Kate Forbes freezes key budgets in painful 'reset' of public sector

The sweeping changes are designed to help head off a projected £3.5 billion spending shortfall by 2026/27 caused by SNP policy choices, the pandemic and rising inflation.

Local government was the biggest loser, with its central funding frozen at around £10.6billion for the rest of the parliament, implying big council rises from next spring and potential cut to schools, social work, cleansing, parks, roads and other council services.

Labour called it the “death knell” for local government.

The justice system also suffered, with all budgets bar pensions frozen until 2026/27.

It means real-terms cuts for community justice, legal aid, the police, prison service, fire service and the prosecution and court services, despite a record backlog in trials.

The Institute for Fiscal Studies (IFS) said the freeze would mean real terms cuts of around 8 per cent over four years to the police, justice servcies, universities and rural affairs, and a 16% cut to enterprise, tourism and trade promotion.

"The axe is set to fall on a wide range of public service areas," the IFS said.

The Fraser of Allander Institute said the Scottish Government deserved credit for setting out its plans while Treasury funding was "extremely tight" , but added the impact would be "stark". 

The Scottish Police Federation, which represents frontline officers, called the review "absolutely brutal" and predicted a fall in police numbers.

General Secretary Calum Steele said: "A bad day for the public, a good one for criminals."

Ms Forbes also froze the budget of the Scottish Funding Council which supports colleges and universities, skils and training and learning services for most of the parliament, and froze spending on rail, despite taking over nationalised ScotRail. 

Spending on rural affairs and the islands was also frozen in cash terms, although there will be a small rise for ferry services. 

Overall, the £180bn spending review pencils in a real-terms spending increase of around 5% (or 1.2% a year) in real-terms over the next four years. 

There were also winners in the exercise, with more money for concessionary fares for the young and old, and spending on renewables and net zero measures increasing.

Ms Forbes also set aside £20m for the “delivery of a referendum on independence” in 2023/24, although there is widespread scepticism about it taking place.

The Scottish Tories urged her to scrap the item altogether.

The biggest increase in the spending review was social security benefits, up from £3.9bn this year to £6.4bn by 2026/27, a real terms rise of 48%, as part of efforts to help reduce child poverty.

The health budget will also grow from £17.1bn this year to £19bn in 2026/27, up 2.6% in real terms.

Ms Forbes did not set out any tax rises, saying those would be for her budgets, although the IFS said it now assumed she would freeze the threshold for the 41p higher rate of Scottish income tax for four years.

On possible council tax rises, the review said it made “no assumptions about council tax, which is a decision taken at annual budgets".

It is the first time the Scottish Government has published a multi-year spending review since 2011.

Outlining her oplans at Holyrood, Ms Forbes told MSPs that Scotland was facing an “unprecedented cost of living crisis”.

She said: “The UK currently has the highest inflation of any G7 country– almost twice the rate of France.

“Brexit has made this problem worse, with increases in food prices, hitting the poorest hardest.

“We are experiencing an unprecedented cost of living crisis.

“Inflation is at a 40-year high of 9% with households facing considerable hardship.”

She went on: “Following a real-terms reduction of 5.2 % between last year and this, our real terms funding grows by only 2% across the whole four-year period, after accounting for the devolution of social security benefits.

“That is the stark reality. But it is not inevitable - it is the result of a deliberate choice by the UK Government - as they sit on their hands.

“While the Chancellor has provided welcome, if limited support for households, the chill winds of Tory austerity are blowing when it comes to spending on public services.”

She said the public sector would need to reform and become more efficient as money was prioritised in particular areas to deliver a fairer, greener society.

She told MSPs that would including digitalisation, reducing the size of the public sector estate and improving public procurement.

She said: "After years of growth in the public sector, due to Brexit and the pandemic, we need to reset.

"We need to focus on how the public sector can reform to become more efficient, giving us space to realise our ambitions for better outcomes.

“The UK Government has chosen not to act on public sector pay, meaning our more progressive approach, with public sector wages on average 7% higher than where the UK Government is the employer, is funded from within our severely limited budget.

