The Scottish Government's Medium-Term Financial Strategy

1. A strategic approach to managing the Scottish public finances

Most independent nations operate under a set of fiscal rules set by the Government of the day. Under the current constitutional settlement, the Scottish Government has to deliver against one rule set by the UK Government, and is also required under Scottish legislation; to balance the annual budget. We have to do so with limited fiscal levers, in particular no ability to borrow for day-to-day spending and the majority of our funding determined by UK Government spending plans and the operation of the Barnett Formula to provide our consequential share each year. Despite this, the Scottish Government has a strong track record in delivering a balanced outturn against budget, while providing the people of Scotland with a broad range of public services.

Continuing to deliver this is becoming increasingly challenging. This MTFS illustrates the scale of likely future pressures on the public finances, on top of those already felt over recent years. Sustained high inflation has fundamentally reshaped the prices of what the public pound can buy in Scotland, yet the funding available to the Scottish Government has not grown to match these pressures. This has already led the Scottish Government to undertake reprioritisation action in the middle of a financial year, for example during the Emergency Budget Review in Autumn 2022, and we will continue to take action this year as needed. As we look ahead to future years, the UK Government continues to adopt a fiscal stance which results in low levels of real-terms growth in the Scottish Block Grant and inadequate levels of capital funding over the coming years, which do not keep pace with the anticipated pressures on public spending. Whilst the Scottish Government has successfully used its tax raising powers to increase its funding, these powers are limited, and do not permit the full range of revenue-raising options available to an independent country.

Whilst the forecasts of funding and spending set out in this MTFS are subject to uncertainty - including both the ongoing uncertainty about the pace at which inflation will return to target rates, and the fiscal policy to be applied by the next UK Government after the 2024 General Election – it is clear that action is needed.

The Scottish Government cannot rely on the UK Government to take action on the public finances to meet these spending challenges. We are committed to doing all we can within the powers at our disposal to ensure the public finances are on a sustainable path. This MTFS sets out the three pillars that will underpin the Scottish Government's strategic approach to managing the public finances over the medium term.

First, we will focus spending decisions on achieving our three critical missions. This will mean taking a relentless approach to ensuring that spending represents value for money to the taxpayer. The Scottish Government will ensure that public money is committed to delivering clearly defined outcomes. Within this, we will not back away from tough choices and targeting, and we will underpin our spending with the necessary reform to ensure that people in Scotland get value for the taxes they pay.

Second, we will support sustainable, inclusive economic growth and the generation of tax revenues. We recognise that economic growth is necessary to generate the tax revenues which support sustainable, high-quality public services. As we deliver our National Strategy for Economic Transformation, we will prioritise policies and actions with the greatest potential to grow and change Scotland's economy, taking advantage of economic opportunities on the path to a net zero economy, to expand and broaden the tax base to fund our vital public services, and make people's lives better.

Third, we will maintain and develop our strategic approach to tax. The primary role of any tax system is to raise revenue to fund public services and to allow us to invest in tackling poverty. However, within this, there are choices for the government around who and what to tax, and by how much. We will also openly work with Scottish citizens, businesses, academics , trade unions, the third sector and other key stakeholders to ensure their voice is heard when we look at the type of tax system we have and want, to ensure it is fit for the challenges of the 21st century.

Figure 1: Strategy for managing the public finances

Achieving Fiscal Sustainability

• Focus spending decisions on achieving our three critical missions
• Support sustainable, inclusive economic growth and the generation of tax revenues
• Maintain and develop a strategic approach to tax policy

To ensure the Scottish public finances are on a sustainable trajectory over the medium term, we will need to concentrate our actions on all three areas. In the short term, the Scottish Government will focus on the spending decisions ahead, as this is the most immediate lever through which we can affect fiscal sustainability. Tax policy choices and the strength of the Scottish economy will become increasingly important to the Scottish Government's ability to invest in public services.

As we take forward actions to manage the public finances, we will continue to be open about the challenges and choices that will need to be made. Fiscal openness and transparency are important enablers of fiscal sustainability, helping to promote improved policies and strengthen accountability for fiscal management. The Scottish Government is committed to transparency, both in how it manages the public finances and in its wider work with civil society in Scotland's Open Government Partnership National Action Plans.

