While the current economic situation gives reason for cautious optimism, Scotland's fiscal outlook remains uncertain over the period of this Programme for Government. The pandemic has shown, and continues to show, that we need strong public, private and third sectors to meet the economic and health challenges of this crisis. The Scottish Government will continue to act responsibly in its management of public finances, building on and updating the approach set out in the Medium Term Financial Strategy. However, as Scotland recovers, we will also take the next steps in the necessary transformation of our economy and public services required by the pressures of Brexit, the climate emergency and tackling the inequalities that the pandemic has so cruelly amplified in our societies.
Our public services must be underpinned by appropriate and stable funding so that fiscally sustainable decisions can be made over the medium to long term. This Programme for Government (PfG) demonstrates that the Scottish Government has a clear reform agenda for this Parliament, but the fiscal foundations for this agenda remain unsteady. The UK Government's COVID‑19 funding guarantee was welcome, but looking ahead the basic uncertainty around the Scottish funding position remains. We do not know what the upcoming UK Spending Review means for us, and we have called repeatedly on the UK Government to maintain fiscal support and not return to the austerity of the past.
Among the negative side‑effects of Brexit are the extensive spending powers conferred on the UK Government through the UK Internal Market Act. Consequently, the UK Government has started spending directly in Scotland in areas of devolved competence, without consultation and often without any prior notice. We therefore find ourselves in a situation where the UK Government cuts across Scottish policies and, apart from undermining devolution, uncoordinated UK Government policy decisions may actually waste valuable public funds. Despite the unconstructive stance of the UK Government, we are continuing to engage to get better results for the people of Scotland.
The events of the last eighteen months have further demonstrated that the Fiscal Framework agreed in 2016 is not fit for purpose. We have had to manage unprecedented volatility and the limits on borrowing and the Scotland Reserve proved to be overly restrictive. There is emerging consensus in Scotland around the shortcomings of the Fiscal Framework. Together with the UK Government, we are set to review the Fiscal Framework in 2022. We will use that review to push for a substantial increase in the fiscal power of the Scottish Parliament, including:
- Removal of the caps on capital borrowing, which constrain our ability to invest in the economy and public services, to be replaced by a prudential borrowing scheme – the same power local authorities already enjoy.
- Removal of the restriction on resource borrowing to fund day‑to‑day costs, an increase in the borrowing cap for forecast errors to £600 million, and an increase in the Scotland Reserve drawdown to £700 million per year.
- Strengthening of Scotland's tax powers with the devolution of VAT, and full powers over Income Tax and National Insurance contributions.
While there are substantial limits to our fiscal autonomy, we will use our devolved tax powers to best effect. Our commitment to freeze Income Tax rates and increase thresholds by no more than inflation for the duration of this Parliament will provide individuals and businesses the certainty and stability they need as we recover. We will protect and grow the tax base through our economic policies in pursuit of stable growth, reflecting our commitment to fiscal sustainability and to generate revenues to fund our public services and strengthen our economy.
We have published a draft Framework for Tax for consultation, setting out how we use the tax powers we have to deliver public services and support an economy that works for everyone in Scotland – including the principles and strategic objectives that underpin our approach, and our programme of work for this Parliament.
The positive proposals set out in this Programme for Government demonstrate the value of making decisions close to the people they impact. The pace of implementation will, however, be determined by available resources, especially those made available through the UK Spending Review. The Scottish Budget 2022‑23 and Scottish Spending Review will set out the proposals within spending trajectories that will target and prioritise resources so that we maximise the value we get from every public pound. This will involve a clear focus on the contribution that public spending makes to the commitments set out in this Programme for Government, our statutory targets and the National Outcomes. Through all of our actions we will continue to set Scotland's public finances on a sustainable course, and express our commitment to making the recovery from the pandemic into an opportunity for economic, environmental and social transformation.