Chapter 1 Strategic Context for the Draft Budget 2017-18
This Draft Budget sets out the Scottish Government's tax and spending plans for 2017‑18. It delivers on our pledge to support a more sustainable economy, invest in public services and promote an inclusive vision for Scotland's communities. In the face of the continued economic and fiscal uncertainty resulting from the EU Referendum and the UK Government's austerity agenda, the Scottish Budget provides stability and certainty for Scotland's economy and public services.
The Draft Budget sets out our spending priorities, including extra investment for the Scottish Government's top priority of raising standards in our schools and closing the attainment gap of our poorest pupils. It increases frontline NHS spending by more than inflation; invests in the expansion of early learning and childcare towards our pledge of 1,140 hours by the end of this Parliament; and protects in real terms the revenue budget for policing.
As well as setting out our spending plans for next year, for the first time this budget also sets out the Scottish Government's proposals for income tax in Scotland under the powers devolved through the Scotland Act 2016. These are underpinned by economic and fiscal forecasts independently scrutinised and endorsed by the Scottish Fiscal Commission.
Economic and fiscal outlook
The Scottish economy has grown over the past year in spite of persistent external headwinds arising from weak global growth and a low oil price that has created challenging conditions for Scotland's oil and gas sector and its supply chain.
In the first half of 2016, the economy continued to grow, albeit at a slower rate than in recent years. The labour market has also remained resilient with unemployment falling to its lowest level since 2008 and continued high levels of employment.
The outcome of the EU Referendum in June has created a heightened level of uncertainty across Scotland and the UK. The result has triggered a 10 per cent fall in the value of Sterling and led to volatility across financial markets. This fall in the value of Sterling is expected to boost export growth over time. However, it is also increasing the cost of imports to the UK, resulting in higher inflation and increased pressure on household budgets that are already under strain as a direct consequence of the policy measures being implemented by the UK Government.
The EU Referendum and UK austerity
We are yet to see any significant detail from the UK Government on their plans for leaving the EU. The Office for Budget Responsibility ( OBR) underlined the uncertainty that this is causing in their 'Economic and Fiscal Outlook' where, despite asking the UK Government for clarity, they were unable to model anything other than their best assumption of what the economic outcome might be.
In contrast, we have set out clear ambitions to remain within the EU single market and will shortly set out our plans for protecting Scotland's place in Europe. It is incumbent upon the UK Government to engage positively with our proposal and make clear their own position.
The UK Government's approach to public spending is having a significant detrimental effect in Scotland. Between 2010-11 and 2019-20, the Scottish Government's Fiscal Departmental Expenditure Limit ( DEL) from HM Treasury will fall by over nine per cent in real terms - the equivalent of over £2.8 billion - with a share of a further £3.5 billion of as yet unallocated budget reductions in 2019-20 still to come.
The Scottish Government has long argued that the UK Government's austerity programme is damaging. A more flexible approach would deliver significant additional public spending over the Parliament to be invested in improving and widening public service provision without undermining the long-term sustainability of the UK public finances.
The Chancellor of the Exchequer's 2016 Autumn Statement also failed to deliver on promises to help those families most in need by neither reversing cuts to the Work Allowance nor lifting the freeze to benefits announced in July 2015. As a result of the cuts to social security by the UK Government, and the deterioration in the economic outlook generated by the outcome of the EU Referendum, many families will see a significant reduction in their household incomes. As an example, the Resolution Foundation has estimated that a dual-earning family with three children on low incomes could be worse off by £3,650 a year, by 2020. 
The Draft Budget 2017-18 responds directly to these challenges, providing stability and certainty of approach. It delivers on the positive steps set out in the 'Programme for Government' to build a nation with a dynamic, sustainable and inclusive economy where every individual has equality of opportunity.
It supports our long-term aspiration for inclusive growth - the twin objectives of boosting competitiveness whilst tackling inequality - by targeting resources, reforming public services and the responsible use of tax powers.
