Scotland's Economy

Ensuring the UK Budget delivers for Scotland

October 10, 2018 by No Comments

Ahead of the UK Budget on the 29th of October, I have written to the  Chancellor of the Exchequer to outline the key issues that the Scottish Government wishes see included in the Budget. A full copy of my letter to the Chancellor is below.

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Rt Hon Philip Hammond MP
Chancellor of the Exchequer
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

9 October 2018

Dear Philip,

I am writing to set out the key issues that the Scottish Government wishes to raise ahead of your Budget on 29th October 2018.

Austerity and Brexit

You will be aware that the Scottish Government has a long standing opposition to the UK Government’s austerity agenda as it disproportionately hurts the poorest and most vulnerable in society. In our Financial Strategy published in May this year, the Scottish Government proposed alternative UK fiscal plans which would provide valuable additional resources for Scotland’s public finances to support key commitments and public services while keeping the public finances on a sustainable path. The Prime Minister accepted this week that austerity must end. This statement must be backed up by concrete actions at the Budget to provide a meaningful uplift in funding for public services.

The UK Government’s determination to focus on a hard Brexit outcome represents an unprecedented risk to the UK economy and will weaken rather than strengthen the public finances. The people of Scotland voted overwhelmingly to remain in the EU and the Scottish Government firmly believes that Scotland’s public finances should not bear the costs of EU exit. With six months to go to Brexit, the only ‘credible plan’ to minimise the damage of Brexit is the Scottish Government’s proposal to stay in the Single Market and Customs Union.

Welfare Reform

The Scottish Government remains deeply concerned about the impact UK welfare reforms are having on the people of Scotland, pushing them into poverty and hardship, and causing stress and anxiety. Our new 2018 Welfare Reform report shows that by 2020/21, social security spending in Scotland is expected to have reduced by £3.7 billion as a result of UK Government welfare cuts since 2010. In Scotland, the four-year Benefit Freeze is the reform that is estimated to have led to the biggest reduction in spending – around £190 million in 2018/19, and around £370 million per year by 2020/21.

The report also shows that over the first year of its implementation around 3,800 Scottish families have seen their incomes reduced due to the Two Child Limit. Each year more children will lose out on up to £2,780 per year because they were born after the arbitrary April 2017 cut-off date.

The Scottish Government also remains concerned about the impact that the roll out of Universal Credit (UC) is having as it causes further widespread hardship, stress and anxiety. Due to work allowance cuts, more and more working people in Scotland are losing out on vital support to help them sustain employment and make work an attractive option. For example, in 2018/19, working UC claimants in Scotland will lose £164 million, and approximately £245 million by the year 2021. We have repeatedly called on the UK Government to halt the roll out of UC until the fixes the system urgently needs can be implemented.

In order to stop things getting any worse, I am asking you to use the Autumn Budget to act immediately to lift the benefit freeze, and for benefits to be uprated in line with inflation. The benefit freeze has resulted in the biggest reduction in welfare spending in Scotland and it is time for the UK Government to lift it.

Funding and EU Exit

If agreed in full, the Withdrawal Agreement between the UK and EU sets out that current EU funding would continue until the end of the current Multiannual Financial Framework. It is vital that this agreement is reached in order to provide some stability and certainty for stakeholders in Scotland and a no deal situation is not acceptable. I am therefore seeking specific assurances that the UK will cover the full allocations that the EU would have provided if a deal is not reached.

The Scottish Government remains deeply concerned on the lack of detail regarding future funding arrangements to succeed EU programmes. The UK Government has yet to provide any detail on its plans for the Shared Prosperity Fund, including which EU funds it will replace, or how “farm support” will be defined. The Scottish Government has been absolutely clear that Scotland must not be any worse off in respect of the funding allocations that replace those provided from the EU and that any arrangements must fully respect devolution.

On agriculture funding in particular, the Cabinet Secretary for the Rural Economy wrote to your colleague Michael Gove on 1st October to express the Scottish Government’s deep disappointment regarding the proposed approach to the Convergence Review. Most disappointingly, the proposed Terms of Reference do not include any reference to the consideration of the past decisions for the 2014-2020 CAP period. It is patently unfair that Scottish farmers have lost out on money they are rightfully owed. It is therefore vital the review takes place urgently, addresses past decisions which led to Scottish farming losing out, and considers proposals to make future intra-UK allocations of agriculture funding more equitable and according to the needs and interests of each nation.

