Funding: Scotland’s being short-changed

The UK Government must use their 2019 spring statement to stop Scotland being ‘short changed’ as a result of additional funding being allocated to Northern Ireland, Finance Secretary Derek Mackay has said.

It follows the recent announcement that Northern Ireland has received an additional £140 million for its 2019-2020 Budget on top of the £1 billion Northern Ireland has already been allocated by the UK Government.

In a letter to the Chancellor of the Exchequer, Mr Mackay has also urged the UK Government to use the statement to provide the Scottish Government with the necessary financial resources it will need in the coming months to help mitigate some of the damage Brexit will bring to the Scottish economy.

Mr Mackay pressed the Chancellor to:

• resolve the issue around additional funding being provided to Northern Ireland without applying the Barnett formula, and use the spring statement to provide a proportionate amount of additional finance and flexibility to Scotland, Wales and the rest of the UK
• guarantee that all EU funding to Scotland – worth over £5 billion in this current EU budget round – will be replaced in full
• commit to ending unnecessary austerity, which disproportionately impacts the poorest and most vulnerable in our society
• make urgent progress on the request to grant financial flexibilities to the Scottish National Investment Bank in order to manage money across years
• meet the full costs of changes to employer contributions to public sector pensions
• make a formal commitment to 100% coverage of Scotland with growth deals
• return the £175 million Scotland’s Police and Fire Services paid to HMRC between 2013 and 2018

Mr Mackay said: “Scotland is once again losing out on vital funding and being short changed by the UK Government. The Chancellor must use his spring statement to address this imbalance which is penalising people across Scotland.

“The decision in 2017 to allocate £1 billion exclusively to Northern Ireland without consequentials to the other devolved administrations is yet to be resolved, and it is unacceptable for the UK Government to continue to provide additional funding for devolved services in Northern Ireland without applying the Barnett formula.

“This, along with the latest funding for Northern Ireland, has meant that Scotland has lost out on equivalent funding of around £3.3 billion.

“In addition, analysis by the Scottish Government shows that a disorderly ‘No Deal’ Brexit has the potential to generate a significant economic shock and tip the Scottish economy into recession.

“The UK Government must rule out ‘No Deal’ at any time and request an immediate extension of Article 50.”

Full text of the letter:

Dear Philip,

I am writing to set out the key issues that the Scottish Government wishes to raise ahead of your Spring Statement on 13^th March.

Brexit

The Statement will take place less than three weeks before the date that the UK is due to leave the EU. It takes place in the week that the UK parliament is expected to vote on any Brexit deal. It is a time of unprecedented uncertainty.

The deal negotiated by the Prime Minister is unacceptable. It will cause major, lasting damage to jobs, living standards and public services. The UK Government must also take the threat of a No Deal Brexit off the table. Analysis by the Scottish Government shows that a disorderly No Deal Brexit has the potential to generate a significant economic shock and tip the Scottish economy into recession. This week, for the first time in the 20-year history of devolution, the National Assembly for Wales and the Scottish Parliament voted simultaneously on the same motion – to reject the deal negotiated by the Prime Minister, rule out No Deal at any time and to request an immediate extension of Article 50. Next week you, the Prime Minister and the UK Government must show that they have listened.

Austerity

I have set out on numerous occasions 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. The UK Government has recently stated that austerity has ended. Yet this is contradicted by recent analysis by the Institute for Fiscal Studies which shows that many public services will face further real terms cuts to public spending over the coming years.

In your UK budget in October you noted that there was £15.4 billion in fiscal headroom available, recent trends in the public finances suggest that this headroom may have increased further.

I strongly encourage you to use this fiscal headroom to ensure that the Scottish Government has the resources at its disposal over the coming months to mitigate the damage that the UK Government’s approach to Brexit is causing to our economy. I also urge you to use the Spring Statement to confirm that additional funding will be provided through the next Spending Review to unequivocally end the decade of austerity which the UK Government has imposed on Scotland.

EU Funding

EU funding is worth over £5 billion to Scotland in this current EU budget round, supporting jobs, delivering infrastructure, sustaining rural communities, providing valuable support for the farming and fishing industries and delivering research funding for universities. In line with the overwhelming vote in Scotland to remain in the European Union, the Scottish Government has consistently been clear that the best option for the future wellbeing and prosperity of Scotland and the UK as a whole is to stay in the European Union which would allow continue access to this vital funding.

In my letter to you in advance of last year’s Spring Statement, I urged you to provide clarity on successor arrangements for these funding streams, yet with only two weeks until Brexit, we are little further forward.

As yet, there has been no certainty that these will be replaced, with commitments on agriculture, fisheries and structural funding all remaining unclear. The position on the proposed Shared Prosperity Fund is particularly concerning, with no sign of the consultation that was promised in Autumn of last year, or any meaningful engagement with the Devolved Administrations on this matter.

It is crucial that the UK Government urgently commits to replacing all funding streams in full, and that we receive our fair share of this to ensure that decisions can be taken in the best interests of the Scottish economy and Scottish people. Any new arrangements must fully respect the devolved settlement. Funding decisions currently being made by Scottish Ministers should continue to be made by Scottish Ministers.

Where participation in EU funding programmes is an option, this should be fully explored in partnership with the Devolved Administrations, not by engaging us as consultees. Whilst we have made some progress in understanding the UK’s approach to future participation, there is still a significant way to go if we are to be meaningfully engaged.