Scottish Government spending limits
The Scottish Government DEL budget for 2017-18 is determined through the combination of three main elements: block grant funding from HM Treasury; forecasts of receipts generated by taxes devolved to Scotland through the Scotland Act 2012 and Scotland Act 2016; and planned use of available devolved borrowing powers.
The operation of the Block Grant Adjustment is explained in more detail in Chapter 2.
The DEL Spending limits for the Scottish Budget are set out in Tables 1.01 and 1.02 below.
Table 1.01: Scottish Government Departmental Expenditure Limits 2015-16 to 2019-20
| SG Spending Limits -
|UK Government SR settlement - November 2015
|Subsequent Barnett consequentials and other additions
|Total DEL Settlement from HMT
|Fiscal Revenue DEL
|Block Grant Adjustment
|Scottish Rate of Income Tax
|Land and Buildings Transaction Tax
|Scottish Landfill Tax
|Air Passenger Duty ( OBR Forecast)**
|Net DEL Adjustment
< Adjusted to include Council Tax Benefit for comparison purposes.
* 2016-17 includes the deferral of budget savings from June 2015 as agreed with HM Treasury.
** Air Passenger Duty revenues are based on OBR forecasts of Scottish revenues in 2018-19 and 2019-20.
*** Non-tax adjustments are not yet finalised. We are assuming that the block grant adjustments are revenue neutral.
Table 1.02: Real Terms Changes to Scottish Government Discretionary Spending Limits
| SG Discretionary Spending Limits - Real Terms
|Fiscal Revenue DEL
|Real-Terms Change - cumulative
|Real-Terms Change on 2010 ‑ 11 - cumulative
|SG Adjusted Spending Limits - Real Terms (2016-17 prices)
|Fiscal Revenue DEL Adjusted by BGA
|Capital DEL + Capital Borrowing
|Real-Terms Change - cumulative
|Real-Terms Change on 2010 ‑ 11 - cumulative
Implementing the Scotland Act 2016
Draft Budget 2017-18 will, for the first time, operate under the Fiscal Framework established in support of the Scotland Act 2016. This heralds a material change in the financial responsibility of the Scottish Parliament, including the first opportunity to set income tax rates and thresholds with the exception of the personal allowance.
We set out in March 2016, and in our 2016 'Programme for Government', how we intend to use the devolved powers over income tax. Those plans form the basis of the tax proposals set out in this Budget.
We will ensure that Scotland continues to be an attractive place to live, work and do business. The Scottish Government will not pass on austerity to the household budgets of the lowest income taxpayers. Instead, we will protect low and middle income taxpayers at a time of rising inflation by freezing the Basic Rate of Income Tax.
The Scottish Government will, however, give priority to the protection of public services over a substantial tax cut for individuals with the top 10 per cent of incomes. The Scottish Government will not cut tax for higher rate (40p) taxpayers through above-inflation increases in the higher rate threshold.
The impact of economic growth on Scotland's finances
The newly-devolved powers place a greater emphasis on Scotland's relative economic performance in determining the resources available to fund devolved public spending. Once the Scotland Act 2016 powers are fully devolved, approximately half of devolved expenditure in Scotland will be funded by devolved or assigned tax revenue.
As a result, this Budget and future budgets will be informed by an annual adjustment to the Scottish Block Grant, based on OBR forecasts of the growth in corresponding tax receipts in the rest of the UK, offset by forecast and ultimately actual Scottish tax receipts.
Supporting sustainable growth
Never before has such a direct link existed between Scotland's economic performance, tax revenue and the Scottish Government's budget. That is one key reason why this Draft Budget is focused on growing a sustainable and productive economy, supporting more and better jobs.
We will therefore cut the Business Rates Poundage, introduce additional reliefs in rural areas and expand the Small Business Bonus Scheme so that 100,000 properties will be exempt from paying rates altogether. Taken together, these proposals will support jobs by delivering a highly competitive tax environment, ensuring that Scotland is an attractive place to live and do business.
Scotland has already made huge progress in tackling climate change. We will publish new Climate Change and Energy plans in 2017 that set out our vision and strategy for developing the low carbon products and services that will be needed throughout the world in the future, keeping us at the international frontier of sustainable growth.
