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Spending Review

Funding boost for Scotland, but questions remain

Rishi Sunak delivering his speech

Chancellor Rishi Sunak unveiled a package of measures aimed at improving the country’s infrastructure, helping the low paid and getting the jobless back into work.

Announcing his Spending Review, he outlined the extent of the economic crisis facing the country, but drew concern that his help for the devolved nations may increase tensions with the UK government.

He said that the forecast for UK borrowing will be an eye-watering £394bn this year – equivalent to 19% of GDP, and will rise by a further £55bn next year.

The economy will shrink 11% this year, and recover only about half that ground next year.

Mr Sunak promised more money for the devolved nations with an additional £2.4bn for Scotland (of which £1.3bn was related to coronavirus). This is double the £1.2bn new funding provided for 2020/21 at the 2019 spending round. 

It is also in addition to the £8.2bn guaranteed to the Scottish Government in 2020/21, above the funding allocated at the Spring Budget earlier this year in the face of the coronavirus and its impact on the economy.

Scotland will receive a significant boost from more than £100bn of capital investment across the UK in 2021/22, aimed at improving connectivity and productivity.

He announced an £11m acceleration of City and Growth Deal funding over each year that remains in four Scotland Deals.

Tay Cities, Borderlands (Scotland), Moray and the Scottish Islands will be funded over 10 years, rather than 15 years, releasing funding more quickly to enable projects to come online sooner.

By bringing forward the investment, Tay Cities will receive an additional £6.3m each year, Borderlands (Scotland) an extra £2.1m, Moray an extra £1.1m and the Scottish Islands an additional £1.7m.

The Government is committed to at least one free port in each of Scotland, Wales and Northern Ireland, with locations to be jointly decided by the UK Government and the devolved administrations.

On the cultural front the Government announced £29.1m for Festival UK with projects expected across Scotland, Wales and Northern Ireland.

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He confirmed that a UK Shared Prosperity Fund will replace the structural funds received from the EU.

However, the package of support for the devolved nations drew questions about how it may be allocated.

Regarding the implied boost to Scotland’s funding for Covid support, the Fraser of Allander Institute (FoAI) notes that, for example, the Spending Review works on the assumption that 100% business rates reliefs for businesses in tourism and hospitality sectors in England will cease completely in 2021/22.

The review notes that the UK Government is considering options for further Covid-19 related support through business rates reliefs. In order to ensure that any decisions best meet the evolving challenges presented by Covid-19, the government will outline plans for 2021-22 reliefs in the New Year.

“The implication here is that, if some form of business rates reliefs for the hospitality sector does continue in England in 2021/22, additional consequentials will flow to the Scottish budget at that point,” said the FoAI.

The FoAI argues that the acceleration of the City and Growth Deals is “more about soundbite than substance”, with the schemes being implemented over 10 years rather than 15, but without any direct funding implications.

On the UK Shared Prosperity Fund it warns that “tensions are likely to emerge over both the levels of funding identified, and how funds will be allocated and prioritised.”

The Chancellor has committed funding of £1.5bn in future years to match EU funding receipts but the FoAI says this “ignores UK Government match funding that might have previously been provided”. There is also concern about the way in which the UKSPF may operate in a devolved context.

“The scheme will apparently operate ‘UK wide, using the new financial assistance powers in the UK Internal Market Bill’. Whilst the fine details are awaited, the lack of explicit reference to the devolved governments will antagonise intergovernmental relations in area where tensions are already running high,” said FoAI.

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The next stage of the Plan for Jobs was announced – including £1.6bn for the landmark Kickstart scheme in 2021/22, which will see the creation of up to 250,000 government-subsidised jobs for young people.

Pay rises in England for half of public sector workers will be paused, except for doctors and nurses and the National Living Wage is increased by 2.2%, benefiting two million workers.

As a result of what he called “long-term scarring”, the Chancellor said that in 2025 the economy “will be around 3% smaller than expected in the March Budget”. Unemployment will hit 7.5% next year with 2.6 million out of work.

The foreign aid budget is cut from 0.7% of national income to 0.5% prompting calls for a rethink in order to meet the government’s commitments to the poor.

Business groups were disappointed at the lack of further support for those who have been overlooked in the various government schemes and by a failure to reverse the abolition of tax-free shopping for tourists.

