in teacher numbers,

• provide £60 million for our flagship early learning and childcare commitment, and

• invest over £1.6 billion in higher and further education, ensuring access for eligible students remains free and maintaining 116,000 college places.

Presiding Officer, the commitments I am announcing today mean that, overall, national investment in education and skills will increase by £170 million this coming year.

Let no-one be in doubt. From birth and the earliest years, through school and beyond, education is this Government's number one priority.

Tackling Inequality

Our mission to raise educational attainment will contribute to our efforts to address poverty and build a more equal society.

As part of our social contract with the people of Scotland we will provide £47 million to continue to mitigate the Bedroom Tax and we will abolish it at the earliest opportunity.

We will continue our support for the Independent Living Fund and, as part of our new powers, we will begin to build a social security system, based on dignity and respect.

Strong public services

We will continue to invest in all our public services while maintaining the pace of reform, protecting public sector workers and driving further efficiency.

I have published a public sector pay policy for 2017 and 2018 that guarantees the Scottish Living Wage, offers those earning less than £22,000 a basic pay award of more than 1% and caps other basic awards at 1%, whilst continuing our no compulsory redundancy policy.

Today's budget also delivers on our commitment to protect the resource budget for policing in real terms, supporting frontline policing, as we seek to maintain record low levels of recorded crime.

We have also made a clear commitment to increase the NHS revenue budget by £500 million above inflation by the end of this Parliament, going beyond anything offered by any other party in this chamber.

That will see the share of the frontline NHS budget invested in primary care, community care, social care and mental health all rise.

We will invest £72 million next year in an improvement fund for primary care and GP services and over £150 million in mental health over five years.

Overall, next year we will invest an additional £300 million in NHS resource budgets – £120 million more than inflation – a massive step toward our promise to Scotland's Health Service.

Presiding Officer, this budget delivers the Government's commitment to secure the future of Scotland's health service.

We will also invest to protect our local services.

As I set out, local government will receive £120 million from central government to fund our shared ambitions to close the attainment gap.

In addition we will maintain councils' share of capital spending with an increase of £150 million compared to 2016 and 2017.

If we stopped here, Scottish Government funding for local government services would be set to fall by just £47.4 million next year.

However, I want to do more to protect vital local services. So, I have decided to go further.

Last year, we transferred a quarter of a billion pounds from the NHS to support health and social care partnerships. I can announce today that on top of that transfer, we will provide additional funding of £107 million from the NHS next year.

This additional funding will deliver the Living Wage for social care workers and protect overall investment in these crucial services.

This will secure a total of £8 billion for health and social care, ensuring that people have access to the right care, at the right time and in the right place.

Presiding Officer, this additional investment in social care means that, in the coming year, there will be no overall reduction in the funding provided by the Scottish Government to support Local Government services.

Funding will increase by £59.6 million.

Of course, Government funding is not councils' only source of additional revenue next year.

As I have already said, the £111 million that will be raised through Council Tax re-banding will be retained locally.

And local authorities will also be free to increase the Council Tax generally by up to 3% next year, generating – if they so choose – a further £70 million.

Presiding Officer, the measures I have announced today mean that the total support from the Scottish Government and through local taxation provides an increase in spending power on local government services, not of £59.6 million, but of £240.6 million or 2.3%.

That is a settlement which invests in education, invests in social care and invests in local services.

Conclusion

Presiding Officer, this Budget exercises our new powers responsibly, marking a significant step in the history of the Scottish Parliament.

It is a Budget for growth and public services; for our environment and our communities.

It delivers:

• increased Investment in education,

• record investment in the NHS,

• protection for low income households from tax hikes and supports more and better jobs.

Overall, it delivers £700 million of additional spending on our economy and public services.

That is a budget for Scotland and I commend this budget to Parliament.