Box 1: The Role of the Scottish Fiscal Commission (SFC)

Since becoming a public body in April 2017, the SFC has played a key role in enhancing fiscal transparency in Scotland. The SFC has been successful in establishing constructive relationships with key stakeholders and has quickly developed a reputation for delivering independent and credible forecasts.

It provides the Scottish Government with the official independent economy, tax and social security forecasts that underpin the MTFS report and provides a commentary on the Scottish Government's funding position. Following recommendations from the OECD in its evaluation of the Commission and by the Parliament's Finance and Public Administration Committee, the SFC has continued to expand its work and build its capability, most recently moving into the area of reporting on fiscal sustainability. It published its first Fiscal Sustainability Report in March of this year, looking at the long term fiscal sustainability of the Scottish Budget.

Having key fiscal events in Scotland supported by an independent forecaster reduces any bias and ensures genuine transparency of Scottish public finances, in line with international best practice. It provides the Scottish Parliament and the general public with the means to scrutinise Scottish Government fiscal policy and sustainability. The Scottish Government places great importance on the role of the SFC and to the fiscal transparency it provides, using its forecasts at fiscal events since its inception in 2017.

The remainder of this chapter sets out further detail on each of the pillars of the Government's approach.

1.1 Public Spending: Focusing spending decisions on the Government's missions

Last month the First Minister set out the three Missions which will guide the Scottish Government's decision making over the next three years of this parliamentary term:

Equality: Tackling poverty and protecting people from harm

Opportunity: A fair, green and growing economy

Community: Prioritising our public services

It is critical that every pound the Scottish Government spends achieves maximum impact as we focus on these Missions, and that our programme of work is built on the strong foundations of sound public finances. The financial situation facing the Scottish Government continues to be among the most challenging since devolution with high inflation experienced globally in 2023-24 expected to have a long-lasting impact on public spending in Scotland. The Scottish Budget published for 2023-24 demonstrates how we have chosen to focus our resources on our public services, direct support to households and deliver fair pay settlements for public sector workers to mitigate the worst effects of the cost of living crisis, while growing our capital investment that supports the transition to net zero.

These choices will carry into future financial years and with ongoing impacts for public spending. We: have increased the Health and Social Care budget by more than £1 billion in 2023-24, far beyond our commitment to pass on frontline Barnett consequentials received from the UK Government; are continuing to invest around £1 billion a year in high quality early learning and childcare provision and will invest a further £15 million this year to expand our support for school age childcare; and have reallocated over £900 million to support enhanced pay deals for the public sector. Scotland did not receive additional in-year funding from the UK Government to support higher than anticipated inflationary pressures in 2022-23, meaning the recurring impact of pay deals had to be found within 2023-24 baseline budgets. These inflationary pressures continue to manifest in pay deals within the NHS for Agenda for Change and also for school teachers which have been agreed since the 2023-24 Budget was set. These therefore still require us to reprioritise and slow down or stop some programmes in 2023-24 to maintain fiscal sustainability.

We have also chosen to invest in social security over and above the funding we receive from the UK Government through the Block Grant Adjustment, reflecting this Government's choice to prioritise our resources for those in greatest need. Our expenditure on social security benefits is expected to grow from £4.2 billion, or 10% of the resource budget, in 2022-23 to 15% or £7.4 billion by 2027-28 on current trajectories. This investment will support low-income families with their living costs and older people to heat their homes in winter, and enable disabled people to live full and independent lives than might otherwise be possible.

Without any mitigating actions public spending is therefore currently projected to grow at a faster rate than our central forecast for funding, the majority of which is still determined by UK Government spending decisions. Our modelling indicates that resource spending may increase from £45.2 billion in 2023-24 to £52.8 billion in 2027-28, meaning that our spending requirements could exceed our central funding projections by £1.0 billion (2%) in 2024-25, rising to £1.9 billion (4%) in 2027-28.

The spending outlook is set out in full detail in chapter 4. Chapter 4 also explores the risks which may, if not managed, increase public spending further over the period. Most significantly, the central spending scenario is underpinned by the Office for Budget Responsibility (OBR) forecasts^[4] which show inflation falling below 2% by the end of 2023-24 and continuing at a lower rate, but there is significant uncertainty in this forecast. Our experience of the financial years 2022-23 and 2023-24 has demonstrated the significant impact sustained high inflation can have on the Scottish Budget. The choices the Scottish Government makes to maximise value from public spending and further embed good governance can control this spending trajectory and secure a sustainable future for Scottish public finances.

