Hansard

The fundamentals of the Scottish economy remain strong. Since 2007, Scotland has largely closed the productivity gap with the rest of the UK and, in 2017, our economy continued to grow, the number of people in work has reached a record high, and unemployment is close to its lowest-ever level.

Today, the Scottish Fiscal Commission has published its first comprehensive report on Scotland’s economic and fiscal forecasts. I thank the commission for its work. Its report underlines those fundamental strengths in our economy. It predicts continued growth and that employment will rise further and earnings growth will match that in the UK. However, the commission has also highlighted the negative impact that Brexit will have and the challenges that we will face from a declining working-age population. It forecasts that productivity growth will be subdued, that the labour market will tighten as a result of reduced migration and that that will impact on gross domestic product.

The commission’s forecasts for growth are more cautious than those of other forecasters, but it is clear that, to grow faster, we must boost productivity and grow our working-age population. That is why the budget sets out immediate measures to stimulate economic activity and improve productivity.

For Scotland’s future prosperity, the Parliament must reach a consensus on the powers that we need to increase the number of working-age people in Scotland, and we must continue to make the case for a commonsense solution to Brexit that keeps Scotland and the UK in the single market and the customs union. However, even as we do that, we will redouble our efforts to ensure that our economy will flourish, no matter the outcome of the negotiations.

Equally as important as the budget’s economic context is the fiscal context. Over the 10 years to 2019-20, Tory austerity will mean that the Scottish Government’s fiscal block grant allocation will have been reduced in real terms by £2.6 billion. Despite the chancellor’s claims,

“By 2019-20 the resource block grant will be around £500 million lower than in 17-18”,

as the independent Fraser of Allander institute recently stated.

We welcome the additional capital funding that will transfer to Scotland and we will make good use of the financial transactions that are available. However, we cannot spend financial transactions on teachers, nurses or the police. Instead, we will use Scotland’s own resources to invest in our public services, and we will provide the support and infrastructure that our economy needs to flourish in a low-carbon, high-technology world.

We believe that strong public services and a vibrant economy go hand in hand. Undoubtedly, our public services require a strong economy to generate investment; equally, the most successful economies in Europe are built on the firm foundation of strong public services.

At the heart of this budget is immediate action to support the economy, and there will be a series of key investments and programmes that deliver for business now and build the right environment for the future. The global economy is changing at an unprecedented rate, but Scotland already has competitive advantages in many industries of the future, such as life sciences and renewable energy. Therefore, the budget delivers an increase of £270 million, which is an increase of 64 per cent, in the economy, jobs and fair work portfolio. That additional funding contributes to investment of almost £2.4 billion in enterprise and skills through our enterprise agencies and our skills bodies. The increased investment includes a 70 per cent uplift in our funding for business research and investment, which takes our investment in the coming year from £22 million to £37 million. The budget also contains an initial £10 million to support the new south of Scotland enterprise agency, and it doubles, to £122 million, the funding that is allocated to city region deals.

Through the Scottish Further and Higher Education Funding Council, the budget invests around £1.8 billion in our colleges and universities, providing a real-terms increase in their funding. That investment funds the teaching, research and innovation that will provide opportunities for our young people, train the workforce of the future and drive our productivity. Further, the budget allocates an initial £18 million for the new national manufacturing institute that was announced by the First Minister on Monday. Construction of that new centre of excellence will begin next year.

Scotland has a world-leading reputation for our efforts to tackle climate change. To support our transition to a low-carbon economy, the budget allocates £60 million to a low-carbon innovation fund.

We will invest £1.2 billion in our transport infrastructure, including support for new and improved road and rail developments. We will not only dual the A9, but turn it into an electric highway, and we will deliver new railway investments like the electric trains that now run between Edinburgh and Glasgow. In addition, we will make a £20 million investment in the coming year to support the transition to electric vehicles and the delivery of more green buses and, as promised in the programme for government, the budget doubles investment in active and sustainable travel.

In total, the budget invests more than £4 billion in infrastructure, which is part of our £20 billion infrastructure investment plan over this parliamentary session.

I can confirm today that the budget also includes the first steps towards one of the most significant infrastructure projects of this parliamentary session: superfast broadband for the whole of Scotland. At the end of this year, we will achieve our target of delivering fibre internet access to at least 95 per cent of premises.

As a result of our actions to date, Scotland has experienced the fastest rate of progress of any part of the UK. However, we want that progress to continue. Our new reaching 100 per cent programme is an ambitious plan to make superfast broadband available to every home and to every business premise in every part of Scotland by 2021. That commitment, which will position Scotland at the forefront of the digital revolution, is unmatched anywhere in the UK. I am therefore delighted to confirm to Parliament that the initial procurement for the R100 programme begins today, and that over the next four financial years, it will be supported by investment of £600 million.