European Investment Bank and European Investment Fund

Access to the European Investment Bank (EIB) and its lending are crucially important to Scotland and similarly the European Investment Fund (EIF) has been a valued partner. There is little reason for the UK to lose access to EIB Group Capital and expertise as a result of Brexit – the EIB can and does lend to EFTA members and others outside the EU, albeit at a much lower level. I urge the UK Government to allocate a proportion of repatriated EIB capital to devolved development institutions and to ensure Scotland retains its EIF shareholding.

I also note the National Infrastructure Assessment’s (NIA) recommendation of a new UK Infrastructure Finance Institution if the UK loses access to the EIB following Brexit. It is essential that the Scottish Government be closely involved in shaping any new UK Infrastructure Finance Institution to ensure it fulfils Scottish specific needs, as well as that of the rest of the UK. Any new arrangements must also take into account, and work with, the Scottish National Investment Bank.

Abandon the Charge on EU Citizens Applying for Residency

The Scottish Government has made repeated calls on the UK Government not to impose fees on EU citizens applying for settled status. It is wrong that EU citizens will be financially burdened by paying a fee to obtain a status which they already enjoy by right and I strongly urge you to scrap the fees for settled status altogether. However, if the UK Government persists in imposing a fee I would ask that the Treasury, HMRC and the Home Office work with the Scottish Government to enable employers to meet the fees for their staff in a simple and cost effective manner minimising the impact on the public purse. While the Scottish Government disagrees over the decision to compel EU citizens who wish to stay in the UK to apply for settled status we have a shared interest in ensuring that any scheme meets the needs of those citizens. The Scottish Government wants to be a constructive partner in that process but in order to do that we need engagement from the UK Government and a willingness to work constructively to address barriers to ensure that EU citizens can continue to live and work in the UK to the benefit of our economy, our public services and communities.

NHS Consequentials

Following the Prime Minister’s announcement of the real terms increase in budgets for the NHS in the 5 years to 2023-24 in June, I have repeatedly sought clarity from the Chief Secretary on the consequential budget allocations that will flow as a result and the detail of any impacts for Scotland arising from the funding of the uplift. I remain concerned about the proposed funding package for the NHS commitment. In particular I am seeking confirmation that the Health uplift will not be offset by reductions in spending elsewhere. In addition, funding the uplift through a change to income tax at the UK level would have a financial impact on the Scottish budget through the Fiscal Framework. A commitment was made that Scotland would receive around £3.27 billion of consequentials (in cash terms on a recurring basis by 2023-24). For that commitment to be met that must be a net benefit to the Scottish budget.

North Sea Oil and Gas

The Oil and Gas industry has seen a welcome recovery over the last two years, with lower costs and an increased oil price seeing profitability return to offshore producers and a number of key developments going on-stream. However, the recovery is not being felt evenly across the sector, with the supply chain still under significant pressure and exploration activity and new investment still a serious concern.

It is essential that the you use the Budget to maintain fiscal stability and predictability which is critical for the oil and gas industry, any increases in the tax rate would discourage new investment. With only 4 exploration and 5 appraisal wells spudded in the first 8 months of the year, the UK Government must bring forward further measures to improve exploration activity which is essential to Maximising Economic Recovery and attract new investment, providing an immediate boost to the supply chain. The UK Government also needs to provide support to the industry in its ambitions to increase the total economic value of the North Sea, including delivering a strong Oil and Gas Sector Deal.

Ultra Deep Water Port Commitment

Decommissioning of end of life oil and gas infrastructure and vessels is a growing market and one that Scotland and the UK are responding to with some success.  The Scottish Government is committed to facilitating access to all of the opportunities that decommissioning presents.  However, without an ultra-deep water port, the UK is unable to accommodate the size of vessels used in the majority of large scale platform decommissioning projects.

The UK Government should continue to work collaboratively with the Scottish Government, and honour their manifesto pledge, in committing to the development of an ultra-deep water port, which will bring benefits not only for a single location, but as part of an integrated decommissioning offering.