We know that we will need to target support and take tough decisions to both improve the underlying sustainability of our public finances in the face of these unprecedented shocks and pressures, and to ensure we can prioritise our resources towards realising our strategic missions.

That action will begin in the Scottish Budget 2024-25, due for presentation to the Scottish Parliament later this year, when we must address the immediate financial pressures in a year where the upper funding scenario is insufficient to meet our spending needs, and take decisions that will secure our fiscal stability over the medium term.

The Scottish Government's spending plans will unapologetically direct our resources to those in greatest need, and we will review opportunities for more effective targeting of existing provision and services. Universal provision can improve take up of benefits and services amongst those who most need support, and offer greater security and certainty for people, but these demand-led services come with limited opportunities to control costs once introduced. Facing both supply and demand pressures on public finances, we must consider whether targeting help may offer greater value for money and an improved offer to those most in need, while releasing resources to advance progress on our three missions.

We need to prioritise the programmes, such as early learning and childcare, which have the greatest impact on delivery of our three missions. In order to do this and to absorb the impacts of pay and other inflation into our baseline, the Scottish Government will need to take difficult decisions to stop spending money on programmes that make a less meaningful contribution to our missions.

Key to securing our fiscal sustainability is adopting a multi-year outlook, which gives greater transparency over the impact of annual budget decisions on future years' spending plans. It also gives our public bodies and other stakeholders greater confidence in the trajectory of public spending to support their own financial planning and enable them to invest efficiently and effectively in our shared priorities.

Later this year, the Scottish Government will publish refreshed multi-year spending envelopes for both resource and capital alongside the 2024-25 Budget. This will reset the portfolio spending envelopes previously published in the Resource and Capital Spending Reviews to reflect the new economic reality and ensure that spending is aligned to the three missions for this Parliament.

The Scottish Government will extend the Capital Spending Review (CSR)^[5] and Infrastructure Investment Plan (IIP)^[6] period by one year, taking these to 2026-27, as it will now take longer to deliver the intentions contained within those.

Given the challenging and volatile market conditions of the last two years, coupled with the UK Government's decisions that reduce our capital budget in real terms, the trajectory of public capital spending is more than the capital funding available, with around an estimated 16% gap in 2025-26.

To help to address the difference between the capital funding and spending outlook, we plan to publish a reset of the project pipeline, first set out in 2014 and last updated at the publication of the 2021 Infrastructure Investment Plan, alongside the 2024-25 Budget – providing transparency over which projects may now be delivered over a longer timescale. To do this we will undertake a prioritisation exercise to ensure we target the available capital spending to support employment and the economy through the Scottish Government's infrastructure plans, support the achievement of net zero emissions targets and underpin the provision of high-quality public infrastructure and services across Scotland.

Without further funding and increased fiscal flexibility through increased borrowing powers from the UK Government, tough decisions will need to be made as we prioritise infrastructure investment to meet the core missions set out in the policy prospectus. The Scottish Government will continue to press the UK Government to use the levers at its disposal to help mitigate the current market conditions and support infrastructure investment, but without further funding and associated fiscal flexibility through enhanced borrowing powers, tough decisions will need to be made to reprioritise the pipeline of projects set out in the Infrastructure Investment Plan.

1.1.1 Reform

Reform of public services and their delivery was central to the strategy the Scottish Government set out in the Resource Spending Review (RSR) (May 2022)^[7] to improve outcomes and achieve sustainable public finances. Recognising that there have been significant global economic changes since May 2022, we have reviewed these commitments to prioritise actions which remain both relevant and likely to have a meaningful positive impact on financial sustainability. Annex B provides a progress update and summarises the outcome of the review, with actions spanning four key workstreams:

• Public Bodies and Public Service Reform as an overarching approach encompassing both larger-scale and longer-term reform alongside a range of 'quick wins', which may be delivered through the measures and programmes detailed below.
• Efficiency levers, across digital, shared services, public sector estates, procurement and grant management, each of which are being progressed within Scottish Government, and by individual public bodies and partners.
• Revenue raising to maximise the funding available to invest in and support our public services.
• Pay sustainability, as explored in Chapter 4, is a significant component of our spending and the 2023-24 Pay Strategy reiterates that pay and workforce must more than ever be linked to both reform and to fiscal sustainability.

