It is with pleasure that I speak on behalf of the Finance Committee in this stage 1 debate on the Budget (Scotland) (No 5) Bill for 2016-17 and to our draft budget report, which was published last Friday.
Scrutiny of the draft budget always works to a tight and demanding schedule. This year’s timetable was even more challenging than usual as the Scottish Government had to await publication of the UK Government’s spending review in late November 2015 before it introduced its budgetary proposals. I would like to thank all those who contributed to our scrutiny, particularly given the challenging circumstances.
As most members are aware, we approach budget scrutiny on the basis of four principles: affordability, which is the wider picture of revenue and expenditure and whether they are appropriately balanced; prioritisation, which is a coherent and justifiable division between sectors and programmes; value for money, which is the extent to which public bodies are spending their allocations well and achieving outcomes; and budget processes, which is the integration between public service planning and performance and financial management.
This year, we concentrated our scrutiny on affordability and budget processes. Historically, budget scrutiny has focused almost entirely on the Government’s spending plans, with little consideration of taxation. However, the devolution of some tax powers, along with the expectation of more to come, fundamentally changes the process and caused us to reassess it. Last year, we considered in detail the land and buildings transaction tax and landfill tax; this year, a key element of our scrutiny was on the Scottish rate of income tax.
Subject committees considered Government spending plans in their areas and we recommended that they examine the extent to which public bodies are adopting a priority-based budgeting approach to deliver the outcomes set out in the national performance framework. The Finance Committee welcomes the work of the subject committees in making the shift towards a more outcomes-based approach. I thank them for their helpful contribution to our scrutiny process.
To enable us to hit the ground running when the draft budget was published, we issued separate calls for written evidence on, in addition to taxation, the work of the Scottish Futures Trust and progress in delivering preventative spending. I thank all who submitted evidence.
Given the new tax powers, for the first time we questioned the Deputy First Minister over two sessions. The first session considered the Government’s tax proposals in detail; we then scrutinised its spending proposals at an external meeting in Pitlochry. That worked well and we will consider the need for any further changes to budget scrutiny as part of our legacy report.
In Pitlochry, we also held workshops with representatives of local businesses, voluntary organisations and public bodies, hearing first-hand about the impact of public spending on their community and how spending should be prioritised. The key issues raised included flood prevention, access to high-speed broadband, transport, housing and community empowerment. Nevertheless, given the topicality and importance of issues relating to taxation, I intend to largely concentrate on those, although I will also briefly touch on the work of the Scottish Futures Trust and on delivering the prevention agenda. Other members will wish to discuss the Government’s spending priorities and I look forward to hearing from them.
Turning first to affordability, the committee considered the need for a balanced budget, with expenditure being no greater than revenue. The draft budget proposes to apply a 10 pence Scottish rate of income tax, meaning that Scottish taxpayers will continue to pay the same rate of income tax as those in the rest of the UK.
To inform our consideration of the issue, we held several oral evidence sessions during the autumn. One or two witnesses favoured a reduced rate of SRIT on the basis that that would act as a stimulus to the wider economy, boosting jobs and growth; others advocated an increased rate on the basis that higher revenues could be used to reduce inequalities. However, a clear majority of responses supported the maintenance of the 10p rate for 2016-17, citing factors such as the complexity for employers, the mobility of labour, the economy’s on-going but incomplete recovery from recession, the impact on our workforce, which has endured below-inflation pay rises in recent years, and the blunt nature of the power.
Having considered the matter in detail in our report, the committee unanimously supported the Government’s proposal to set the Scottish rate of income tax at 10p for 2016-17. Nevertheless, we heard some innovative proposals for changes to taxation going forward, and recommended a wide-ranging debate across Scotland on taxation policy in anticipation of expected new financial powers from April 2017.
To inform such a debate, one of our key recommendations is that future decisions on taxation policy must be informed by behavioural analysis. Expert witnesses explained how taxpayers could be expected to change their behaviour in response to tax changes. Evidence from around the world suggests that higher rates of income tax are likely to lead to behaviours that impact negatively on tax revenues, including reductions in labour supply, tax avoidance and migration. Those behavioural responses are particularly important in relation to high earners, who are more likely to have the means, mobility and motivation to change their behaviour in response to tax changes. Professor David Bell told us that the highest 10 per cent of taxpayers pay more than half of income tax revenues, while the top 1 per cent contributes around a fifth. He estimated that there are around 11,000 additional-rate taxpayers in Scotland. As such a large proportion of tax revenue depends on a relatively small number of taxpayers, the committee was clear that it is imperative that the potential impact of behavioural responses on tax revenues is assessed before changes to taxation policy are made.