The investment in skills and innovation, new technologies, manufacturing, infrastructure and broadband is all part of a package of measures to improve our productivity, boost our trade and make Scotland the most attractive place in which to do business. We will support the internationalisation of our businesses and help boost exports through the work of Scottish Development International. We will also support our culture sector with a £10 million investment in a new screen unit and funding to protect the arts and culture.

On business rates, I confirmed following the Barclay review that I would go beyond what it recommended with a set of new reliefs to incentivise investment. Our growth accelerator means that no business rates increases will be payable for new or improved properties for a period of one year, and a separate, additional measure will ensure that no new-build property will enter the valuation roll until it is first occupied.

The budget also protects our small business bonus scheme, which lifts 100,000 properties out of business rates altogether. The scheme is part of the most competitive package of rates relief anywhere in the UK, and in the coming year, it will be worth around £720 million—a record high.

I can also confirm that we will accept the remaining Barclay recommendations almost entirely, except those on charity relief, which we do not intend to curtail for universities or council arm’s-length external organisations. An implementation plan providing fuller details on how and when the reforms will be implemented is being published today.

The Barclay review also favoured a switch from the retail prices index to the consumer prices index for the application of the inflationary uplift to the poundage rate, but it was unable to make that a recommendation, given its revenue-neutral remit. However, for many Scottish businesses, that was the number 1 ask of the budget, and I can therefore announce that the inflationary uplift for the poundage next year will be capped at CPI, not RPI. Our package of business rates measures provides a boost of almost £100 million and helps keep Scotland the most attractive place in the UK in which to do business.

Nowhere is the interaction between investment in public services and a successful economy more evident than in education. Raising the bar for all and closing the attainment gap is the key priority for this Government. Since my last budget, more than 2,300 schools have benefited from targeted investment and 506 extra teachers are teaching in Scotland’s schools because of our attainment Scotland fund.

I am therefore delighted to announce today that I am increasing the attainment Scotland fund to £179 million, which means that £120 million will again be allocated directly to headteachers through the pupil equity fund, and a further £59 million will provide targeted support for the children and young people in greatest need.

I am also allocating £10 million to provide support to children and young people with complex additional support needs.

We recognise that a strong education system relies on a strong teaching profession. That is why I am committing an overall funding package of £88 million in the local government finance settlement to maintain the national pupil to teacher ratio, and to ensure that places are provided for all probationer teachers. The budget also protects our continued commitment to university education that is free of tuition fees.

The Government is committed to getting it right for every child. We want Scotland to be the best place in the world to grow up. Since their introduction in August, more than 20,000 baby boxes have been delivered, and the budget funds that important part of our social contract.

A child’s early years are critical to determining outcomes in later life. Since 2014, we have increased high-quality early learning and childcare by almost 50 per cent, to 600 hours per year. By 2020, we will increase publicly funded entitlement to 1,140 hours per year, which will benefit thousands of children and parents across Scotland. That requires us to invest now for the long term. In 2017-18, we provided £60 million to support expansion. Now, for 2018-19, we are allocating £93 million in resource funding and £150 million of capital funding, which is a total investment of £243 million next year.

That will support expansion by upskilling the early years workforce, refurbishing and expanding existing premises, and constructing new settings. It will also provide funding for graduate-level early learning and childcare courses. That means that, in the coming year, we will invest almost a quarter of a billion pounds to build more nurseries, support childcare professionals, create jobs and graduate opportunities, and provide support for parents. Ours is the best publicly funded childcare package in the UK, and is an investment that will pay dividends throughout the lives of our young people.

Local authorities are our partners in delivering vital services, and I welcome the constructive engagement that I have had from the Convention of Scottish Local Authorities. Throughout our discussions, I have made clear my desire to treat local government fairly. I believe that the budget does that. I know that local authorities have been concerned about a possible cut of about £300 million to their budgets. However, as a result of decisions that underpin the budget, I have been able to avoid that. I can announce today that the local government resource budget will be protected in cash terms and that the capital budget will be increased in real terms, which will result in a total increase in local authority core funding of £94 million.

In addition, local authorities have the option to increase the council tax by up to 3 per cent. If they choose to do so, they will raise an additional £77 million, which would secure a real-terms increase in local government funding. Local government will also be the beneficiary of the doubling of investment in the city deals.

Our police and fire services also make a huge contribution to our communities. We will deliver more than £20 million of additional investment to protect the police revenue budget and an additional £5.5 million for continued transformation of the fire service. Scotland’s police and fire services will also retain the full benefit of—at long last—having the ability to recover VAT, which will boost their spending power by £35 million in 2018-19. The budget also secures investment in key measures to make our communities safer, including tackling domestic abuse, reducing reoffending, protecting witnesses and modernising the justice system.

