The Scottish government has gained £820m in extra capital funding after Philip Hammond’s boost to infrastructure investment, partially offsetting a forecast decline in the overall economy.
The chancellor’s focus on greater roads, housing and digital infrastructure spending in England is also due to increase capital spending for the Welsh and Northern Irish governments by £400m and £250m respectively under the Treasury’s formula for funding the devolved administrations.
Optimism about the benefits of that capital spending boost was dampened by gloomy forecasts from the Office for Budget Responsibility that Scotland’s overall economy would be hit directly by leaving the EU. It said Scottish income tax receipts would be £2.4bn lower across the next five years than it had forecast in March, before the EU referendum.
Derek Mackay, the Scottish finance secretary, added that the capital spending increase would still lead to a real-terms cut of 8% in his capital budget, alongside a 9% real-terms cut in day-to-day spending measured against what ministers expected in 2010 they would get.
UK government sources said that the Scottish capital budget was now 25% higher in real terms than forecast last year. Mackay insisted that the extra £820m only moderated the existing cuts.
“The real cost of Brexit has now been revealed – and it is a cost which will be paid through lower growth, lower tax revenues, higher borrowing, higher debt and higher inflation. That is the future the autumn statement revealed the UK faces as a result of leaving the European Union,” he said.
“Above all, this was a massive missed opportunity to end austerity. The chancellor has failed to ease the punitive cuts that are hitting so many Scottish families. Instead he has continued the damaging austerity that is slashing the budget for public services, hammering family finances and failing to revive the economy.”
Although income tax receipts would slightly increase in cash terms, the OBR said they were likely to be £581m lower in 2020/21, at £5.34bn. That is likely to put the very complex fiscal framework funding deal agreed by the Treasury and Scottish government earlier this year under further strain.
That fall in tax receipts is likely to fuel calls for a full renegotiation of that funding formula, which is already anticipated once the UK government resumes control over agriculture and fisheries support, university research and structural funding from the EU after Brexit.
That cash currently flows directly into the Scottish government’s accounts from Brussels, with Scottish farmers and universities receiving more support than the UK average, but would need to be reallocated once the UK quits the EU.
Hammond added that he was pressing on with plans to award a city deal to Edinburgh and surrounding towns , and offer a city deal to both Stirling and the Dundee area. Alongside modest cash transfers under the current fiscal framework, that would increase UK government spending in Scotland by £235m over the next five years.
The Treasury said there would be additional knock-on spending at Scottish universities from Hammond, a £2.2bn increase in research and development spending, and a share of £3.3m for charities from fines for Libor interest rate manipulation by banks.
Analysts with the accountancy firm PwC said the increase in Scotland’s capital budgets, forecast to rise by £257m in 2020/21, will help Nicola Sturgeon’s government boost its faltering infrastructure programme.
Scottish ministers lost nearly £400m in capital spending after the Office of National Statistics ruled they had wrongly assumed major new privately-financed roads and hospital projects would not go on the public books. Larger capital budgets will now allow ministers to finance more public sector projects.
Lindsay Gardiner, regional chair for PwC in Scotland, said: “The extra £800m will give the Scottish government some extra options for improving the country’s infrastructure if they choose to use it in that way – and this will be doubly welcome given that many of the current projects including the Queensferry Crossing and M8/M74 work are nearing completion.”
The Scottish National party was far more critical, however, attacking Hammond for failing to give further help to the North Sea oil industry. “Philip Hammond has failed to move on loan guarantees, failed to encourage exploration and failed to deal with decommissioning; risking the future of the industry and the many jobs it provides,” said Callum McCaig, the SNP MP for Aberdeen South and party energy spokesman.
Mark Drakeford, the Welsh government’s finance secretary, said the extra capital funding was of some help. “Although today’s announcement doesn’t go as far as we had hoped, this extra investment goes some way to restoring the cuts we have seen to our capital budget over recent years.”