Learning from the Christie Commission^[8] tells us that it takes leadership, change capacity and time for intended shifts in fiscal sustainability and improved outcomes to bear fruit, and alongside these cross-cutting workstreams, reform programmes will continue in the major areas of public spending.

1.1.2 Pay and workforce

Pay accounts for over £24 billion of resource expenditure across the devolved public sector in Scotland, and it is essential that our focus on fiscal sustainability and reform recognises the importance of our public sector workforce to the delivery of sustainable and effective public services. The Scottish Government will develop a pay and workforce strategy for 2024-25 which continues to reflect the principles of affordability, sustainability and fairness in the context of an expected fall in inflation.

1.1.3 Health and Social Care

Scotland continues to face significant population health challenges: stalling (and in some groups falling) healthy life expectancy,^[9] and widening levels of inequality, exacerbated by COVID-19. Our system of public services, not just healthcare, is under unprecedented pressure and reform is essential if we are to manage this pressure within our budgetary constraints, and ensure that our spending choices target these health inequalities.

The Scottish Government recognises that factors that impact on people's health and wellbeing go beyond what the health and social care system itself can deliver and we are working across government on critical, cross-cutting issues that improve population health and the wider Scottish Government missions.

Under the leadership of the Cabinet Secretary for NHS Recovery, Health and Social Care, we continue to bring together our major reforms through the Care and Wellbeing Portfolio to improve population health and wellbeing, reduce health inequalities and improve the health and social care system sustainability. This includes working with other programmes across the Scottish Government, such as those relating to child poverty, economic transformation, climate change and net zero to deliver these benefits. This approach seeks to create the conditions – social, economic and environment – which support, protect and generate good health.

1.1.4 Local Government

The RSR set out the critical role that local government plays in delivering services and improving outcomes for people in Scotland, while recognising the pressure on budgets experiencing growing demand. Ministers continue to work closely with Convention of Scottish Local Authorities (COSLA) Leaders to deliver a New Deal for Local Government^[10] founded on a Partnership Agreement and a Fiscal Framework. The Partnership Agreement will confirm the intention for National and Local Government to work together to deliver shared priorities around tackling poverty; transforming our economy through a just transition to deliver net zero; and delivering sustainable person-centred public services.

The Local Government Fiscal Framework will seek to simplify and consolidate the Local Government Settlement to ensure reduced reliance on ring-fenced funding and establish clear routes to explore local revenue raising opportunities. In connection with the Partnership Agreement, the Local Government fiscal framework will provide for an improved shared understanding of the financial sustainability of public services and enable better alignment of resources to our shared priorities. The New Deal will be underpinned by a jointly agreed monitoring and accountability framework, drawing on proportionate reporting and data collection, to provide evidence and visibility over progress towards agreed outcomes.

1.2 The Economy: Supporting sustainable, inclusive economic growth and the generation of tax revenues

A strong Scottish economy is essential for stable Scottish public finances. As the Scottish Government set out in 'Equality, opportunity, community: New leadership – A fresh start',^[11] we will grasp opportunities for economic growth and ensure we create an economy which is fair and green. The Scottish Government remains committed to the creation of a wellbeing economy, one which serves and prioritises the collective wellbeing of current and future generations. At the heart of this is economic growth for a purpose – to drive improved living standards, to reduce poverty, to promote wellbeing and to deliver sustainable high quality public services.

The Scottish Government is committed to taking action to ensure we deliver the growth and the tax revenues necessary to achieve fiscal sustainability and to deliver public services. This forms the second pillar of the Government's approach to managing the public finances.

