Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, March 18, 2021

Official Report 564KB pdf

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Covid-19 (Tracking the Implications for Scotland’s Public Finances)

Under agenda item 3, the committee will take evidence on tracking the implications of the Covid-19 pandemic for Scotland’s public finances. I welcome our witnesses to the meeting. From the Scottish Government, we have Liz Ditchburn, director general, economy; Jackie McAllister, chief financial officer; Richard McCallum, interim director of health finance and governance; and Andrew Watson, director of budget and public spending.

I understand that the witnesses are content to move straight to questions from committee members. I would be grateful if witnesses could indicate who would be best placed to respond to each question.

The first questions are from Colin Beattie.

I have one or two questions about contingency planning. I hope that we will be coming out of the Covid-19 pandemic in the near future. Managing our way out of it is just as important as coping with it at the moment. What financial contingency planning has been undertaken during the pandemic?

Can Liz Ditchburn answer that question or tell us who is best placed to answer it?

Yes. The question is very much about money, so it would be good to hear from Andrew Watson on how we are building in medium-term financial planning in order to understand what the needs are against the requirements of the pandemic.

I am happy to start on that question. I think that it relates to the current financial year but, as Liz Ditchburn said, we are very much looking ahead to the 2021-22 financial year and beyond that.

I have a couple of observations. First, we have built into the 2021-22 budget, which the Parliament has just agreed, about £3.6 billion of Covid consequentials. The money has been spread across portfolios, notably in the areas of health, business support and transport, but it has also been spread more generally. The combination of that and an overall increase in our core funding means that we have increased the majority of key budgets for next year, so that is quite a strong position to start from.

However, as the committee will be aware, there is a significant difference between the level of Covid funding in the budget this year and the level of Covid funding in the budget next year. Therefore, although we believe that we have allocated as best we can, we recognise that there will be pressures across public services. The Scottish Government has made representations to the UK Government on the overall level of grant funding that might be available next year but, at the moment, we have allocated the budget that is available to us.

Going forward, one of the key points will be the way in which we mobilise all our resources in response to Covid. In the current financial year, there has been a focus on specific Covid funding, whereas the challenge for us in future will be about how all our programmes contribute to the recovery.

I point to our medium-term financial strategy. Despite the high degree of uncertainty that faces us, the Scottish Government decided that we should set out some medium-term financial planning alongside the budget. The committee recently took evidence on our infrastructure investment pipeline, on which we have set out a five-year plan. In the medium-term financial strategy, we set out the fiscal outlook for Scotland and a run of numbers on the budget position. We are trying to set out the overall framework as best we can.

As Ms Forbes observed during the budget process, our budgets might change. We are therefore working closely with delivery partners and portfolios to explore the costs that might emerge in the year ahead. However, the further out the forecasts go, the more uncertainty there is on precisely what will need to be spent. The possibility of further changes happening in the budget during 2021-22 is therefore fairly high, so we need to remain flexible and nimble.

I hope that that answers the question.

It does to an extent, but I am still a little unclear as to what the actual financial contingency planning process is. You mentioned one or two areas, but what are the main areas in which you are focusing on financial contingency planning? What risks have been identified and how have you identified them? You must have a process.

I am happy to start on that, but I might bring in my colleagues. Richard McCallum might want to comment on how the health service is preparing for some of the significant issues in that area.

During the current financial year, we have had detailed processes of engagement with all the portfolios in the Scottish Government. There are key milestones in the course of the year at which they give us their updated assessments of costs and risks. We very much build that into the forward look for the budget for the next year.

One key thing that we will need to do is move money in step with the overall coronavirus road map. The First Minister has clearly set out the latest thinking on the overall road map, and the money very much needs to follow that. We envisage a financial road map over the year ahead, with key milestones. We will bring in the latest forecasts from portfolios about the needs that they are identifying, which will bring choices for us.

Clearly, we have the election coming up, so one of our key milestones will be to pull together for an incoming Administration the latest and most accurate set of assumptions that we can on the costs.

My colleagues might want to comment on some of the more specific risks, such as those in the health space.

From a health portfolio perspective, we are looking at the issue through three lenses.

First, there is the underlying position that health boards and integration authorities are managing. That involves their financial assumptions, almost pre-dating Covid, and the on-going management of finances in the national health service system.

There is then the lens of the additional specific Covid-related costs that have emerged, some of which have almost a non-recurring nature—for example, the costs associated with personal protective equipment, test and protect, and vaccinations—and ensuring that there is sufficient funding to support investment in those areas.

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The third lens, which I suppose relates to the particular points that Mr Beattie is raising, is about what that looks like in the longer term as we recover from Covid. It is about how much of what we are currently spending on things such as vaccination could potentially be required not just in the short term but in the longer term. With health boards and integration authorities, we are working through the potential for some of those things to have a longer-term impact and the potential costs associated with that. Andrew Watson mentioned the financial framework for the whole of Government; through a health and social care lens, we are looking at what the financial challenge is likely to be for the health and social care system in the next three to five years and beyond.

Have you broken down the financial risk and so forth for each major component area in the budget?

We have done that for health. We have looked at areas such as social care, the vaccination programme, test and protect, the NHS and the recovery that will be required by health boards. That is the approach that we are taking in health, but Andrew Watson and my other colleagues might want to say something about the position more generally in Government.