“We do not intend to take the same approach as set out by the UK Government today, but we do need to reshape and refocus the public sector post-Covid and the spending review calls upon all of the public sector to look creatively at ways to sustainably address that challenge, while seeking to ensure fair increases.”

Scottish Tory Finance and Economy spokeswoman Liz Smith MSP said: “If ever proof was needed of the SNP’s mismanagement of the Scottish economy, it can be seen in the glaring £3.5billion black hole in our public finances.

“The world economy is facing extraordinary pressures, but the financial shortfall that has been forecast comes despite the SNP receiving record funding from Westminster, this year.

“The gaping hole between projected public spending and tax revenues in the next few years is the product of staggering incompetence from an SNP Government that has no idea how to manage public finances – the ferries fiasco being just one example.

“With hard-pressed families here in Scotland struggling to make ends meet, the SNP must urgently get on top of our economic decline.

“They must commit to bringing Scottish income tax levels back on a par with the UK, so that Scotland is no longer the highest taxed part of the country.

"They must address the ever-growing skills gap that is stifling our productivity.

"And they must take an economically devastating independence referendum off the table, to finally prioritise Scotland’s economic growth.”

Scottish Labour Finance spokesperson Daniel Johnson said: “Scots are about to be hit by the worst drop in disposal cash since records began but the SNP have nothing to offer except empty rhetoric and the same old spin. 

“Fifteen years of failed SNP economic policy have got us to this point, and this dire update promises more of the same.

“They are slashing support for economic development as our economy falls off a cliff and wasting £20m on a divisive referendum while cutting local services to the bone.

“Their economic mismanagement has led to Scots' wages growing more slowly than the rest of the UK, making this cost of living crisis all the more painful and draining money from public coffers. 

“Scots have been paying the price the SNP’s warped priorities and disastrous incompetence for years, and now things are set to get even worse. 

“Scotland deserves better than managed decline from this tired government– we need real ambition to get our economy back on track.”

Scottish Greens finance spokesperson Ross Greer MSP said: “A totally misguided UK Government squeeze on Scotland’s budget, combined with the financial straitjacket placed around the Scottish Government, have forced some tough decisions on how budgets will be shaped over the coming years.

“Scotland lacks the tax and borrowing powers of a normal nation and the devolution settlement puts arbitrary limits on things like the size of the Scottish Government’s reserve and the amount which can be drawn from it each year. If this exercise has proven anything, it is how much Scotland is held back by Westminster.

“Despite these challenges the Scottish Greens have ensured that spending on climate action and tackling child poverty are top priorities at this difficult time.

“The only way Scotland can avoid having to fight this uphill battle against cruel and economically incompetent Tory governments time after time is by taking our future into our own hands as an independent European nation.” 

Scottish Liberal Democrat finance spokesperson John Ferry added: “Under the SNP, the Scottish economy has consistently been outpaced by the rest of the UK, meaning there’s less money to spend.

“We’ve seen money frittered away on botched projects from the ferries to the census. ScotWind, the best chance for generations to bring serious money into the public purse, was sold on the cheap after the government capped how much companies were allowed to pay. Next they want to spend countless millions stripping powers from local communities to create an expensive centralised National Care Service.

“It’s time to remove the drag of SNP economic mismanagement.”

A UK Government spokesperson said: “All of Scotland is benefitting from unprecedented UK Government support. We are providing the Scottish Government with a record £41bn per year for the next three years – the highest settlement since devolution, funding our NHS, our schools and other vital services.

“And after supporting 1 in 3 jobs in Scotland during the pandemic, we are providing people with a £37 billion UK-wide package to help with fuel bills and support the most vulnerable including pensioners and disabled people.

“We are growing the economy across Scotland through our £2 billion in regional growth deals and levelling up initiatives to create a high-skilled, high-wage economy. 