Scotland has always been an outward-looking nation, embracing the world beyond our borders and making a contribution to the international community. Through our Major Events Budget we will support the successful delivery of the new national events strategy. This will enable Scotland to further enhance and sustain an inspirational programme of events each year that generate business, create jobs and boost the economy.
In 2017-18, we will launch the £500 million Scottish Growth Scheme, which will provide support to businesses seeking access to finance. Good progress is being made in preparing the necessary operational arrangements for the scheme and the Government is working with the Scottish Parliament to ensure appropriate and effective scrutiny arrangements are in place to support it.
The Scottish Government has also intervened directly in supporting Scotland's economy where we feel it is necessary to provide certainty and a platform for future growth.
We have introduced a £100 million capital stimulus package (which was announced earlier this year), and helped to secure a viable future for the Clydebridge and Dalzell steel plants and the aluminium smelter and hydro sites in the Lochaber area. We also welcome the progress made by Ferguson Marine Engineering, including the apprenticeship programme launched earlier this year.
Supporting local economies
The Scottish Government continues to promote the case for City Deals for Edinburgh, Stirling and Dundee/Perth and will engage with the UK Government, local authorities and other partners. This budget confirms the Scottish Government's 2017-18 funding commitments to City Deals for Glasgow, Aberdeen and Inverness, as part of an overall Scottish Government contribution of more than £750 million over the lifetime of the deals.
City Deals, as well as Regional Partnership Plans such as the Clyde Gateway, provide additional resources while encouraging local and regional partners to identify and deliver a vision for inclusive growth in their areas. The Scottish Government, supported by the Scottish Futures Trust, will also continue to explore with local authorities the potential offered by the Growth Accelerator model that is being applied successfully in Edinburgh and Dundee. We will also work to explore and make progress on the development of a potential Ayrshire Growth Deal and invite proposals for two further Tax Incremental Financing projects.
The £25 million Regeneration Capital Grant Fund invests in disadvantaged areas to tackle inequality, increase opportunities and create jobs, while the Town Centre Action Plan has identified key actions across government to support effective town centre regeneration.
We will support Scotland's rural economy by delivering a reformed Common Agricultural Policy; building growth within our marine and coastal communities through investment in, and support of, our fisheries and aquaculture industries; investment in digital and transport infrastructure; increased funding to support the food and drink industry; and offering business rates relief in applicable rural areas.
We are also continuing to invest in community-led regeneration of some of Scotland's most deprived areas through the People and Communities Fund and the Empowering Communities Fund. These support communities to tackle poverty and exclusion on their own terms, and through the Community Empowerment Act we will promote the use of participatory democracy approaches such as participatory budgeting.
This budget delivers significant further investment in infrastructure, including in core drivers of economic growth such as transport, energy, housing and digital infrastructure. This Draft Budget delivers:
- funding to bring the Queensferry Crossing to completion, progress on the M8/M73/M74 Motorway Improvements project, Aberdeen Western Peripheral Route, the A9 and A96 projects, the A737 Dalry Bypass, and commencement of procurement on projects such as the A90/A96 Haudagain junction and improvements on the A9 at Berriedale Braes (subject to the completion of statutory procedures);
- £460 million expenditure on rail network enhancements, such as the Edinburgh Glasgow Improvements Programme ( EGIP) and enhancements to the Aberdeen to Inverness route;
- over £100 million investment in digital and mobile infrastructure, to improve digital connectivity, grow Scotland's digital economy and increase digital participation, including support for our commitment to deliver 100 per cent broadband access by 2021. The budget also confirms that the Scottish Government will consider matching the business rates reliefs for fibre infrastructure announced in the UK Chancellor's Autumn Statement of 23 November 2016; and
- substantial investment in social infrastructure, underpinning a modern and effective NHS, providing high quality education facilities that support our attainment objectives, and initial investment in the most significant infrastructure project of this Parliamentary session: the expansion in the provision of early learning and childcare.
