Hansard

I am open to having that discussion. When Liz Smith made that point at committee, I said that a lot of time has elapsed and a lot of changes have been made. Under the current constitutional arrangements, further changes would need to be agreed on a cross-party basis, but we should have the discussion.

Since the unanimous passing of the Social Security (Scotland) Act 2018, we have introduced 13 benefits, seven of which are brand new and available only in Scotland. This year, we will invest £405 million in the Scottish child payment, improving the lives of more than 300,000 children across Scotland. As a result of the Scottish child payment and Scottish Government policies, 90,000 fewer children will live in relative and absolute poverty this year.

However, it is also the case that the fiscal framework has been stress-tested since 2016. The agreement preceded the European Union referendum and the subsequent chaos and uncertainty that accompanied the UK Government’s hard Brexit. We have also seen extraordinary fiscal upheaval as a result of the pandemic, the on-going cost of living crisis and the UK Government’s economic mismanagement.

Given that political and fiscal upheaval, the review provided us with an opportunity to take stock and consider elements of the fiscal framework that required change. The centrepiece of the agreement in 2016 was the block grant adjustment arrangements that account for the devolution of new tax powers and social expenditure to Scotland. Under those arrangements, a total of £16.1 billion was deducted from the Scottish block grant in the 2023-24 budget to reflect the devolution of various tax powers and the corresponding revenues that are now retained by the Scottish Government. Similarly, £4.4 billion was added to the block grant for 2023-24 to reflect the transfer of responsibility for a suite of social security benefits to the Scottish Parliament. The methodology that is used to calculate the block grant adjustments therefore has a material impact on the funding that is available for the Scottish budget. Securing the indexed per capita block grant adjustment methodology on a permanent basis is a significant win for Scotland.

The Scottish Government pressed hard for the indexed per capita methodology as part of the original fiscal framework. The 2016 fiscal framework said that the indexed per capita methodology would apply on an interim basis, with a permanent arrangement to be reviewed and agreed at a later date. Now that that review has been completed, the agreement to apply the indexed per capita methodology on a permanent basis is a positive step, because it removes uncertainty and protects the Scottish budget from the impact of slower population growth in Scotland, which has been the historic trend for the past 50 years.

An independent report that was jointly commissioned by the Scottish and UK Governments ahead of the fiscal framework review estimated that the on-going use of the indexed per capita methodology for calculating income tax block grant adjustments alone could be worth around £500 million a year by 2026-27 when compared with other methodologies that were considered, such as the Treasury’s preferred comparable model. In my view, it is right to protect the Scottish budget in that way. The Scottish budget should not be penalised for lower population growth, which, of course, is outwith Scotland’s control, because we do not have the key levers over issues such as migration or the other levers that would be required.

The agreement also provides a substantial increase in the resource borrowing powers that the Scottish Government has to enable it to manage funding volatility associated with the operation of the framework. Specifically, it increases the Scottish Government’s ability to borrow to address tax and social security forecast errors, with borrowing capacity being doubled from £300 million to £600 million per year. Such forecast errors are a normal part of the way in which the fiscal framework operates, but that change will greatly improve the Scottish Government’s ability to manage and smooth funding volatility that is driven by forecast error. In turn, that will provide a more stable and predictable funding environment for the Scottish budget and the programmes and services that it supports.

Those new borrowing powers will take effect from 2024-25. I will set out how we intend to use the new powers in the forthcoming budget but, in principle, they would allow us to borrow in full to cover next year’s income tax and other reconciliations, which amount to £338 million. In effect, the ability to borrow in full spreads the impact of the tax reconciliations across multiple years rather than requiring that cost to be absorbed in a single budget.

Another important development involves changes to the operation of the Scotland reserve. Alongside borrowing powers, the Scotland reserve provides the Scottish Government with flexibility to manage its funding position across financial years and to respond to unforeseen circumstances. However, the Scottish Government’s ability to draw funds from the reserve was previously constrained. The amount that it could draw down was limited to a maximum of £100 million for capital and £250 million for resource funding. That amounts to around 1.5 per cent of the total Scottish capital budget in 2023-24 and 0.5 per cent of the resource budget.

I am pleased to report that those drawdown limits will be removed altogether as a result of the new agreement, which will significantly increase reserve flexibility and the Scottish Government’s ability to manage funding across financial years. As members would expect, specific decisions on the use and application of those bolstered powers will be outlined as part of the Scottish budget.

More broadly, we have also agreed that, in the future, all borrowing and reserve limits will grow with inflation each year. Previously, annual and cumulative limits for borrowing and reserve limits had been set in nominal terms, which meant that their power and effectiveness were eroded by inflation over time. Securing uprating ensures that the powers will continue to be viable and sustainable, and that limits will be protected in real terms.

In keeping with that approach and recognising how circumstances have changed since the fiscal framework was introduced in 2016, we have agreed to increase the baseline adjustment to the block grant that accompanied the devolution of responsibility for managing Crown Estate assets. That adjustment will increase in increments, and, when it reaches £40 million, in 2028-29, it will remain fixed in nominal terms.

To avoid any further delays in the Scottish and UK Governments concluding the revised agreement, it was jointly decided that arrangements for implementing VAT assignment would be further considered at a future meeting of the joint Exchequer committee. I very much appreciate the work that the Finance and Public Administration Committee has put into looking at that matter.

Viewed in the round, the agreement protects funding for the Scottish budget, updates the framework to reflect changes that have occurred since 2016, provides greater certainty on future funding and equips the Scottish Government with a set of strengthened fiscal levers.

However, as I said, although the revised fiscal framework agreement represents good progress and puts in place arrangements that better reflect the scale and complexity of the Scottish budget, the changes are not of the scale that is required to offset the broader fiscal challenge. In the autumn statement, the Chancellor of the Exchequer failed to provide the funding that devolved Governments need, and little consideration was given to Scotland and the specific challenges that we face, dealing with which will be very challenging indeed. I will set out the consequences of that in the budget on 19 December.

I move,

That the Parliament recognises the limited improvements to the Scottish Fiscal Framework, following a joint review with the UK Government; welcomes the outcome of the review, which provides an increase in the Scottish Government’s borrowing and reserve capacity, and also confirms the Indexed Per Capita methodology as the permanent basis for calculating Block Grant Adjustments for devolved tax and security spend; notes that, while the limited progress is welcome, the Framework cannot protect Scotland from the UK Government’s austerity-driven budget decisions; understands that the Autumn Statement saw real-terms cuts to frontline spending in NHS England and on justice, and that these cuts have impacts on the finances that are consequently available to Scotland; calls for the UK Government spending plans for 2024-25 to be urgently revisited to invest in services and provide the funding necessary to meet the costs of public sector pay deals, not least in the NHS, and believes that the Scottish Parliament should have all the fiscal levers to prevent Scotland being subject to the austerity policies that harm efforts to reduce poverty, develop a growing wellbeing economy, tackle climate change and invest in public services.