However, under the current constitutional settlement, the Scottish Government has limited powers with which to pursue this objective. Our borrowing powers are constrained, so our ability to support the economy in the short term by, for example, providing additional spending during the current cost of living crisis, is extremely limited. We also lack key levers to tackle Scotland's historically slower population growth relative to the rest of the UK, such as powers over migration policy which could be used to support growth. However, we have a greater ability to influence the long-term trajectory of the economy through other channels, for example through policies on education, infrastructure, or economic development. Given the importance of income tax revenues to the Scottish Budget, the Scottish Government will continue to ensure we fully consider the use of these levers to support the long-term and sustainable growth of the Scottish tax base.

The Scottish Government's National Strategy for Economic Transformation (NSET)^[12] provides a ten-year framework for achieving a fairer, greener and growing economy. As we deliver NSET, the Scottish Government will prioritise policies and actions with the greatest potential to grow and transform Scotland's economy, expand and broaden the tax base to fund our vital public services, and make people's lives better. Given the importance of growing the tax base, creating more high quality and well-paid jobs as well as more opportunities for all in Scotland will be central to this mission.

This is not all new. We have already set up the Talent Attraction and Migration Service, are delivering A Trading Nation to grow Scottish exports, adopting a new approach to target inward investment that aligns with our values and strengths, providing access to superfast broadband for all through the Reaching 100% programme and are transforming employment support in Scotland through No One Left Behind.

Going forward, this renewed emphasis will require the Scottish Government to focus action on a number of areas, including:

• Seizing new market opportunities in sectors in which Scotland can be world-beating, including the transition to net zero. Historically, the strength of the oil and gas industry in the North East of Scotland has been an important part of our tax base. As well as being vital to our own national effort to decarbonise, developing and building the renewable technologies and sectors which will power the global transition to net zero offers Scotland an enormous economic opportunity to develop a new, sustainable tax base to help replace that which oil and gas historically provided. Focusing on how Government can align strategic support and investment around this opportunity will be important.
• Continuing to support sectors and clusters of excellence in which Scotland already leads the world, such as space, digital and data, financial services and life sciences. Sectors like these, driven by investment and innovation, are powerhouses of the Scottish economy and key to the sustained growth of international exports. In a competitive global environment, government has a vital role to play in supporting them through, for example, infrastructure and a skills system which is responsive to industry needs.
• Supporting entrepreneurs, start-ups and scale-ups, so that Scotland is on track to become a leading European start-up nation, in which more businesses are created and grow to scale. New and growing companies are an essential driver of the innovation which is crucial to productivity growth, and deliberate government action can have a significant impact on attracting the mobile investment and talent which drives success.
• Supporting businesses across the economy to raise productivity, so that they can raise wages and offer greater security of employment. Adopting proven technology tools and management approaches could help boost productivity in the service sectors, like hospitality and retail, which are such an important part of Scotland's economy.
• Focusing on labour market participation, helping more people to get into and stay in good, well-paid jobs which meet fair work principles, to underpin our other economic policy aims. Two issues will be of particular importance. First, the Scottish Government needs to consider how we can prevent experienced workers from leaving the labour market early: healthcare services have an important role to play, as do businesses by offering more flexible working opportunities to help people balance work with other priorities and challenges in their lives. Second, we need to help parents, in particular, to access more and better paid work. Not only is this a vital part of tackling child poverty, but helping parents earn more can also reduce pressure on social security spending. Childcare provision in particular has a vital role to play here, particularly when integrated with other local services, and we already invest around £1 billion per year to provide high-quality funded early learning and childcare. One key objective of this funding is to support parents and carers to take up or sustain work, training or study opportunities. This year we are investing a further £15 million to develop a system of school age childcare and, by 2026, we will have built a system of school age childcare and developed a funded early learning and childcare offer for 1 and 2 year olds, focusing on those who need it most.

With focused action in these areas, the Scottish Government will help create the high-skill, high-wage jobs needed to underpin the tax revenues that are vital to sustainable public finances. And, because those jobs are created and sustained primarily by business, we will engage widely with business leaders to develop and agree a 'New Deal' with the private sector while using the devolved powers we have and Fair Work First to work with employers across the economy to deliver fair work. Within government, we will make the decisions needed to prioritise our actions and funding in a transparent, evidence-based way.