The first phase report produced by the Enterprise and Skills Review suggested a range of actions to create growth driven by investment, innovation, exports and inclusion, such as aligning the functions of our learning and skills agencies to better join up education services and training. Our Trade and Investment Strategy sets out a vision to promote Scotland on the international stage, including through Innovation and Investment Hubs in London, Dublin, Brussels and Berlin.
Investing in housing
Recognising that keeping housing costs affordable can have a positive impact on both the economy and people's experience of poverty, we are investing heavily in the provision of affordable housing. Over £470 million of direct capital investment in the Affordable Housing Supply Programme, combined with work to maximise the opportunities presented by innovative finance, will keep us on course to deliver 50,000 affordable homes during the life of this Parliament, including 35,000 for social rent. With every £100 million of investment in construction supporting 800 jobs, this will also support employment in construction and housing management and will leverage increased private investment. Help to Buy Scotland also continues to provide significant support to those seeking home ownership.
Scotland's Energy Efficiency Programme has been given National Infrastructure Priority status reflecting the key role energy efficiency can have across multiple outcomes including reducing carbon emissions and lowering fuel bills while supporting quality job opportunities and the environmental sustainability of the Scottish economy. This budget provides over £140 million of investment in energy efficiency measures as a significant first step in delivering our commitment to invest over £500 million in energy efficiency over this Parliamentary term.
Creating the conditions for longer-term economic growth
Investment now in the infrastructure and support that businesses and entrepreneurs need to prosper must be coupled with investment in people, services and communities. By combining sustainable growth and tackling inequality, Scotland will build a fairer, more prosperous future with opportunities for all.
By helping to close the educational attainment gap, reduce child poverty and ensure access to higher education is on the basis of the ability to learn not the ability to pay, our extensive educational investments not only benefit children, young people and their parents and carers, but also have the potential to generate significant longer-term benefits to society, the economy and our public finances.
This Government has, therefore, made education its number one priority and this budget underlines our determination to pursue our three key ambitions:
- to ensure our children and young people get the best possible start in life;
- to raise standards in our schools and close the educational attainment gap; and
- to create opportunities for all through widening access to higher, further and vocational education.
Investing in school education
Additional resources made available through our Attainment Scotland Fund provides targeted support for those local authorities and schools who need it most and help make real progress in closing the attainment gap. Coupled with our joint commitment with local government to protect the ratio of teachers to pupils and the fair settlement for local government, this budget delivers the resources we need to drive improvement in our school system.
We know that it is not just our schools that can contribute to excellence and that high quality and flexible early learning and childcare has the dual benefit of raising educational attainment and allowing greater opportunities and flexibility for parents to work or study. This Draft Budget invests £60 million in the workforce and infrastructure necessary to start to undertake the radical and ambitious expansion in the provision of free early learning and childcare entitlement to 1,140 hours - essentially matching the time spent in primary school - by the end of this Parliament.
As with our approach with schools, we will focus investment in the most deprived areas and by 2018, nurseries in the most deprived areas will benefit from an additional qualified teacher or graduate.
The 'Programme for Government' established plans to support increased investment in educational attainment by directly targeting additional funding to schools in 2017-18. This Draft Budget will now go further and provide £120 million - £20 million more than previously planned - as the next step towards investing £750 million over the life of this Parliament.
The £120 million of additional funding for the Attainment Scotland Fund is included in the local government settlement. However, as we have made clear, it is intended that this money will be allocated to individual schools to be utilised at the discretion of headteachers in addition to the resources already available to them. Schools will be allocated around £1,200 for each pupil from P1-S3 known to be eligible for free school meals. This Pupil Equity Funding will be available for head teachers to use for additional staffing or resources that they consider will help raise attainment and reduce the attainment gap. Guidance will be issued to assist headteachers in the use of this additional funding. The remainder of the Attainment Scotland Fund will be invested through our current local authority and schools Attainment Challenge programmes.