Ultimately, the intention underlying the devolution of tax powers is that the Scottish Parliament will be responsible for raising more of the money that it spends and thus that it will be more accountable to the electorate. Nevertheless, a large part of its income will continue to be dependent on the block grant and, as members know, the mechanism by which it will be reduced to compensate for devolved tax powers is of supreme importance to Scotland’s future financial wellbeing. We have consistently raised concerns about the impact of relative population growth on the indexation of the block grant adjustment. We therefore welcome the fact that the Deputy First Minister supports the indexed deduction per capita method and we recommend that that method is agreed in the fiscal framework that will underpin the devolution settlement.
Members will not need reminding that time is of the essence in agreeing the framework if the Parliament is to scrutinise it prior to dissolution. We look forward to questioning the Deputy First Minister and the Chief Secretary to the Treasury on the framework in the coming weeks to consider whether it meets the criteria agreed by the Smith commission and, importantly, whether it is fair to Scotland and to the rest of the UK and meets the no detriment principle. The Finance Committee has consistently raised concerns about the current lack of transparency in relation to block grant adjustments arising from the devolution of financial powers and we believe that full transparency is an essential element in securing public confidence in the process. It is therefore imperative that the fiscal framework contains detailed explanations of how the block grant will be adjusted in 2016-17 and beyond.
Regarding taxes that are already devolved, we have closely followed developments in the first year of their operation, particularly with regard to the land and buildings transaction tax. Stakeholders raised concerns that LBTT had a negative effect on sales at the higher end of the property market. Although it is not possible to fully assess LBTT’s impact before outturn figures for the full year are available, the latest indications are that high-value sales are returning to previous levels, while according to Your Move and Acadata, the middle and lower tiers of the market have been given a new lease of life by the Government’s approach. On that basis, we are supportive of the proposal to maintain the current rates and bands for residential LBTT. However, we have also recommended that the Government conducts and publishes a review of LBTT once the outturn figures for its first year of operation become available. That will doubtless assist the Parliament in its scrutiny of next year’s draft budget proposals regarding LBTT.
Members will be aware that the committee takes a keen interest in the Scottish Fiscal Commission’s work. Indeed, stage 2 proceedings on the bill that puts the commission on a statutory basis will take place next week. I look forward to discussing the issues raised in our stage 1 report then, so I do not intend to discuss the commission at length today, except to reiterate our recommendation that greater clarity is needed on the role of the commission and how it works in practice, particularly regarding whether it is asked to agree the forecasting methodology prior to publication of the official forecasts and what happens if it does not do so.
Regarding the Scottish Futures Trust, the committee invited written evidence on how successful it is in achieving its aim,
“to improve the efficiency and effectiveness of infrastructure investment in Scotland by working collaboratively with public bodies and industry, leading to better value for money and ... improved public services.”
The overwhelming majority of responses were positive and indicated a high level of regard for the SFT, its staff and their professionalism and collaborative approach. Suggestions on how the SFT could further improve its work were also made, and we look forward to hearing the SFT’s views on those suggestions in due course.
Staying with capital investment, an issue around which on-going concerns have been raised relates to the impact of the European system of accounts 2010 regulations, which have led to certain non-profit-distributing projects being reclassified as public sector spending. We note that £398 million was allocated from the capital departmental expenditure limit budget in 2016-17 to cover NPD projects, and we believe that it is vital that full transparency is provided on the impact of reclassification, particularly where it resulted in delays to other planned capital investment projects.
That is no doubt relevant to the fiscal framework negotiations that relate to additional borrowing powers. We would welcome an update from the Deputy First Minister in that regard.
The committee continues to scrutinise the Government’s commitment to
“a decisive shift towards preventative spending.”
We have long taken an interest in the subject. Although there is evidence of progress, the committee remains frustrated by the lack of evidence of a large-scale shift towards prevention. We received more than 40 responses to our call for evidence on the topic, several of which highlighted perceived barriers, including a lack of shared ownership among public sector partners.
It is clear that if a decisive shift towards prevention does not take place, public bodies will face growing demands for services against a backdrop of finite and perhaps diminishing resources. The committee therefore agreed to take further evidence on prevention before reporting its conclusions by the end of this parliamentary session.
As I said, the committee’s budget scrutiny focused on affordability and budget processes, but many other topics were covered in our report, which I am sure that members will raise in the debate. I hope that I have given a flavour of the increasingly broad range of subjects that the Finance Committee considers as part of our draft budget scrutiny, and I look forward to hearing from members.