1.3 Taxation: maintaining and developing a strategic approach to tax

The third and final pillar of the Scottish Government's strategy focuses on developing the tax system. The primary role of any tax system is to raise revenue to fund and sustain public services, and to invest in measures to reduce poverty. However, within this, there are choices for the Government around who and what to tax, and by how much. We have policy responsibilities for tax rates and bands for Scottish Income Tax, Non-Domestic Rates income, Land and Buildings Transaction Tax and Scottish Landfill Tax and will seek to continue to apply these to best effect. As the second pillar of our approach sets out, tax performance and the economy are intrinsically linked, and delivering economic growth is key to realising the full benefits of the tax decisions the Government makes.

Tax presents a vital, and increasingly important, source of revenue, with tax devolution forecast to make a positive net contribution to the Scottish Budget. The most recent forecasts show that tax devolution will add an extra £574 million to the Scottish Budget in 2023-24, increasing to almost £1.7 billion by 2027-28,^[13] mainly as a result of Scottish Income Tax (which accounts for £325 million of the net position in 2023-24 and £1.6 billion in 2027-28). This is a significant improvement compared to last year's MTFS forecasts. Chapter 3 sets this out in fuller detail.

While these forecasts are encouraging, the Scottish Government is not complacent and sustained action will be needed to deliver a strong, growing economy that can support fiscal sustainability over the medium term, as set out under the second pillar of our strategy.

The policy decisions taken by the Scottish Government since Income Tax has been devolved have benefitted the Scottish Budget by up to an estimated £1 billion in 2023-24, when compared with matching Income Tax policy in the rest of the UK. Whilst this is offset by relatively weaker economic performance, with the overall impact on the Scottish Budget lower at £325 million in 2023-24 the policy decisions we have made have had a substantial impact on the revenues we raise. It is therefore vital that the Scottish Government uses its tax powers effectively, at the same time as managing the risks and impacts on taxpayers, the economy and competitiveness, if we are to achieve fiscal sustainability over the medium term.

However, the tax policy choices of the Scottish Government are limited by the current devolution settlement and the revenue for the Scottish Budget is heavily reliant on Scottish Income Tax, which is only partially devolved. The Scottish Government does not hold all the levers necessary to make the Scottish tax system work in the most effective way and has repeatedly called for the full devolution of Income Tax, National Insurance and VAT to better enable tax policy choices to collectively serve the interests of the people of Scotland. Whilst the Scottish Government will continue to press the UK Government to devolve further tax powers, we are committed to using the tax powers we do hold to continue to deliver a fair and progressive tax system, ensuring the sustainability of the public finances.

The Scottish Government's approach to tax is underpinned by a set of core principles, which were outlined in the Framework for Tax.^[14] We will continue to build on these principles by:

• Continuing to look at the sustainability and the limitations of our tax base and the impact our tax policies have on economic and tax performance and fiscal sustainability;
• Building on our existing understanding of how different taxes interact with one another to help us better understand the burden of tax on individuals, households and businesses when making policy choices;
• Engaging more regularly and systematically with citizens and taxpayers to extend our understanding of attitudes towards the nature, purposes and extent of taxation and its role in Scotland's public services;
• Further considering how devolved taxes contribute to the Scottish Budget and how these interact with the Government's wider priorities on progressivity, competitiveness and contribution to fiscal sustainability.

With this in mind, the Scottish Government will establish an external tax stakeholder group this summer, chaired by the Deputy First Minister, ahead of setting out the Scottish Budget 2024-25. This group will build on the Government's inclusive approach to tax policymaking and will consider how best to engage with the public and other stakeholders on the future direction of tax policy, including whether a 'national conversation' on tax is required.

The outcomes of this engagement will feed into the Budget 2024-25 and the development of the Government's longer-term tax strategy. The Scottish Government will publish updates of these alongside the MTFS in 2024.

To support public understanding of the revenue impact of tax policy choices, the Scottish Government also publishes Income Tax 'Ready Reckoners' annually. These show the estimated revenue impacts of illustrative changes to Scottish tax policy and are used to assist researchers and policymakers, improve transparency and facilitate understanding. The Scottish Government has published a broader set of ready reckoners for all devolved taxes for 2023-24 alongside the MTFS 2023. These can be found at Scottish Tax - changes for 2023 to 2024: ready reckoners.