Rain Newton-Smith, CBI chief economist: said “Stark forecasts point to tough times ahead. But through his statement, the Chancellor has made some bold autumn decisions to power a Spring recovery. 

“The Spending Review lays the foundations for a brighter economic future.

“A new National Infrastructure Bank, long-term funding for innovation, and a comprehensive plan for creating jobs and renewing skills are just some of the building blocks needed to deliver on this vision. It’s right to take this opportunity to plan for tomorrow.”

Andrew McRae

Andrew McRae: ‘no decision to plug the holes in the current coronavirus support package’

Andrew McRae, the Federation of Small Businesses’ (FSB) Scotland policy chairman, said: “Disappointingly, there was no decision to plug the holes in the current coronavirus support package and provide aid for the around one in five Scottish FSB members that have had little or no support from governments in London or Edinburgh. This omission needs to be tackled at the earliest opportunity.”

Helen Dickinson, chief executive of the British Retail Consortium, said: ‘We are encouraged that the government is considering options for further rates relief for businesses affected by Covid.

“We were disappointed that the Chancellor did not choose to reverse the decision to end tax-free shopping for international visitors to the UK. 

Political reaction

Responding to the Chancellor’s statement, Shadow Chancellor Anneliese Dodds said the government’s plans will create “half” the number of jobs that Labour’s plan will create.

The SNP’s Treasury spokeswoman Alison Thewliss said that instead of rising to £8.91 per hour, the national living wage should rise to £9.50, as recommended by the National Living Wage Foundation.

Inflation change

Alongside the review, the Chancellor confirmed that the retail price index (RPI) measure of inflation will be replaced by the consumer prices index plus housing (CPIH), but not until 2030 to limit the impact on savings. Investors who lose out will not be compensated.

Tom Selby, senior analyst at AJ Bell, said: “Chancellor Rishi Sunak has pushed the effective abolition of the RPI inflation measure as far back as he can to ensure it is not ‘materially detrimental’ to holders of index-linked gilts.

“However, from 2030 onwards the message is unequivocal: if you are negatively impacted by this, tough. The Government is clear it will not provide any kind of compensation to those who lose out as a result of the downgrade in the value of RPI. 

“This looks set to include millions of defined benefit (DB) scheme members whose pensions are linked to RPI. In addition, those who have bought annuities from insurance companies promising annual RPI inflation rises will also bit hit.

“While the average difference between RPI and CPIH might look small at 0.8 percentage points, over time that could lead to a retirement income worth thousands of pounds less.”

As it happened:

1.15pm: Labour responds with question on Brexit

Shadow Chancellor Anneliese Dodds says that with only 40 days until the end of the EU transition period the Chancellor made no mention of Brexit.

1.10pm Markets

Having anticipated most of the measures announced, the FTSE 100 barely moved throughout the speech, trading 40 points lower at 6,392.54.

1.06pm: New infrastructure bank

A national infrastructure bank will be set up in the north of England in the Spring and will work with the private sector.

1.04pm: Overseas aid cut

Mr Sunak has cut the foreign aid budget from 0.7% of national income to 0.5%.

“Our intention is to return to 0.7% when the fiscal situation allows,” he adds.

12.58pm: More funding for devolved nations

Scotland will receive an additional £2.4bn, Wales will get £1.3bn and Northern Ireland £0.9bn.

The whole of the UK will benefit from the UK Shared Prosperity Fund to replace EU funding ending next year.

12.55pm: Low Pay

National Living Wage increased by 2.2%. It will benefit two million workers. The 2.1m public sector workers who earn less than the median wage of £24,000 will be guaranteed a pay rise of at least £250.

A million nurses, doctors and others working in the NHS will get a pay rise but rises in the rest of the public sector will be paused next year.

12.53pm Borrowing

The forecast for UK borrowing this year is £394bn this year, equivalent to 19% of GDP.

12.50pm: Infrastructure commitment

Chancellor promises a once in a generation investment in infrastructure

11.30am: FTSE 100 lower

The Chancellor leaving Number 11 for the Commons

The FTSE 100 fell back as investors anticipated weak economic forecasts in Chancellor Rishi Sunak’s spending review due at 12.30pm.

The index was 40 points lower at 6,391.96, failing to follow the record-breaking session on Wall Street.

However, analysts believe the Commons statement could hit the pound, which would normally favour internationally-focused blue-chips on the FTSE. Financials and holiday groups were among weaker performers.

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