Ensuring that everyone in Scotland has access to good-quality secure affordable housing is a key part of making Scotland fairer. New figures out this week show that, since 2007, the Government has delivered nearly 71,000 affordable homes, and that we are building social rented housing at twice the rate of the Government in England. Our commitment to deliver 50,000 affordable homes over the five years of this session of Parliament is a significant challenge, but it is one that we are determined to meet. The benefits of the investment will be felt throughout our society for generations to come. I am therefore delighted to announce investment of £756 million in 2018-19, as part of our commitment to invest more than £3 billion in affordable housing over this session of Parliament.

We will also take steps to make home ownership a reality for more of our young people. To help to achieve that, I am introducing a new relief on land and buildings transaction tax for first-time buyers of houses up to £175,000. All first-time buyers will benefit from that and, as a result, 80 per cent of first-time buyers will be taken out of LBTT altogether.

Alongside that record investment in housing, we will invest £137 million in 2018-19 in energy efficiency and heat decarbonisation. Good-quality affordable housing is one way in which we can help to drive down poverty.

One of the most devastating results of Tory austerity has been a rise in rough sleeping and homelessness. Our programme for government set out a national commitment to eradicate rough sleeping and to transform the use of temporary accommodation. In 2018-19, we will invest £10 million in an ending homelessness together fund—a fund that will invest £50 million over the next five years. That will drive change and improvement in line with the recommendations of the homelessness and rough sleeping action group.

We will also tackle child poverty in all its forms. This budget supports the first investment in a new £50 million tackling child poverty fund, which will help to address the underlying social and economic causes of poverty.

We will continue to mitigate UK welfare reform by investing more than £100 million on interventions, including the Scottish welfare fund and reversal of the bedroom tax. Parliament is currently considering our Social Security (Scotland) Bill. Although I cannot allocate funding for specific benefits until the bill is passed, I can confirm that I will allocate additional in-year funding to support the landmark step of increasing the carers allowance. The increase will be delivered by summer 2018, and backdated to April.

The staff in our schools, hospitals and other public services do an outstanding job and we have always sought to offer a fair deal, particularly for those who are lowest paid, by ensuring that all public sector workers earn the living wage, and that those who are on low pay receive guaranteed increases. However, now is the time to lift the 1 per cent pay cap. We are determined to provide a pay package that is affordable and reflects the increasing cost of living. I am grateful for the constructive engagement of the trade unions on this matter, including the joint letter from me and the Scottish Trades Union Congress to the Chancellor of the Exchequer ahead of the autumn budget. Unfortunately, our calls were ignored by the chancellor, which limits how far we can go on pay. However, unlike other Governments across the UK, we committed to lifting the pay cap—so lift it we will.

Today, I have published a progressive pay policy. I confirm that we will deliver a guaranteed minimum pay increase of 3 per cent for all public sector workers who earn £30,000 or less. For those who earn above £30,000, we will limit the increase to 2 per cent and apply a cash cap of £1,600 to people who earn £80,000 or more. That demonstrates our commitment to closing the gap between the lowest paid and highest paid. That is the framework that will apply to public sector pay negotiations.

However, let me make clear three additional points. First, notwithstanding the policy that I am setting out today, we will respect the recommendations of independent pay review bodies. Secondly, we will be mindful of any developments for national health service staff elsewhere in the UK in order to ensure that our health service staff are treated at least as fairly as those in any of the other UK nations. Thirdly, we will retain flexibility to enable us to address particular recruitment challenges.

Once again, the Scottish Government is leading by example, delivering on our promises and putting fairness at the heart of what we do. Our decision to lift the pay cap will benefit thousands of nurses and other healthcare staff. I know that I speak for everyone in the chamber when I thank our NHS staff for the work that they do in caring for the people of Scotland.

Our approach to health and care is one of reform and investment. In the coming year, we will invest £110 million in reform of primary care, thereby supporting our general practitioners and health centres to meet the changing needs of our people. We will increase our direct investment in mental health services—child and adolescent mental health services, in particular—by a further £17 million. That is the third annual increase in a row, which will help to deliver an additional 800 mental health workers over this session of Parliament.

The budget will also deliver more than £550 million in 2018-19 in direct support of social care and integration through Scottish Government and NHS investment. We will also continue to support free personal care and the roll out of Frank’s law by April 2019.

Underpinning all that is increasing investment in the NHS. This year, an additional £200 million would be required to increase health resource spending in line with inflation. That is equal to the amount that is being cut from Scotland’s resource block grant in real terms this year by the UK Government. However, we have been clear that, over this session of Parliament, we will increase health resource spending by a total of £2 billion, which is considerably more than the rate of inflation.

Today, I confirm that our increase in health resource funding in 2018-19 will not be £200 million but will be more than £400 million, which will take our total front-line investment to more than £13 billion in the coming year.