Renewables Support

The Contracts for Difference (CfD) mechanism has been hugely effective in reducing technology and  deployment costs. While the Scottish Government welcome the recent moves to introduce eligibility for remote island wind capacity, these projects – as well as our wave and tidal technologies and developers – would benefit hugely from the enhanced ability to compete which a more flexible approach towards CfD auction design could deliver.

To maximise support for evolving technologies, such as tidal where Scotland is a global leader, I request that both our governments engage closely to explore where differentiation from the CfD process could be achieved to support the technology journey from development to commercialisation. For example, the introduction of an ‘Innovation Power Purchase Agreement’ whereby corporate companies would get a tax rebate for energy they purchased, above market rate, to support the development of new technology.

We have also been urging the UK Government for some time to move beyond its senseless position on onshore wind, and to reintroduce support for these and solar PV projects under the CfD mechanism. There is compelling evidence to support such a move, and which underlines the potential benefits to our economy as well as for consumers from enabling these most cost competitive technologies to make the maximum contribution possible towards our renewable and carbon targets.

100% Coverage of Scotland with Growth Deals

Over the past year, more than one UK Government Minister has indicated in public that all of Scotland is likely to benefit from city region or other growth deal investment. While on a recent Ministerial visit, Liz Truss MP was quoted in the Scotsman newspaper of 27 September as saying, “… in Scotland I’ll be announcing the Moray Growth Deal, the next step in meeting our aspiration that 100 per cent of Scotland is covered by a deal.” This aspiration expressed through the media is welcome and recent dialogue in this vein with the Secretary of State for Scotland has been encouraging. However, it is now time for the UK Government to make a formal commitment to 100% coverage of Scotland with a growth deal.

At a time when Brexit is damaging confidence in our economy and jeopardising prospects for future prosperity, it is clear that the UK Government should confirm that it is ready to invest with us for growth in every community in Scotland. Specifically, a deal for the Tay Cities Region must be agreed as an immediate priority.

Pensions Revaluation

The Scottish Government shares the concerns of many that requiring Departments to meet costs arising from late changes to the discount rate and from any reduction in member contributions has distorted the valuation process. This places unreasonable constraints on the pension schemes and on a wide range of employers seeking to deliver efficient and effective services to the public. I would ask that UK Government meet all of these costs and lift the restriction on member contributions.

Air Passenger Duty

As you are aware, our two Governments have agreed to defer the introduction of Air Departure Tax until the issues which have been identified with the Highlands and Islands exemption have been resolved. I remain committed to working with the UK Government to find the best possible solution for the Highlands and Islands. In the meantime, I would call on the UK Government to act now and reduce the rates for Air Passenger Duty, in order to support connectivity and economic growth in Scotland and across the UK.

Police Scotland and Scottish Fire and Rescue Service VAT

The change in VAT status for Police and Fire services in Scotland has enabled communities in Scotland to directly benefit from the additional £35 million spending power this allows for our vital emergency services. I would like to use this opportunity to again press you to address the inequitable treatment emergency services in Scotland have suffered for the last 5 years, by returning the £175 million paid to HMRC up to March 2018. This resource should be rightfully returned to Scotland to further benefit community safety.

Emergency Services Mobile Communication Programme

I am also extremely  concerned about the affordability of the Home Office led Emergency Services Mobile Communication Programme. A recent forecast from the Home Office suggests that our original costs are set to almost double to £964.5 million over the course of the programme, with an additional cost of £20.7 million in 2019/20 and significant peaks in the next 5 years. Without additional funding from the UK Government, meeting these costs, which are significantly higher than expected largely due to the delay in the overall Home Office programme, will be unachievable in the current, extremely challenging, financial environment.

Whisky Duty Freeze

You will be aware of the Scotch Whisky Association’s request for a freeze on duty on whisky, which we would fully support. The industry is currently facing great uncertainty in the face of Brexit and we should avoid bringing forward any measures which could make the industry less competitive both in the domestic and international market. Moreover, the industry has estimated that last year’s freeze on duty delivered more than £1.5 billion extra revenue to the Treasury compared to the same period the previous year.

I trust that you will consider the issues I have outlined above, and that you will reflect them in your Budget on 29th October.

DEREK MACKAY
Cabinet Secretary for Finance, Economy and Fair Work


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