The cost of living crisis represents an unprecedented challenge.
Families face a winter where they cannot afford to heat their home.
Businesses face energy bills they cannot pay.
Parents are struggling to feed their children.
That is the reality of the cost crisis.
And, while we are a long way from its full effects being known, the Bank of England last month set out the reality that the UK is facing a recession as deep as the 1990s and as long as that following the 2008 financial crash.
That is the context within which the First Minister set out the Programme for Government.
She confirmed that we will extend and increase the Child Payment in November and protect the roof over people’s heads with a rent freeze and a moratorium on evictions.
Free school meals will be rolled out further, the Fuel Insecurity Fund will be doubled, rail fares will be frozen until at least March and the Warmer Homes Fuel Poverty Programme is being widened.
This all comes on top of the almost £3 billion in support already budgeted for and an existing £800 million of reliefs for business this financial year.
The UK Government holds reserved powers over energy, over tax, over the bulk of benefits, over business support and over regulation that could help address this crisis.
They have borrowing powers and the ability to deploy financial instruments that can transform household and business budgets.
They have all of this yet as the crisis has worsened, there has been no substantive action taken to help people and business.
Urgent action is overdue and I urge the Prime Minister and the Chancellor not to waste another day before setting out their plans.
Today I will update Parliament on the impact of the cost crisis on the public finances and the steps we will take to keep them in balance while funding the support it is in our power to provide.
This is not just a cost of living crisis as some characterise it. The costs of doing business, the cost of third sector support and the cost of public services are all rising as well.
Indeed, in all of my experience, now and during my previous tenure as Finance Secretary, there has never been a time of greater pressure on the public finances.
Our budget was based on a UK Spending Review that simply did not foresee the levels of inflation that are now a reality.
Last summer, inflation was just 2%.
In December, when the budget was agreed, CPI stood at just 5.4%.
Now it is more than 10% and predicted to go higher still.
The result is simple: almost every cost government incurs has risen.
At the same time, our budget is now worth around £1.7 billion less than it was in December. That alone would require the budget to be revisited.
But, in times of crisis, the job of the finance secretary is not simply to balance the books.
It is to find the money to help families, to back business and to fund the priority projects that improve lives for the long term.
And so, the Emergency Budget Review must both identify funding to cope with inflation-driven cost increases and aim to support those who most need our help during this crisis.
And it must do so using only the fixed powers of this Parliament.
Our total budget is fixed.
We cannot vary income tax in-year.
Our reserve funding is fully allocated.
We have no legal ability to borrow to fund day-to-day spending such as pay increases.
Our capital borrowing is allocated for projects such as new schools and housing - projects which supporting employment and investing in our recovery.
In short Presiding Officer, the Scottish Budget is at the absolute limits of affordability.
So, today I will set out to Parliament the initial steps the Scottish Government has taken, and will take, to manage the nation’s finances, while maximising the support we make available to help those in need.
Firstly, let me quantify the demand arising from public sector pay.
As the First Minister set out to Parliament yesterday, in the midst of a cost crisis, our role in pay negotiations is to maximise the support to the lowest paid as a crucial part of our response to the cost crisis.
My job is not to fight low paid workers’ pay claims.
My job is to fund low paid workers’ pay claims.
Accordingly we have seen police officers agree a 5% deal while, in Scotrail, Aslef have similarly settled at 5%.
Negotiations with some of the largest workforces, NHS Agenda for Change for example, are on-going but the enhanced pay offers that have been made, excluding direct Local Government contributions, total approximately £700 million.
Last week, we also reached a proposed local government pay settlement.
As a result of our intervention – and the hard work of the unions and their members - the pay rise proposed for the lowest paid was significantly increased – with awards in excess of 10% - while the increases for the most well-off were capped at £3,000.
More money for the lowest paid, funded by the Scottish Government.
The proposed settlement means, however, that we must find additional savings.
We said there was no more money and there is not.
Funding this agreement means taking money from elsewhere.
Pay is not the only cost pressure we face. We have rightly given a warm Scottish welcome to people displaced from Ukraine as a result of the illegal and ongoing Russian invasion.
