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We do not want exponential growth, because bodies have to live within their financial means, but we must recognise the issues in social security and healthcare.

If you would like me to do so, I am happy to write to the committee to set that out.

No—not at all. I would not accept that. To be blunt, I need to set out in the 2024-25 budget how we are going to deliver all this within a balanced budget. There are no ifs or buts. The detail will be there and we will set out how we are going to close the gap, because we have to. Unlike other Governments, which can borrow their way through difficult scenarios, we must balance our budget. That is a fiscal rule that we cannot escape and we have only limited levers to use in balancing the budget. Since 2007, we have had unqualified accounts from the Auditor General for Scotland, which show that we have managed to do that, despite the increasing challenges.

You mentioned NCS and childcare, which are areas where we need to create some headroom. I spoke earlier about childcare. If we want to increase the very good offer that already exists, which we see as being clearly linked to the priorities of growing the economy and growing the tax base, we must create headroom to do that. We might not be able to do that in one year, in 2024-25, which will be a very challenging year in which to do anything at great scale, but we can set out multiyear objectives and priorities for spending. I will be setting out the detail for the budget and for our next few years of spending plans and priorities. Childcare is a good example. We must ensure that we set out what and how we will deliver in the next few years.

Far from

“hoping that something will come along”,

we must consume our own smoke. We have very limited levers, so what you have said could not be further from the truth.

We are meeting ministers over the next few weeks.

We will write back to the committee with details of why we think that that has increased, if that is okay.

If only we could!

You are right to point out that that was the position. The Scottish budget for 2023-24 set out that it is for individual public bodies to ensure that workforce plans and projections are affordable in 2023-24 and for the medium term. We are really looking for public bodies to ensure that their workforce numbers and models are within their financial envelopes.

If we were to take a policy of returning to pre-Covid levels across the whole public sector, that would be a bit of a blunt tool. In recognition of the fact that some areas of the public sector will, by necessity, have to continue to grow—the health service is one example, and social security, when it is delivering its programmes, is another—the policy needs to be more nuanced than that.

Essentially, we have said that public bodies’ workforce numbers need to be affordable within their financial envelopes. We have set out some workforce scenarios in the MTFS, with low growth being 0.3 per cent and high growth being 2.2 per cent. That is in recognition of the fact that some parts of the public sector will continue to grow. The approach is more nuanced. However, the overall message is that the public sector must ensure that its workforce is affordable and that projections are within the financial envelope.

I thank the committee for inviting me here today. As I said in the chamber, this is the first MTFS that I have published as finance secretary. It is transparent about the issues that we face as we look at the public finances over the next five years, and it sets out how the Government will maintain a sustainable financial position over the medium term.

Although the Scottish economy has proved to be more resilient than expected, the fiscal outlook remains among the most challenging since devolution, with the Covid pandemic, the war in Ukraine and soaring inflation putting significant pressures on the economy, on society and, of course, on public finances. We are committed to tackling those pressures head on, which is why I have ensured that the MTFS does not shy away from highlighting the scale of the challenge ahead.

Although I welcome the recent fall in inflation, falling inflation does not reverse the increasing pressure on households and businesses, with prices expected to be about 20 per cent higher by the end of 2023 than they were at the start of 2020. Indeed, we are experiencing record falls in living standards, which are not set to recover to pre-pandemic levels until about 2026-27.

The Scottish Government’s resource funding outlook has improved since the 2022 MTFS. The main drivers in that regard are significant improvements in the forecast net tax position, which has increased by an average of £1.1 billion per year since May 2022, and increases to the block grant as a result of announcements in the autumn statement and spring budget.

However, the funding outlook for the next financial year—2024-25—is set to be particularly challenging. The SFC has stated:

“Once we account for social security spending plans and ring-fenced Scottish local authority funding, we expect there to be less real-terms funding in 2024-25 than there is in 2023-24.”

We anticipate a negative tax reconciliation of £687 million, according to our current forecast, with the original forecasts having been produced at a time of significant economic uncertainty caused by the Covid-19 pandemic. As that figure exceeds the Scottish Government’s borrowing limit by £387 million, it will reduce the amount of funding that will be available for the budget. We also expect a small real-terms reduction in the block grant next year.

The risk of reconciliations for forecast error exceeding the Government’s borrowing limits will continue to grow. Borrowing powers are fixed in nominal terms, so there is now a 14 to 27 per cent probability of total negative reconciliations breaching the £300 million annual borrowing powers for forecast error. Therefore, I will continue to press the United Kingdom Government for further powers and for these limitations to be addressed as part of the fiscal framework review.

With regard to resource spending, our projections show an increase in spending from £45.2 billion in 2023-24 to £52.8 billion in 2027-28, meaning that our spending requirements could exceed our central funding projections by £1 billion in 2024-25, rising to £1.9 billion in 2027-28.

