Can Kate Forbes force the SNP to accept there is no magic money tree?

The woman who could succeed Nicola Sturgeon has delivered hard economic truths to her party.

The Finance Secretary Kate Forbes at the Scottish parliament. Photograph by Fraser Bremner - Pool/Getty Images.

Some Scottish ministers will have enjoyed a Spectator post this week that labelled Kate Forbes a “Tartan Thatcher”, following the Finance Secretary’s brutal spending review on Tuesday (31 May). “A few of the losers are quite sore,” admitted a source in Forbes’s team. An unhelpful comparison to the great bogeywoman of Scottish politics will be especially pleasing for those vying with her to be Nicola Sturgeon’s successor as first minister.

But who could be a popular finance minister in the current climate? In the review, Forbes plunged her government into a cold bath of fiscal reality, delivering the most punishing set of figures in 15 years of SNP rule. With the cost-of-living crisis intensifying, inflation forecast to be around 9 per cent and growth around a measly 1 per cent in coming years, the nationalist government has had to dramatically curb its trademark, big-spending generosity.

For a party that has always taken a flash-the-cash approach to public finances, it is something of a culture shock. Even the process for arriving at the budgeted figures was new and painful – Forbes and her officials met with each cabinet secretary and their senior civil servants for a deep dive into departmental outgoings. Ministers were told to choose their key priorities, jettison others, and find ways to make Scotland’s well-funded public services more efficient.

The result is that most devolved departments will see their budgets either cut in real terms or frozen. Sturgeon is still determined to prioritise her commitment to spending more on welfare than Westminster, a gap that could rise to £1.2bn annually and that must be funded from elsewhere.

Details of where the savings will fall are slowly emerging, and one key target is public sector jobs. Although there are unlikely to be compulsory redundancies – “every finance secretary has proposed it and it never goes anywhere,” a source told me – the numbers employed by the state are expected to drop sharply in the next few years, probably through retirals, vacant posts being left unfilled and temporary contracts not being renewed. It is understood that Forbes has been taken aback by the recent growth in employment at some government agencies and quangos, including those with no particular role in managing either Brexit or the response to Covid. Among those felt to be over-staffed are Transport Scotland, Marine Scotland, Food Standards Scotland and the Scottish Environment Protection Agency. “Their job numbers have grown significantly, for some reason. Something’s not adding up,” said a finance ministry insider.

Forbes and her team accept that the nationalist government has a bad habit of “deciding to do lots of new things and making big announcements, but then other things we’re already doing don’t stop. It’s clear we need an efficiency initiative. We can’t feed hungry kids if you keep public sector workers in jobs where they don’t have much work to do.”

They also argue that the Scottish economy has become too dependent on the state, which has simply grown too large for comfort. In the longer term this undermines the case for independence: “We can’t become independent on the current trajectory – we have to get fighting fit.”

Another area identified for savings is the much-criticised enterprise network that supports Scottish businesses. Forbes is determined to “reduce the clutter” around the network, in which there are a plethora of bodies offering very similar services. This confuses those seeking financial and strategic aid. “Some businesses find there are ten different places to go, from Scottish Enterprise [SE] to the Scottish National Investment Bank [SNIB] to the Business Gateway to Tourism Scotland and so on,” said a source. “The enterprise agencies need a single interface with the world – one shop front and everybody being clear about what they are contributing.” The various agencies have been told sternly to deliver a better customer service. “We don’t want Scottish government officials doing business scale-ups along with SE and SNIB – it’s a waste of money.” Forbes is taking a carrot and stick approach – the carrot is that more efficient agencies will have greater sums to spend on other aspects of their role, the stick that they will be held publicly accountable each year by the new economic delivery board.

The Scottish government will also reduce its property footprint. It’s not a question of selling land, said a source – “we don’t actually own that much” – but of using rented space more efficiently. A survey is currently under way on the future need for state property, given the ongoing shift in working habits caused by the Covid pandemic. Victoria Quay, the vast government HQ in Leith, Edinburgh, is said to be “really quiet”. Forbes is refusing to renew a host of multimillion-pound leases in Edinburgh, and will ask different departments and agencies to share office space.

In all of this, there isn’t much blame to be placed on Westminster. The Treasury has dug deep to fund both Covid-related furlough spending and now to tackle the cost-of-living burdens facing families across the UK. The SNP finds itself in the unusual position that even it doubts it can get away with grumbling about London. The fact that it has set aside £20m to spend on an independence referendum next year, despite the deep cuts elsewhere, has rather removed the moral high ground.

Forbes still hopes that the UK government will see fit to grant her borrowing powers. This is in part because welfare spending is demand-led, which makes it difficult to budget accurately at the beginning of the financial year. She is legally obliged to balance the budget, which is compared with “trying to land a 747 on a postage stamp every year. We can forecast a welfare budget at £1.8bn that then comes in at £2.3bn,” said a source. “It’s impossible.” Borrowing powers are seen as a way of providing flexibility in such circumstances.

The timing of all this is not great for the SNP. The harsh budget figures come on the back of major problems with Scotland’s newly nationalised rail service and a botched national census. It all threatens to take the sheen off the SNP’s reputation for competence among those voters who have continued to support them throughout their long years in government.

The party may also have to look again at the income tax system, which is now mostly devolved. Claims that changes north of the border have created a more progressive system will be challenged as more and more Scots are dragged into paying the nation’s higher 41 per cent rate within the next few years. The Scottish Fiscal Commission says that with the higher rate expected to remain static at £43,662, and with wages set to increase to keep up with inflation, by 2027-28 there will be almost 697,000 higher-rate taxpayers in Scotland, equivalent to 17 per cent of all those paying tax.

Ministers believe that a rebound in the fortunes of North Sea oil and gas will boost Scottish tax revenues, which may give them some room for manoeuvre when setting rates. They are also wary of damaging Scotland’s competitiveness in the eyes of foreign investors, if taxes are seen to diverge too starkly from those set by London. “We can’t fund public services without a competitive economy,” said a source close to Forbes. “The best way of expanding the economy is to expand the tax base. We need more higher earners to do that.” She is said to be keeping a close watch on the behavioural impacts of tax policy, but as yet has found no evidence of divergence proving harmful.

On the upside, this week’s tough spending review might ultimately be seen as the moment that Scotland’s devolved politics finally began to grow up. There is, clearly, no magic money tree, and it’s hard to blame Westminster for global inflation and the consequences of war. The devolved government is finally having to make hard fiscal choices and institute difficult reforms, and can expect to be held accountable for them.

“This statement had to happen – we are ripping the plaster off,” said an ally of Forbes. The truth often hurts – can the SNP, and the wider Yes movement, handle it?