Almost 18% of all displaced Ukrainians coming to the UK are coming to Scotland.
That requires us to find around £200 million not planned for at the time of the budget, just as the invasion began. I hope no one in the chamber, begrudges that support.
Public sector pay and the cost of supporting displaced Ukrainians along with the rising costs due to inflation are therefore placing enormous strain on our Budget.
In addition to these factors, there is our clear determination to support those who will find themselves in difficulty this winter.
We have already provided almost £3bn of support to people, and as the First Minister set out yesterday we will go further.
I have heard and am listening to proposals for further action – doubling bridging payments, freezing rail fares beyond March, more help for energy efficiency, greater businesses and third sector support, and managing the impact of rising energy and food bills on hospitals and schools.
None of that can be done without reducing planned spend in other areas and on other programmes.
Difficult choices must be made.
There is no unallocated cash.
There is no reserve that has not been utilised.
Every penny more on one policy is a penny less on another policy.
I have therefore today written to the Finance Committee setting out around £500 million in reductions in planned spending and forecasting that we have made in recent weeks.
- a reduction of £53 million in the budget for employability schemes,
- utilising funding of £56 million generated by the Scotwind clearing process – funding that will be reinstated in future years and used, as planned, to invest in the Just Transition.
- £33 million deferral of ring-fenced agriculture funds, to be returned in future years, and whilst not impacting eligibility, taking a risk based forecasting approach based on demand, a reduction of £37 million in the budget for concessionary fares.
Throughout this process we have taken those savings that we consider have the least impact on public services and on individuals.
Still, these decisions have not been easy and they will not be without consequence.
In particular the reduction in employability funding. But given the circumstances we face they are unavoidable.
At a time of acute labour shortages, historically low unemployment and soaring inflation, we have taken the view that we must prioritise wage increases over spending on employability, but this is not a decision we have taken lightly.
It is a decision we have not wanted to have taken.
Any changes to budgets will be formally set out to Parliament in the Budget Revision process but it is in the public interest that underlying savings are set out now so that the scale of the challenge we face is clearly understood and no one in this Parliament, or negotiating pay deals, can be unaware of it.
Many of the individual savings are small amounts of money but together they add up to a significant reduction in expenditure – enabling that money to be invested in addressing the financial challenges we face.
Last week’s intervention by the Scottish Government in the Local Government pay dispute demonstrates what we are having to do.
In order to shift to full consolidation of the award, further savings had to be made.
I have committed to publishing the outcome of the Emergency Budget Review within two weeks of the UK fiscal event planned for later this month.
Further savings will be required to balance the budget, particularly if inflation continues to rise.
And, the majority of our spend cannot be changed at this stage of the financial year. It is contractually committed or supports vital programmes.
In short, what I have set out today is just the beginning of the hard choices.
There is one further point which Parliament must reflect on, and is why I require time following a UK fiscal event before I can set out the results of the Emergency Budget Review.
For eight weeks we have heard the new Prime Minister talk of unfunded tax cuts that will not help the lowest paid or those reliant on Universal Credit, and of cutting public sector spending to deliver tax cuts for businesses.
If, in pursuing these policies, the UK Government reduces the budgets of any portfolios where we have devolved responsibility, then the challenge we face becomes harder, as our budget will become smaller.
This is the harsh reality of a fixed budget and limited powers.
The Scottish Government simply does not have access to many of the levers that would provide the greatest support in this crisis.
Taxation of windfall profits.
Regulation of the energy market.
Instead every new penny spent is a penny that must be found from elsewhere.
That is why the new Prime Minister and her new Chancellor must take action immediately.
They have reserved the powers over this crisis to themselves.
So, my appeal to the United Kingdom Government is to cancel the energy price rises and fund the targeted support people desperately need.
Help families struggling to feed their children and heat their homes this winter.
Provide the additional funding necessary to meet the impact of higher public sector pay and inflation.
We will do everything we can.
We will make the hard choices.
But only the UK Government can act to end this crisis.
They should do so – and I encourage them to do so now.
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