The Scottish Government previously proposed that this direct investment in attainment in schools would come from the reform of council tax bands. Instead, this Draft Budget now proposes to fund this from central resources enabling each council to retain the revenues from council tax banding reform locally and invest them as they see fit. Each council will retain their share of the estimated £111 million of additional income from the reforms to council tax bands. Councils will also have the option of increasing council tax in 2017‑18 up to a maximum of three per cent which would raise an additional £70 million of revenue.
Investing in post-16 education
The Learner Journey Review aims to further improve the post-16 education system, enabling young people to access the right options for them once they leave school, and move more easily through the system towards employment. This sits alongside the Developing Scotland's Young Workforce Programme ( DYW), which is taking forward our ambition to equip young people with the skills, experiences and qualifications needed to secure positive destinations after they leave school. This includes the development of the network of DYW Regional Groups.
Our budget for the further and higher education sectors delivers over £1.6 billion of investment in our institutions - this is augmented by our financial support for students. This ensures that access to further and higher education for eligible students remains free of tuition fees; that we maintain at least 116,000 full-time equivalent college places; that our capital investment across both college and university sectors continues to support excellence in teaching, research and infrastructure investment; that research, innovation and knowledge exchange flourishes; and that our teaching, research and innovation activities support Scotland's productivity and economic growth. In addition, students' living costs are supported during their period of free study through a mixture of bursaries and loans.
Revenues from the UK Government's Apprenticeship Levy replaced funding previously provided to the Scottish Government as a traditional share of UK Departmental spending and used, as part of the overall Scottish budget to support our extensive skills, training and employment provision, including our Modern Apprenticeship programme. In direct response to the views of employers in Scotland, and reflecting on the Apprenticeship Levy consultation responses we received, the Draft Budget 2017-18 delivers a range of interventions that further support skills, training and employment in Scotland.
In particular we will:
- continue to expand the number of Modern Apprenticeship opportunities as part of our planned growth to 30,000 new starts each year by 2020 alongside an increase in the number of Graduate Level and Foundation Apprenticeships during 2017-18;
- support measures to tackle structural unemployment issues and challenge inequalities and under-representation in the labour market by supporting people who face barriers to education, training or employment, in partnership with employers, local authorities and the third sector;
- continue with the implementation of the Developing Scotland's Young Workforce Programme; and
- respond to the skills needs of employers, through:
- the establishment of a new Flexible Workforce Development Fund; and
- ongoing and sector-specific skills support for priority sectors in the economy such as digital, care and early years.
High quality public services
This Draft Budget renews the Scottish Government's commitment to public service reform, guided by the recommendations of the Christie Commission on the future delivery of public services. It also delivers the commitments the Government has made to invest in these services and to maintain or improve the outcomes they deliver for those that use and rely upon them. This budget delivers:
- over £300 million additional resource funding for the NHS, providing a real terms uplift in 2017-18 as part of the commitment to increase NHS resource funding by £500 million above inflation over the life of this Parliament;
- a transfer of resource from health to social care of £357 million, an increase from £250 million in 2016-17 - as part of a package of additional investment of almost £500 million from the NHS in social care;
- plans to secure a total of £8 billion of resources for Integration Authorities, giving them real power to ensure that people have access to the right care, at the right time and in the right place, by changing the way key services are delivered, with greater emphasis on supporting people in their own homes and communities and more appropriate use of hospitals and care homes. By combining resources that NHS Boards and local authorities previously managed separately, as part of the most significant reforms of public services in Scotland since the NHS was established in 1948, this Draft Budget supports:
- continued delivery of the Living Wage;
- sustainability in the social care sector;
- the disregard of the value of war pensions from financial assessments for social care; and
- pre-implementation work in respect of the new carers legislation.
- investment in mental health that exceeds £1 billion for the first time, and will in future years grow at a rate above the overall growth in the frontline NHS budget;
- investment of £72 million in improvements to Primary Care and GP services, contributing towards the additional £500 million being invested in this area in each year by the end of this parliament;
- a strong settlement proposal for local government which would deliver:
- £120 million of additional funding (met centrally) for Educational Attainment;
- increased capital resources and continued investment in city deals;
- additional investment from the NHS through Integration Authorities of £107 million to deliver the Living Wage for social care workers and protect our collective investment in social care;
- the opportunity to raise up to an additional £181 million from council tax; and
- taken together this amounts to a potential increase in the total spending power to support local authority services from a combination of the Scottish Government grant and increased revenue from local taxation of £267 million or 2.6 per cent compared to 2016-17.
