Scotland can’t cut its way to prosperity
An outline of recent fiscal and policy announcements, and the implications for Scotland's economy.
By Miriam Brett
06 September 2024

By Miriam Brett
06 September 2024
It has been a particularly busy week in Scottish politics, with the Scottish Government announcing significant changes to public spending and setting out its Programme for Government for the year ahead. This blog provides an overview of the key announcements, and assesses the implications for Scotland’s economy.
Pre-budget fiscal update
On Tuesday 3rd September, the Finance Secretary announced a fiscal pre-budget update in the Scottish Parliament, which aimed to highlight the stark challenges facing the Scottish Government, noting material changes to circumstances following the December 2023 Scottish Budget. As part of the fiscal update, the Finance Secretary announced up to £500 million of cuts to public services.
What’s being cut? A detailed breakdown of the changes can be found in the statement and in Annex A of the Finance Minister’s letter to the convener of the finance and public administration committee. Areas include the decision not to progress with the permanent removal of peak rail fares and the decision to scrap the pilot on concessionary fares extension for asylum seekers. In addition, it includes the agreement with Local Government that they can draw on specific existing programmes to fund the pay deals. It also includes up to £60 million of cuts anticipated to be created through the emergency spending controls, as well as noting the Scottish Government’s recent decision to mirror the UK Government scrapping the universality in the winter fuel payment.
Alongside this is the reallocation of up to £460 million raised through the ScotWind offshore wind project revenue – which was previously set out as revenue to tackle climate breakdown – in an effort to mitigate the shortfall. In short, this means the cuts would have amounted to around £1bn without this reallocation and, as the ScotWind funds do not reoccur annually, they won’t be there to draw from next year.
In recent years, Scotland has faced increased fiscal headwinds. In December 2023, the Scottish Fiscal Commission warned that capital funding - which supports investment in long-term assets such as infrastructure and hospitals – was forecast to fall over the next five years by 12 per cent in nominal terms. After accounting for inflation, capital funding was set to fall by 20 per cent by 2028 -29. This year, strain on the Scottish Government’s finances has intensified. Consequently, as the Finance Secretary noted, the financial pressure is “enormous and growing.” The fiscal update follows an intervention by the Finance Secretary in August to implement emergency controls, including a recruitment freeze on all but essential posts and tightened rules on discretionary spending.
The largest source of funding for capital spending is the Block Grant, which is driven by the UK Government’s spending priorities and overall fiscal plans and determined through the Barnett Formula. This represents around 87% of the 2024-25 capital budget. While UK fiscal constraints have undeniably negatively impacted Scotland’s public finances, the Scottish Government is not powerless to try to remedy this.
The Scottish Government has the responsibility to allocate devolved spending, and has limited borrowing powers as part of the Fiscal Framework. Under the Fiscal Framework, the Scottish Government can borrow additional capital up to a maximum of £450 million per annum, increasing annually in line with inflation. The ‘debt stock’, meaning the total amount of Scottish Government borrowing, cannot currently exceed £3 billion. The Scottish Government can also raise revenues through devolved powers, as was highlighted in the recent changes to progressive income tax bandings.
Programme for Government 2024-2025
Following the fiscal pre-budget update, the First Minister set out the Scottish Government’s Programme for Government 2024-2025 on Wednesday 4th September. The government publishes the annual Programme for Government at the start of September, establishing actions taken in the coming year and beyond, including the legislative programme for the next parliamentary year.
John Swinney was appointed First Minister in May, which was quickly followed by a snap General Election and then a Scottish Parliament summer recess. As such, the Programme for Government is the first major indicator of the direction of travel under the new Scottish Government leadership.
The programme was published against a backdrop of intertwined crises. After more than a decade of austerity, many of Scotland's public services are already at breaking point, and household budgets have faced an unprecedented squeeze amid the cost-of-living crisis. Child poverty has also increased, and net zero targets have been missed or abandoned.
Since becoming First Minister, John Swinney has set out four priority areas: eradicating child poverty, growing the economy, tackling the climate emergency, and ensuring high quality and sustainable public services. While these are noble aims, the challenge is how to achieve them.
Can the Programme for Government tackle today’s challenges?
In short, the Programme for Government includes measures that have the potential to address key areas of the intertwined crises we face. The programme includes a raft of legislation and a series of policy interventions, strategies and approaches. Below we highlight some of the commitments that can - if designed and implemented effectively - materially contribute towards the four goals set out by the Scottish Government.
In the Programme for Government 2021-2022, the government set out to take forward a Community Wealth Building Bill – the first of its kind in the world – in this Parliamentary term, aimed at “helping create and protect jobs and enable greater community and third sector ownership of assets.” This year’s programme reaffirmed this commitment. If harnessed effectively, a Community Wealth Building Bill can act as a powerful framework to decarbonise local economies while transferring physical and financial assets into the hands of local economies and communities. This not only represents an opportunity to mark a defining directional change in Scotland’s approach to economic development – it can also set a precedent that extends beyond Scotland’s borders. Should the Bill prove transformative, it can create a ripple effect, enabling Scotland to become a test case example for other countries to replicate and build on.
The Scottish Government’s renewed commitment to introducing a Green Industrial Strategy is welcome. As other countries turn to proactive industrial strategy to overcome modern challenges, it is critical that Scotland does not get left behind. Scotland can build a stronger and more productive economy while also transitioning to net zero and creating a fairer society, but achieving this will require embracing a new approach to policy making.