“The Scottish Government’s official figures show that being part of the UK is worth more than £2,200 every year for each person in Scotland. An agreement to review the fiscal framework is underway and we will continue to work with the Scottish Government for the benefit of people right across Scotland in these challenging times.”

David Phillips, Associate Director of the IFS, said:  "Today’s Scottish Resource Spending Review gives a clear indication of the areas prioritised by the Scottish Government - and the services that on current funding plans at least will be cut back as a result.

"On the plans set out today, the axe is set to fall on a wide range of public service areas.

"Budgets for local government, the police, justice, universities, rural affairs are due to fall by around 8% in real-terms over the next four years.

"Spending on enterprise, tourism and trade promotion is set to fall even further - by 16% in real terms, over the same period.

"The relative winners are health, some smaller service areas, and above all social security spending. Spending on health is set to increase by 2.6% in real-terms over the next four years, although this will almost certainly be slower than is needed to meet rising costs and demands.

"Indeed, on this basis, health services could really struggle over the next few years. Social security spending is forecast to increase by a much more substantial 48% as new, more generous, Scottish benefits replace UK-wide benefits. 

"Underlying these difficult decisions are UK government funding plans that look less generous than when they were set last Autumn as a result of higher inflation.

"But big increases in social security spending and a relatively poor income tax performance also make the challenges more difficult, and that’s despite the Scottish Government implicitly assuming a further rise in income tax relative to the rest of the UK."

David Eiser, Deputy Director of the Fraser of Allander Institute, said “There was much talk in the run up to the publication of this Spending Review of a “black hole” in Scotland’s finances – that is, the gap between the Scottish Governments aspirations for the spending review and the finance available. Of course, in practice, they’ve had to make decisions to cut back those aspirations to fit within the finance available.

“The result has been a number of spending lines frozen in cash terms – in practice, real terms cut of roughly 7% over the period. This includes local government, much of policing and justice, higher education and enterprise support."

Philip Whyte, director of IPPR Scotland, said: “While the Resource Spending Review indicates a somewhat positive direction – with increases across social security and social justice, net-zero, education, and health – on the face of the document this essentially just locks in many existing commitments and does little to show where bold new policy action might be taken. 

“With an assumed cash-terms increase of £5.7bn over the period, the Scottish Government have essentially applied a cash-terms freeze to most portfolios and spread what’s left over across the rest.

"While those increases are obviously welcome, it’s also been a missed opportunity.

"It leaves little headroom for future years at a time when we need to supercharge funding and delivery of efforts to tackle poverty and the climate crisis, and when households and the economy are teetering on the brink.

"It’s also left to future budgets to show how progressive taxation will further fund progressive policy.  

“Ultimately, it’s a Spending Review which had the opportunity to take difficult decisions, and a fresh approach to how resources are allocated. Instead, there’s a risk it falls short of what will likely be required to meet the challenges ahead – but without more detail we are still in the dark.” 

John Dickie, director of the Child Poverty Action Group in Scotland, said: “It is absolutely right that tackling child poverty is a top priority within the Scottish governments spending plans.

"That means direct investment in Scottish social security, in childcare, in housing and in removing the barriers parents face securing decent jobs.

"But it must also mean sustaining investment in the wider local services, like schools, transport, family support and leisure facilities, that families rely on to give their children the best start in life. There is no shortage of wealth or income in Scotland.

"The Finance Secretary must review all the tax and spending powers available to her to harness the resources needed to deliver direct action on child poverty without cutting the wider services critical to children’s wellbeing.

"We need to take tough tax and spending decisions as a country, not leave the impossible choices to those on the lowest incomes.”

Scottish Fiscal Commission’s chair Dame Susan Rice said: “The difficulties the Scottish Government faces in managing its budget are illustrated by the eight percent fall in funding available by 2025/26 for areas other than health and social security after adjusting for inflation.

"Scotland continues to be affected by challenging economic circumstances and uncertainty. 

“Rising inflation means earnings aren’t keeping pace with the cost of living. We expect inflation pressures to last into the middle of next year, with a return to positive real earnings growth in 2023/24.”