The key drivers for spending growth are the public sector pay bill, social security and health and social care. Inflation has significantly eroded our spending power, particularly on pay, as fairer pay deals for our valued public sector workers to support them through the cost of living crisis are driving spend above what was modelled at the resource spending review.

The pressures are also severe on capital spending, with the price of infrastructure projects rising by 14.1 per cent this year, according to the Office for National Statistics. The UK Government’s failure to inflation proof our capital budget means that we are facing a real-terms cut every year up to 2027-28. Again, the challenge is particularly acute in 2024-25, when funding will reduce by 3.7 per cent in real terms.

On the current trajectory, we expect the divergence between capital funding and expenditure to grow to around £900 million by 2025-26. Therefore, these are incredibly challenging times, and I am committed to taking the difficult decisions in managing our public finances over the medium term in order to deliver on the key priorities for the people of Scotland and to mitigate the pressures that are being felt by Scotland’s most vulnerable people.

This MTFS sets out the three pillars that will underpin that approach. The first pillar is a focus on public spending to achieve our three critical missions: a commitment to prioritise exploring targeting and adopting a multiyear approach to the budget; delivering a refreshed set of actions, as initially set out in the resource spending review; and delivering a 10-year programme of public service reform.

The second pillar is supporting business to invest and to create new jobs. We recognise the link between economic and fiscal policy to support sustainable inclusive growth and the generation of tax revenues. As well as supporting entrepreneurs, start-ups and scale-ups and helping business raise productivity, we need to find the fiscal headroom to expand our childcare offer, as that will be a key part of our approach.

Finally, the third pillar of our approach is maintaining and developing our strategic approach to tax policy. Our key commitments in that regard include establishing an external tax advisory group this summer, with the outcomes feeding into next year’s budget and the Government’s longer-term tax strategy, which is to be published alongside the MTFS in 2024.

The Scottish Government will continue to do everything possible with the limited levers that we possess to manage our public finances on a sustainable trajectory, and as part of the fiscal framework review, we will continue to make the case for having the fiscal powers and levers to enable us to meet the fiscal challenges now and into the future.

Clearly, it is a very challenging situation, given that the levers that we have do not allow us to cover that extent of negative tax reconciliation. We have the ability to cover up to £300 million, but that leaves a considerable gap, which is a challenge. As you can imagine, that is one of the key priorities in our discussions with the UK Government around the reform of the fiscal framework review.

We require a number of additional levers to manage not only negative tax reconciliation but peaks and troughs and economic challenges and events—for example, Covid and other shocks—that we do not have the levers to deal with, given our largely fixed budget and limited borrowing powers. At the top of the list in relation to the review is to gain a more expansive borrowing power to be able to manage the negative tax reconciliation.

As I said in my opening statement, the reason for such a large negative tax reconciliation related to the forecasts that were made during Covid and which, given the economic shock at that time, were clearly out. Two years later, we are having to deal with that, and in our discussions with the UK Government, we will want to press it for more flexibility in dealing with next year’s negative tax reconciliation or any that should arise in future. I should also say for completeness that we anticipate the tax reconciliation forecast being in a much more positive position beyond next year, but we still have to deal with next year.

We are not starting from scratch here. You will have heard my predecessor, John Swinney, talk a lot about public service reform. We have worked over quite some time to get public bodies thinking in a more sharply focused way about efficiency, how they work with one another and their future plans for delivering better outcomes in a more efficient way.

There is a 10-year programme of public service reform that seeks to do all that. My job is to bring a pace and acceleration to that work across Government, to have a radar beyond the individual bits and to ask, “What does that look like as a collective public sector picture?” I also need to ask how we make sure that we do not just do the minimum in that space, but that we get every public body to maximise what they do in the most efficient way. I mentioned NRS and Scottish Water. How do we link up the best performing bodies and make sure that what they have done happens everywhere?

You are absolutely right about the constraints on migration. I saw that there was quite a lot of commentary from the business community this morning about the challenges that businesses are having in recruiting to large sectors of the tourism industry. Business is very clear that that is down to them not being able to access the labour from the European Union that they were previously able to access. They are very explicit about that.

We are trying to do what we can. We are about to launch our new talent attraction and migration scheme, which attempts to encourage people to come and live and work in Scotland. As I said earlier, there are plenty of opportunities for people to do that and we want to promote those opportunities.

You asked about bringing those issues into discussions about the fiscal framework. You will appreciate that a lot of those discussions are quite technical because they concern issues such as borrowing powers, limits and the reserve, rather than necessarily being about the wider policy issues that form part of the backdrop to all this. That does not mean that such issues are not important—we raise them with the UK Government all the time—but the negotiations on the framework will be about the technicalities of what the framework is at the moment and the key things that need to change and be adjusted that will make a difference to our ability to smooth out things such as negative tax reconciliation. That will not be job done, however. Getting some adjustments to the framework is just part of a process. We want those additional levers, including over migration. Those discussions, calls and asks will of course continue beyond the detail of the framework.