- protection in real terms for the revenue budget for policing, as we seek to maintain current record low levels of crime, and a further £36 million to drive forward the reforms needed to equip the Police service for the challenges of the future and to protect the police from the unfair decision by UK Government which prevents them from reclaiming VAT in Scotland.
Empowering and supporting communities
Our vision is for a fairer, more prosperous Scotland where every individual has the chance to take control and act on the ambitions they have for their own lives and for their communities.
For this vision to become a reality, we need high quality, responsive and affordable public services that put people's wellbeing and improved outcomes first. This relies on public services that are rooted in empowerment and help to break cycles of disadvantage; that work actively to place the needs and aspirations of people at their heart; and that value prevention - rather than relying on crisis intervention.
This budget seeks to protect the poorest members of our society from the most damaging effects of the UK Government's austerity policies. We are therefore supporting advice and advocacy services to ensure people are receiving all the income they are entitled to, and we will provide £47 million to continue to mitigate the 'bedroom tax' and £38 million for the Scottish Welfare Fund.
The Scottish Government wants to go further than mitigation and will use new devolved powers to create a stronger labour market based upon the work of the Fair Work Convention and a social security system based on dignity and respect for those that need it.
Public procurement contracts now stipulate adherence to Fair Work policies, including the Living Wage and the Business Pledge, to create more sustainable, fair and inclusive jobs in Scotland.
The additional investment of £107 million through Integration Authorities will continue to support delivery of the Living Wage for social care workers, recognising the contribution made by the formal care economy in Scotland.
The public sector pay policy for 2017-18 has been published alongside the Draft Budget. The policy is intended to be fair and affordable, targeting resources at those on the lowest incomes and maintaining the commitment to no compulsory redundancies at a time of economic uncertainty and challenges for household finances. The Scottish Government will also consult on the future management of severance of employment in the public sector, following the devolution to Scotland of regulatory powers over the level of payments for early severance/early retirement and clawback arrangements.
Drawing on the responses to our recent consultation, we will introduce a Social Security Bill setting out the over-arching legislative framework for newly devolved powers. We are committed to using these powers to create a fair social security system, which will include the reform of assessments for disability benefits, the extension of winter fuel payments to families with severely disabled children, a new enhanced Best Start Grant to replace current Sure Start Maternity Grants and an increased Carer's Allowance. We will also abolish the 'bedroom tax' as soon as we can.
We have embarked on an ambitious and demanding reform portfolio working closely with organisations across the public sector and the vibrant third sector placing an emphasis on shared outcomes and a shared view on the means of delivery. It is grounded in the principle that local communities and service providers are best placed to design and meet the needs of Scotland's diverse communities.
We are already seeing these changes in health and social care integration and in improving educational attainment and our reforms will touch on many other aspects of everyday life.
Together, this suite of reforms will provide a coherent and complementary package which we believe will improve the lives of people across Scotland. They will be underpinned by opportunities offered through advances in digital technology and a recognition of the importance of integrated local access; helping us to provide effective, person-centred services which can meet the needs of every individual, regardless of their background or personal circumstances.
The Draft Budget 2017-18 sets out tax and spending proposals that support sustainable and inclusive economic growth, that are prudent and progressive and will maintain and improve public services and empower communities across Scotland.
Looking ahead, the fiscal landscape in Scotland will continue to change, as other powers devolved through the Scotland Act 2016 take effect. Over time, this will require further evolution to the way in which the public finances are managed. The Scottish Government will work with the Scottish Parliament and other stakeholders to ensure that our budget processes reflect these changes, including through the tripartite working group established with the Scottish Parliament Finance and Constitution Committee and civic Scotland, which is due to make recommendations in the first half of next year.
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