Medium-Term Financial Strategy: Ministerial statement

Presiding Officer, 

Today I am publishing two documents that set out, broadly, how public finances will be managed over the next five years.

The Scottish Government’s seventh Medium-Term Financial Strategy, and our first Fiscal Sustainability Delivery Plan.

The Scottish Fiscal Commission are also today publishing an update to their independent forecasts, which underpin the strategy and the plan. I wish to thank Professor Graeme Roy and the whole Scottish Fiscal Commission for their flexibility in working with us. 

Presiding Officer, with the world facing profound economic uncertainty this MTFS is being presented in deeply challenging circumstances.

Those challenges have been exacerbated by the actions of the UK Government - whose decisions continue to have serious consequences for the delivery of our public services.

For example, the Chancellor has again failed to provide full funding for the additional costs of employer national insurance contributions – leaving public services in Scotland facing a £400 million shortfall.    

Further, in the UK Spending Review, had the resource funding being provided to the Scottish Government for day to day priorities matched the average increase for UK departments, we would have £1.1 billion more to spend over the next three years.

And, last week, they set out proposals that will deliver deep cuts to disabled people’s support – pushing more people into poverty. With a real life negative funding impact in Scotland of £440 million by 2029-30, based on the Office for Budget Responsibility’s estimates.  

It remains to be seen exactly how the UK Government will deliver its intended changes - seeing how this is a developing situation in Westminster today - but for the purposes of today's publications I am using the numbers given to us by the Treasury at the UK Spring Statement.

For Scotland, funding from the UK Government for day to day spending is only expected to grow by 0.8% in real terms over the next three years, compared with 1.2% average growth for UK Government departments.

And Scotland's capital Block Grant will be 1.1% lower in real terms by the end of the UK Spending Review period.

These allocations simply do not reflect the unavoidable realities of the demands that will be placed on public services by the demographic challenges we face – not least through an ageing population.

On capital, construction price inflation, that has been turbo charged by Brexit, continues to drive up prices. While the necessity to maintain and invest in new assets remains.

To ensure that public services are there to meet the needs of the people we are bringing forward our reform and savings plans. The UK Government is also taking similar action.

The Chancellor has set out the approach to achieving fiscal sustainability for the UK – with all departments to deliver at least 5% savings and efficiencies by 2028-29. Within this, there are reductions in administration budgets of at least 11% in real terms by 2028-29, and 16% in real terms by 2029-30.

We require to take similar actions as, without doing so, the forecast gap between funding and spending in Scotland could reach £2.6 billion for resource, and £2.1 billion for capital, by the financial year of 2029-2030.

Managing the impact of Westminster austerity is all too familiar – and in spite of this we continue to invest in the people of Scotland. Supporting a better paid public sector, delivering high quality public services, and providing welfare support that is not available in other parts of the UK.

And we have done this whilst delivering a balanced budget every single year since 2007.

We will reform and reshape our public services, using technology to embrace and drive forward new ways of working.

This shift is critical to our approach and underpins the first pillar of our strategic approach.

First, we will continue to increase value for the public purse, maximising the amount of impact we achieve for our investment.

That’s why, alongside the Budget in December, I will publish a multi-year Scottish Spending Review and infrastructure pipeline to set out affordable and sustainable investment plans for the years ahead.

A framework for the spending review is being published in the MTFS today.

Second, we will deliver efficiencies – improving productivity and making the most out of every pound of public money spent on delivery.

We will focus on business improvement to drive down the cost of service delivery, not only in corporate functions as set out by the Minister for Public Finance Ivan McKee last week, but across the whole system while protecting outcomes.

This includes sharing services and estates across our public bodies, and driving efficiencies from collaborative procurement across the public sector.

We will set a Public Sector Workforce managed reduction target to reduce staffing levels by an average of 0.5% per year until 2030.

This will be achieved by reforming our public services as set out in the Public Service Reform Strategy, and through natural attrition and recruitment controls.