In this budget, we are investing in the NHS, increasing social care investment, protecting local services, delivering a growth package for business and supporting the low-carbon transition. We are providing real-terms increases for our universities and colleges, expanding childcare, directing more resources to headteachers to close the attainment gap and protecting our police and fire services. We are safeguarding culture and the arts, taking action to alleviate poverty and lifting the public sector pay cap. However, in the face of real-terms cuts to our block grant, it has been possible to deliver for the NHS and to support those other investments only because of the decisions that I have taken on tax.

We do not take tax decisions lightly. In November, we set out four key tests that any change to income tax would have to meet. It must protect low earners, make tax fairer, generate additional revenues for public services and protect our economy.

We also commissioned advice, informed by the Council of Economic Advisers, on options for the additional rate of tax. Having carefully considered contributions from the public, civic society and the business community, I have decided to reform Scotland’s income tax system.

Using the limited powers available to us, the decisions that I have reached will make our income tax system fairer. They will safeguard those on low incomes and, overall, when coupled with our spending decisions, will protect and grow the economy. They will also provide essential revenue to enable us to invest in our NHS without imposing cuts on vital services such as social care, business support, police or education.

Our proposals have been modelled by the Scottish Fiscal Commission, and its revenue forecasts underpin this budget. Where forecasts suggest that a tax change would result in a significant behavioural impact, I do not have the luxury of simply ignoring it. As a result, I have set income tax policy at levels that the analysis says will generate additional revenue.

The changes that I am proposing are as follows. First, I will increase the higher and top rates of tax by 1 percentage point to 41p and 46p respectively. That sets the top rate of tax at a level that will generate the most income with the least risk of losing revenues next year and damaging the economy. Our modelling indicates that, had we gone further, once behavioural effects and forestalling are considered, a higher rate could reduce income tax revenues next year. That is not a decision that any sensible Government would take.

Secondly, I will freeze the basic rate at 20p, but to make the system more progressive, I will introduce a new intermediate rate of 21p. The intermediate rate will apply to income between £24,000 and the higher-rate threshold of £44,273, which will increase in line with inflation only. To make Scotland’s income tax system even fairer and more progressive, I have chosen to make one further change. I can announce today that I will introduce a new Scottish starter rate of income tax of 19p. That new rate will apply to the first £2,000 of taxable income between £11,850 and £13,850. That new starter rate, combined with the increase in the personal allowance, will ensure that no one earning less than £33,000, which is 70 per cent of all taxpayers, will pay any more in tax than they do now for given incomes; on the contrary, anyone earning less than £33,000 will pay slightly less in tax in the coming year than they do this year. The introduction of the new starter rate will also mean that those earning up to £26,000, which is 55 per cent of taxpayers in Scotland, will pay marginally less tax than they would if they lived elsewhere in the UK.

The specific tax reforms that I have announced today will raise an additional £164 million for investment in our public services and our economy. However, taken together with our tax decisions last year, the projected growth of our tax revenues relative to the UK as a whole and relative economic growth, our income tax receipts in 2018-19 are forecast to generate £366 million more than the corresponding block grant adjustment under the fiscal framework. Those decisions have therefore enabled me to reverse the real-terms cut that Westminster has imposed on our resource budget next year, while ensuring that Scotland is not just the fairest-taxed part of the UK but, for the majority of taxpayers, the lowest-taxed part of the UK.

In all these decisions, the interests of our economy have been at the forefront of my mind. I have already outlined a range of economic investments and I want to briefly mention two more.

One of the touchstone pledges from our programme for government was the creation of a Scottish national investment bank to provide long-term, patient capital to support innovation and drive productivity growth. Today, we signal our ambition for the bank with a commitment to an initial £340 million capitalisation between 2019 and 2021. However, while the bank is being established, I intend to create a dedicated building Scotland fund. That fund will be worth £150 million over the next two financial years and its purpose will be to support innovation in house building, help deliver modern, low-carbon industrial and commercial facilities and provide further support for business-led research and development. We will set out further details shortly.

That new fund, together with an additional £96 million of investment in maintaining the most attractive system of business rates in the UK, a 70 per cent increase in funding for business R and D, £60 million of investment in delivering low-carbon technology, more than £4 billion of investment in new infrastructure, doubling our investment in city deals, a £600 million package to deliver 100 per cent superfast broadband to all and almost £2.4 billion of funding for enterprise and skills, demonstrates beyond doubt that this budget backs Scotland’s businesses and will help to grow Scotland’s economy.

This budget is a comprehensive package of measures designed to protect all that we hold dear. It provides the investments that we need to meet the challenges of today and seize the opportunities of tomorrow. It uses the powers of this Parliament sensibly and in the interests of the country as a whole. It overturns the Tory cuts to our block grant. It delivers an additional £400 million to the health service without damaging other vital services. It protects the vast majority of taxpayers. It is a budget for fairness and a budget for growth. It is a budget for all of Scotland and I commend it to the chamber.