UK Funding Guarantees

The UK Government has offered guarantees in the event of No Deal, with the intention to provide stability and certainty of funding to stakeholders across the UK. However, I remain concerned that decisions being taken on the scope and application of the guarantees do not fulfil this intention.

For example, it has become clear that the UK Government is considering applying a less favourable exchange rate to programme allocations than the Commission’s rate. This is an issue that I, alongside the other Devolved Administrations, have already written to the Chief Secretary on.

Whilst I appreciate that this is an issue you are considering outwith the Spring Statement, I urge you to ensure that the guarantees offer the full replacement funding as would have been received under the EU and that you confirm this as a matter of urgency.

Additional Funding for Northern Ireland and Barnett Consequentials

As you are well aware, the Scottish Government fundamentally disagreed with the way in which additional funding was provided for Northern Ireland as part of the deal reached with the DUP. Following the well-established arrangement set out in the Statement of Funding Policy would have resulted in Scotland receiving almost £3 billion of additional funding.

As this issue is yet to be resolved, I was surprised and disappointed by the UK Government’s announcement that Northern Ireland has received an additional £140 million for its 2019-2020 Budget on top of the £1 billion already allocated. While I do not begrudge Northern Ireland the exemption from austerity, Northern Ireland is not alone in facing fiscal challenges.

I would urge you to use your spring statement to provide a proportionate amount of additional finance and flexibility to Scotland, Wales and the rest of the UK.

Employer Pension Contributions

I also remain seriously concerned about the considerable increases in public service pension employer contributions that will be imposed on the Scottish Government from 1 April 2019.

This creates unsustainable pressures for the Scottish Government and the level of proposed HMT funding clearly does not meet the additional costs for any of the pension schemes in Scotland – including for the NHS where the UK Government explicitly committed to fund 100% of the cost increases. Failure to fully fund these costs will have a significant and detrimental impact on the delivery of essential front line services in Scotland.

It is completely unacceptable that the Scottish Government has been seeking clarity on the impact of the planned increases in pension contributions for at least 6 months. We are now a matter of weeks away from the implementation date for these cost increases and still unclear about the precise financial impact of the changes or in receipt of a proper explanation of how any additional funding has been calculated.

Confirming funding levels as part of the 2019 Spring Statement (less than three weeks before these increases will be implemented), does not allow public sector employers in Scotland adequate time to plan and manage the implications of this change effectively.

It is imperative that HM Treasury urgently address this situation by providing the necessary funding to meet the full costs of these changes and a clear explanation of the methodology used to calculate the required funding.

Due to differences in public sector employment profiles in Scotland, simply applying the Barnett formula will result in a shortfall of £160 million that will have to be absorbed in 2019-20. These changes are as a result of UK Government policy, and as set out in Section 1.17.10 of the Statement of Funding Policy, “where decisions of UK Government departments or agencies lead to additional costs for any of the devolved administrations, where other arrangements do not exist automatically to adjust for such extra costs, the body whose decision leads to the additional cost will meet that cost,” it should be for the UK Government to fully fund the impact of these proposals. Scottish public services should not be forced to make cuts to meet these additional costs.

Scottish National Investment Bank

You will be aware of the importance the Scottish Government attaches to the establishment of the Scottish National Investment Bank as a means to raise economic growth – which is more important than ever with the expected negative impact of Brexit on the economy hanging over us. We have published two detailed evidence papers identifying the clear need for a national investment bank that is attuned to the diversity and variability of Scotland’s economic requirement.

This difference in approach means the Bank would be complementary to the British Business Bank and not displace its activity in Scotland. To effectively manage the pipeline of investments at different stages, it is fundamental that the Scottish National Investment Bank should have the modest additional flexibility that we are seeking to build up reserves and manage money across years, just like the British Business Bank does.

I am also aware that the Treasury previously granted financial flexibilities to Transport for London, to allow them to manage borrowing levels across financial years – indicating that there is precedent for considering similar flexibilities for the Bank.

It is helpful that the Chief Secretary has recently confirmed that we will continue to discuss the proposal for the Bank and explore how we might make further progress on this important commitment, but it is imperative that progress on this matter is made quickly to allow me to keep the Scottish Parliament informed on all aspects of progress with the establishment of the Bank.

Growth Deals

Building on recent positive progress made with the Ayrshire Growth Deal, I would expect similar progress to be made on the Borderlands and Moray Growth Deals. In terms of the Borderlands Growth Deal, I hope we can make a joint announcement of our collective investment before 15 March when the English authorities involved in the Deal discussions enter into their pre-election restricted period in the run up to local government elections.   That should enable us to sign heads of terms in the summer.

Last October’s UK Budget made the welcome commitment that UK Government was prepared to open tripartite discussions on a Moray Growth Deal, however the Western Isles, Orkney and Shetland, Falkirk and Argyll and Bute are still waiting for a similar, formal commitment. I would urge the UK Government to make a formal commitment to 100% coverage of Scotland with a growth deal as soon as possible.    

Police and Fire Services 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 suffered between 2013 and 2018 by returning the £175 million paid to HMRC over that period. This resource should be rightfully returned to Scotland to further benefit community safety.

I trust that you will consider the issues I have outlined above, and that you will reflect them in your Spring Statement on 13^th March.

DEREK MACKAY
Cabinet Secretary for Finance, Economy and Fair Work