Scotland's Fiscal Outlook: The Scottish Government's Medium-Term Financial Strategy

This is the third Medium Term Financial Strategy (MTFS) published by the Scottish Government. The MTFS provides the context for the Scottish Budget and the next Scottish Parliament. This context will frame the incoming Government’s strategic approach to fiscal policy.

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6. Conclusion – an opportunity for renewal

As we emerge from the greatest economic shock of our lifetime, it is essential that fiscal rules do not unduly constrain the fiscal policy response, weakening the economic recovery and doing more harm to the long-term fiscal position. We need to make smart spending decisions; but we also require better adapted powers to deal with the challenges of the future. We are calling for a bold new approach from the UK Government. We will need to develop fresh thinking on how to aid the recovery, providing opportunities to deliver a fairer and greener economy and driving sustainable public finances in a way that puts wellbeing at their core.

The introduction to this document sets out the policy framework for our medium-term vision. The National Performance Framework (NPF) continues to embody our ambitions for Scotland and we will maintain our focus on outcomes that deliver an innovative, competitive and inclusive economy, enabling the transition to net zero emissions, building safe, healthy and resilient communities as well as tackling poverty and inequality. The purpose and values at the heart of the NPF give us a broad framework to advance national wellbeing, but the severity of impacts of COVID-19, coupled with the tight fiscal environment have highlighted that we will need to take great care to invest smartly to reset trajectories towards these outcomes.

Chapter 2 illustrates the impact on Scotland’s economy of the joint shock created by COVID-19 and the UK Government’s withdrawal from the European Union over the life of the next parliament. Chapter 3 shows how this uncertainty might affect the funding outlook for the Scottish Budget over the medium term, presenting a range of possible futures with upper and lower scenarios around the SFC’s central funding scenarios. Chapter 4 lays out a broad spending outlook, including setting out illustrative scenarios modelled on current spending trajectories.

There is a balance between maximising the available budget to the Scottish Government in the short term and retaining capacity to manage in-year budget volatility to deliver on outcomes through existing powers and the reserve. However, Scotland’s ability to shape its own response to the pandemic and economic recovery is limited by the fact that a large proportion of the Scottish Budget is still determined by the Block Grant received from the UK Government via the Barnett formula. In addition, the Scottish Government has virtually no borrowing powers to support additional spending on day-to-day public services to deliver on outcomes, as well as the limits on the use of the Scottish Reserve.

In Chapter 5, we have brought the funding and spending outlooks together to explain how we will use our existing powers and levers to manage fiscal risk in the medium term– and also to highlight where and how these fiscal powers and levers are clearly inadequate to allow us to smooth our spending trajectories and manage the level of uncertainty faced by the Scottish Budget.

These concerns must be addressed in the upcoming review of the Fiscal Framework. The experience of the past year has perfectly illustrated the areas of strength and weakness within Scotland’s fiscal settlement. We need a wide-ranging review of whether the Fiscal Framework still sufficiently enacts the principles agreed by the Smith Commission, as well as whether it provides the Scottish Government with the right balance between its levers, powers and responsibilities.

Ahead of the Fiscal Framework Review, however, we fully recognise our responsibilities for managing Scotland’s funds within the remit of our existing powers. Levels of public spending in 2020-21 and 2021-22 have increased significantly, as a result of increased borrowing by the UK Government and the need to respond through reserved and devolved spending to the many immediate impacts of COVID-19. The Scottish Government will play its part in the action needed in future years to consolidate public finances; but this must be delivered in way that does not undermine economic recovery, erode public services or produce negative outcomes for our most vulnerable citizens and communities.

We will engage with the UK Government to press the case for an effective approach. We must also make smart devolved spending decisions to progress national outcomes within the available budget and in ways which will be sustainable over time. Our fiscal policy decisions must find the right balance to support and align with these ambitions. Medium-term planning will support the prioritisation of funding to target expenditure on activities that will have the greatest impact on the wellbeing of people in Scotland, while ensuring that plans are robust against fiscal risks. A focus on value for money, supported by evidence on the impact of available public spending and taxation choices, will be essential to a future Scottish Spending Review, underpinned by the National Performance Framework. Clear and transparent prioritisation will be needed, as our policy and financial interventions support the transition from short-term resilience and recovery in the face of the pandemic to longer-term growth and renewal, delivering long-term objectives including on the just transition to a net zero economy and tackling deep-seated inequalities in our society.

The Scottish Government remains committed to driving the reform of our public services, specifically with a focus on how we collectively use resources to deliver public value and with an increasing need to maximise the enabling power of further digitisation. Reform remains critical and the ethical imperative to deliver public value for our citizens has never been more morally significant. We will learn from the shifts in behaviour and service delivery brought about at pace by COVID-19, and the impact these shifts have had on outcomes.

Our approach to Public Service Reform is rooted in principles that the Christie Commission set out in 2011, of prevention, partnership, outcomes-based performance and empowering our people (communities, front-line staff and leaders). These principles recognise that public services can improve outcomes and work more efficiently when they work together to shape joined-up services around the distinctive needs of communities and citizens, including by building preventative approaches to strengthen positive outcomes and tackle persistent inequalities. We will explore how future spending reviews and budgetary processes can better enable cross-cutting action bringing together different sectors and government portfolios.

Much of the most powerful reform work occurs at local level, with public services, businesses, the third sector and communities coming together to shape service delivery and support around people’s needs. This has been particularly evident in 2020, as the public, third, voluntary and communities sectors have come together to support people in need in the face of the COVID-19 pandemic. This commitment to work together to support people, with speed and conviction, with flexibility and agility, working round long-standing barriers, and focussed on a common purpose, embodies why the Scottish Government remains committed to reform.

As we approach the tenth anniversary of the publication of the Christie Commission’s recommendations later this year, it is clear that the challenges it set out and sought to address remain as relevant as ever, including for ensuring our public services remain sustainable in the years ahead, despite increasing demands.



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