In our ongoing industrial strategy project in collaboration with UCL Institute for Innovation and Public Purpose, Mariana Mazzucato and Laurie Macfarlane set out why we need a mission-oriented industrial strategy. This approach recognises that challenges like climate change do not just require a small number sectors to transform – they require system-wide transformation. It also acknowledges that governments create and shape markets – not just fix them. Finally, it recognises that economic policy must deliver sustainable and inclusive outcomes by design.
The climate crisis remains the single biggest threat to our future and a just transition to net zero can be our single greatest economic opportunity. As such, the Programme for Government commitment to “support a just transition to a green economy” by publishing its Energy Strategy and Just Transition Plan is welcome. This publication is long overdue, and it is critical that it adheres to the scientific evidence that no new oil and gas fields are incompatible with climate targets. Further, as a just transition to net zero will require a fundamental restructuring of our labour market and industrial base, the plan should establish a roadmap to secure a thriving, sustainable future for impacted workers and communities. As areas within this, like workers’ rights, are reserved, this will also require a coordinated approach between the UK and Scottish Governments.
In addition to new legislation, there is also an array of bills currently progressing through parliament, one of which is the Housing (Scotland) Bill. Scotland faces an acute rural and urban housing crisis, the causes of which are multifaceted, from the dramatic rise of short-term lets and second homes to sky-rocketing rents. Soaring rents have eroded living standards across Scotland, contributing to poverty, homelessness, household debt and hunger. The reaffirmed commitment in the Programme for Government to introduce long-term rent controls is very welcome.
Future Economy Scotland polling revealed that 82 percent of people in Scotland support the introduction of rent controls. Evidence from around the world shows that rent controls, if carefully designed and implemented, can improve housing affordability without creating the kind of negative consequences claimed by vested interests. It is imperative amid a cost-of-living and housing crisis that MSPs put tenants’ rights, economic security and living standards at the heart of decision making as the Bill progresses through parliament.
The Land Reform (Scotland) Bill was introduced in March, and represents an important milestone in Scotland’s land reform journey. It contains significant developments, including measures to empower communities with more opportunities to own land. However, transforming the way that land is owned, used and managed is crucial to delivering a just transition and meeting Scotland’s climate and nature targets, which the Bill lacks ambition on, as well as falling short on action needed to tackle Scotland’s housing crisis. The Bill needs to be strengthened in this regard, as well as additional legislative approaches to include fiscal reform to tackle an unfair and inefficient land taxation system.
In addition, the Programme for Government committed to introducing a Natural Environment Bill to “establish the framework for statutory targets to restore and protect nature.” In recent years, the Scottish Government has sought to attract responsible private investment into Scotland’s natural capital. As Future Economy Scotland research reveals, restoring nature by 'de-risking' private finance will not help the public finances — and risks undermining a just transition. With peatland restoration and woodland creation targets off-track under the current approach, this Bill should be used to explore alternative investment models to meet Scotland's nature targets that are aligned with a just transition.
What was missing from the Programme for Government? Among the areas absent from the programme is the Wellbeing and Sustainable Development Bill, which the government had committed to exploring in the 2023 Programme for Government. This, it stated, aimed to support “greater implementation of the [National Performance Framework], and to ensure the interests of future generations are taken into account in decisions made today.” The previous Programme for Government also committed to introduce a “landmark” Human Rights Bill as part of the government’s efforts to “take action to tackle structural and systemic barriers to equality”, which no longer appears in the most recent publication. It is yet to be seen as to whether these bills will be in the next programme.
Fiscal constraints will harm policy ambition
The announcement of £500 million in cuts significantly hampers the Scottish Government’s ability to make Programme for Government legislation transformative and severely undermines the ability to tackle the intertwined challenges of today. A cursory glance at the last decade shows us that we cannot cut our way to a wealthier, fairer, greener economy.
While UK fiscal constraints have undeniably negatively impacted Scotland’s public finances, the Scottish Government urgently needs to harness revenue-raising powers in upcoming budgets and in legislation. The Scottish Government should aim to fully harness devolved tax levers to address the fiscal gap, protect vital public services and invest in infrastructures of the future.
For instance, the distributional consequences of freezing council tax will disproportionately benefit wealthier people. The Scottish Government should enact a long overdue overhaul of council tax, and replace it with a progressive property tax based on up-to-date property values, with a higher surcharge for second homes. Research by the Scottish Trades Union Congress (STUC) shows replacing council tax with a proportional property tax could raise nearly £1bn. In addition, as outlined in our recent land reform report, the Scottish Government should take the necessary steps during this parliamentary term to lay the groundwork for implementing a land value tax, including addressing the data gaps. Further, introducing frequent flyer tax could help to curb emissions and address carbon inequality. Future Economy Scotland research shows that the richest households consume 11 times more carbon from aviation than the poorest households.
Finally, the Scottish Government should create sustainable long-term revenue raising through taking equity stakes in Scotland’s offshore wind developments. The reallocation of the ScotWind funds demonstrates the vulnerability of one-off options fees, creating a situation where we kick the can down the road. In contrast, in April 2024 Denmark launched its biggest offshore wind tender to date, stipulating that successful companies will co-own the developments with the Danish government, which will take a 20% equity stake in each project. Following Denmark’s lead in future ScotWind rounds would mean a share of the profits would flow to the Scottish Government annually once the project is operational.