By taking this action, we will protect valuable frontline services, and continue to offer a progressive pay policy which recognises that our public sector workforce is our most valuable asset.

We will focus on how we process and deliver benefits with dignity, fairness and respect - whilst driving important efficiency savings - ensuring that people access the support that they are entitled to.

We will continue our targeted programme of efficiency and productivity improvement within the NHS. We will seize opportunities presented by the rise of innovation, digital, and treatment advances, making a commitment to work with NHS boards and staff, ensuring the use of core resource is optimised and best value secured across NHS Scotland.

Third, we will drive forward service reform, improving the way we deliver services. We must integrate support, and empower the front line to bring together all the resources people and families need to thrive.

Finally, we will focus on prevention – investing in the most impactful preventative spend to reduce demand on services in the medium to long-term. We will deliver the technical and cultural change needed to go further to tackle the root causes of poor outcomes to improve lives.

For example, through the Best Start, Bright Futures breakfast club delivery plan we will continue to drive forward cross-government action on eradicating child poverty.

Through the actions presented in today’s delivery plan to maximise value from public spending and drive forward efficiency and reform, we expect to generate total cashable savings of £2.6 billion by 2029-30. This equates to 4.4% of the  forecast resource budget in that year.

Presiding officer, growing the economy is a top priority for this government.

By boosting business activity, driving wage growth and creating employment opportunities for more people, we can broaden the tax base, alleviate pressure on the public finances and generate income tax revenue to support fiscal sustainability in the medium to long term.

This is the focus for the second pillar of our strategy.

Our plan for increasing Scotland’s economic activity centres on creating a dynamic and flexible business environment, improving skills provision and supporting people to secure higher paying jobs, creating the opportunity for people to enter or take on more or better work, attracting investment and promoting entrepreneurship in the industries of tomorrow.

Yet the levers available to us to stimulate economic growth are of course limited. For example, the UK Government’s current approach to immigration harms Scotland by failing to address our demographic and economic needs, exacerbating labour supply issues.

Despite these constraints, this Government will continue to take action and make the most of Scotland’s strengths and opportunities, to boost our long-term economic prospects.

Our overarching economic strategy sets out our vision for a fair, green and growing economy, and we are prioritising delivery of the actions outlined in the Programme for Government to deliver growth that will help people enjoy more prosperous lives, now and for the long-term, and protect the public services that we rely on.

The third pillar of our approach focuses on delivering a strategic approach to tax policy decisions.

Presiding Officer, despite limited tax powers, we have taken bold, necessary action in recent years to ensure that our vital public services are prioritised.

Our decisions on Income Tax since devolution helps protect investment in public services. Scottish Income Tax is forecast to raise a record £20.5 billion in 2025-26 with the latest Scottish Fiscal Commission (SFC) forecast showing a positive contribution to the 2025-26 Scottish Budget of £616 million. And the total tax net position to be £2.3 billion by 2029-30.

Our delivery plan sets out further the range of actions to improve the operation and performance of the existing tax system.

For example, we are implementing new devolved taxes including the UK Aggregates Levy in 2026 and the Building Safety Levy in 2027. And we are continuing to work in partnership with local government, to ensure that local taxes are fair and sustainable.

We will also take forward work on considering future reform to the tax system, including developing our thinking on longer term issues such as wealth taxation.

In conclusion Presiding Officer, fiscal sustainability is about more than balancing the books — it’s about delivering value, driving reform, and making strategic choices that support long-term growth.

By focusing on efficient public spending, modernising services, growing our economy, and taking a strategic approach to tax, we can build a stronger, fairer Scotland.

Meeting the challenges that face our public finances will require a collaborative effort across the public sector and beyond any single parliamentary year.

This strategy and action plan sets out a clear path. I invite my colleagues across the chamber to work with me to deliver it and ensure our public finances stay on a sustainable footing.