Behavioural changes are a vital part of the Scottish Government's tax policy decisions. The Scottish Government's evaluation of the move to a more progressive Income Tax system in 2018-19 found no evidence of significant behaviour change, including cross-border migration. Building on this, the Scottish Government and HMRC are developing new, and robust, data sources and evidence to help better understand potential behavioural responses, including taxpayer movements across the UK over time.

In addition to the tax system, the Scottish Government will also look to maximise other revenue raising opportunities and get best value of government assets with a view to putting our public finances on a sustainable trajectory.

1.3.1 Local taxation

The Scottish Government's strategic approach to taxation also applies to local taxes. Council Tax receipts will contribute around £2.9 billion in 2023-24 towards the funding of local public services. Council Tax rates are set by individual councils who are also responsible for its collection, administration and enforcement. All revenues are retained locally and not included within the Scottish budget. However, the Scottish Government and Parliament set the legislative framework and as part of this, we are committed to a fair, inclusive and fiscally sustainable form of local taxation.

The Scottish Government convened the Joint Working Group on Sources of Local Government Funding and Council Tax Reform to build consensus on an alternative to the present Council Tax. This group also forms part of the joint working to develop a fiscal framework for local government and is co-chaired by Scottish Ministers and COSLA. The Joint Working Group provides a space for joint dialogue on a range of issues relating to sources of local government funding and Council Tax. The group is also considering targeted changes to Council Tax (such as set out in the current consultation seeking views on the taxation of second homes and long-term empty properties) to reflect the current circumstances created by the cost of living crisis. Importantly, this group will also consider approaches to longer-term reform, including using deliberative engagement where appropriate to capture the views of citizens and taxpayers towards potential alternative approaches.

The Scottish Government also expects that an agreed fiscal framework for local government, once concluded, will set out an approach for considering any proposed new local taxes to ensure they are consistent with the ambitions to strengthen local democracy and fiscal accountability, whilst adhering to the strategic approach to taxation. Any new local taxes need to be created by an Act of Parliament, and we will introduce a Bill before summer 2023 to create a new discretionary power for local authorities to apply a visitor levy on overnight accommodation, thereby adding a further discretionary fiscal power for local authorities alongside the workplace parking levy created by the Transport (Scotland) Act 2019.

The principle of engaging with citizens and taxpayers also applies to our approach to Non-Domestic Rates, where the New Deal for Scottish Business discussions, announced by the First Minister, will provide an opportunity to explore, among other things, how non-domestic rates can support business growth and our communities.

1.4 A progressive approach to tax and social security

As the Scottish Government takes forward each of the elements of its strategy, it will retain the progressive approach it has taken to date. Although tough decisions will be required in order to manage the public finances, these will be underpinned by the desire to make Scotland a fairer country where everyone's life chances are improved.

Taken together, the evidence shows that the Scottish Government's tax and social security policies are reducing inequality and targeting support at those who need it most. Figure 2 shows the combined impact of income tax and social security policies on household incomes in Scotland, compared to the system in the rest of the UK. The Scottish Government's policies mean that households on the lowest incomes have seen their incomes increase by almost 4%, driven by the flagship Scottish Child Payment, a key part of delivering on our commitment to reduce child poverty. Further detail is set out in Annex E.

Source: Scottish Government analysis using UKMOD. Change in equivalised income before housing costs

Looking ahead, the Scottish Government will continue to be transparent in the impact of our decisions, setting out how we are prioritising fair and progressive policies even as we make tough choices needed to deliver on our core missions.

1.5 Conclusion

Scotland, like many countries, has been through an acute series of economic shocks, which has led to real pressure on the Scottish public finances. These are challenges that no government can shy away from. This document sets out this government's strategy for addressing this challenge, whilst continuing to deliver on the three missions outlined by the First Minister.

Chapter 2 details the economic outlook which will define both Scotland's funding and pressures on public services in the years ahead, drawing on the independent forecasts from the SFC.

Chapter 3 sets out our strategy for funding public services, through the block grant, tax revenue, and other sources of income. It also sets out our approach to the use of Scotland's borrowing and reserve powers, and our approach to the upcoming fiscal framework review.

Chapter 4 then sets out our approach to spending choices, and how we will maximise Scotland's resources to ensure that every pound spent in Scotland provides value to Scottish citizens.