We have a detailed process of monthly forecasting across Scottish Government budgets. Clearly, the emerging impacts of Covid will be part of that. To give some assurance, we provide that overall assessment month by month, looking across the full suite of Scottish Government budgets. That is partly done through a process that involves embedded finance business partners working actively with each of the portfolios to ensure that the forecasts and assessments of risk are as accurate as possible.

Liz Ditchburn might want to add something to that.

I was thinking that, in the way that Richard McCallum talked about health, I would offer the example of how we think about the issue with respect to the economy. Obviously, the extent to which we need to provide business support or the extent to which we can move to providing support for recovery depends on what is happening in the pandemic, such as whether businesses still need to be closed as a result of the public health restrictions that we have to put in place, and what is happening in the economy more broadly.

We continually track what is happening in the economy and for businesses in different sectors. We look at the cumulative impact on businesses that have not been able to trade or generate revenue and at the levels of cumulative challenge relating to cash flow and debt levels. We look at those issues and a range of other things to help us to understand the current health of the business base. We then consider what the implications would be of providing, for example, additional business support. We do contingency planning, which Mr Beattie asked about.

As Andrew Watson outlined, we have a road map, which the First Minister laid out. That is our core plan and what we hope will happen, and we base our budget on that. However, we have to recognise that, if things in the pandemic changed in a negative way and restrictions were needed for longer, that would impact on businesses, which might have to stay closed for longer, and so generate additional requirements for business support.

That is the kind of planning that we are doing. We are always testing scenarios. We have a core plan that sets out what we hope will happen, but we have in place arrangements to assess needs if things were to change and to then build that back into the decisions that ministers take about funds.

That was just to complement Richard McCallum’s example about health.

Do you take into consideration the impact of different funding and spending scenarios on the national performance framework outcomes?

Absolutely—that is one of the things that is always being tracked. Andrew Watson might want to give more detail about how that falls into longer-term budgeting, the spending review and so on but, obviously, we are always seeking to achieve the national performance framework outcomes.

This year, we have been looking at the risks to those outcomes, the most recent data that we have, the changes that we can see as a result of Covid, which indicators are most off risk, which things look as though they will be particularly challenged, and how we can put mitigation in place for that. A theme that comes out strongly when we look at the national performance framework and what has happened as a result of the Covid pandemic is that some of the inequalities are at risk of worsening or are, indeed, already worsening. That tells us that we need to target particular actions at trying to reduce the level of inequality that might result from Covid.

The national performance framework is always there, and it drives some of our immediate spending choices as well as medium-term and longer-term choices.

I do not know whether Andrew Watson wants to say more about how he thinks about that in a medium-term and spending review context.

I was going to make a similar point to the one that Liz Ditchburn made about the emerging evidence of the unequal impact of Covid on society and the outcomes. That is a key point going forward. I am conscious that there is an on-going dialogue with Audit Scotland, for example, about how we can use the medium-term financial strategy and future budgets to set out a more direct line between the way that budgets are allocated and the impact on the outcomes. That will definitely be prioritised as we deliver future budgets and the next iteration of the medium-term strategy.

Thank you. Back to you, convener.

Alex Neil, please. Oh—he is not there. Graham Simpson, please.

Right, I will step into Alex’s shoes. I will move in a slightly different direction and ask about the framework for investment in private companies. As you will know, there have been a number of high-profile cases—BiFab, Ferguson Marine, Prestwick airport—where the Scottish Government has put money into companies that has, in effect, been lost. A massive amount of taxpayers’ money is no longer with us and there is no prospect of getting it back. The panellists know that the Auditor General has been asking the Scottish Government to produce a set of principles on which to base such interventions in future. Where is that?

I will come to all the points that Mr Simpson raised but, by way of context, it is important to say that there are a lot things that we do in investing in the private sector and I think of those in three categories.

The first category is the proactive investment for growth that we make, whether that is through the new Scottish National Investment Bank, Scottish Enterprise and the other agencies or schemes such as the Scottish growth scheme. That is where the bulk of the money goes. That is us saying, as a country, that we want to invest in companies that can do good things for Scotland and where we see a role for us. The way in which those schemes operate—the objectives, principles and means by which they make choices—is all laid out in detail. The new bank has a set of missions, which is a new approach: mission-driven investment. That is category 1 and it is a lot of what we do; it is certainly the majority.

Category 2 is a much more reactive set of support, which is for companies in crisis. Because of Covid, this conversation is very different from the one that we would have had even just over a year ago. We have obviously had to put very significant funds into companies this year to support cash flow. That is lifeline support the likes of which we have never seen before. We have provided much of that in grant form but, in addition, the UK Government has had some significant loan schemes that companies in Scotland have been able to access. However, there are potentially further challenges ahead for many companies.

That second category—reactive support that we have had to provide in this emergency situation—also draws from a series of principles. An example that I will say a little bit more about is the pivotal enterprise resilience fund, which had a very clear set of principles and was starting to help us to make choices about which companies we see as key and where we needed to do something specific. That is an important part of the overall picture.

As you say, there are then the high-profile, one-off cases, which are often policy driven. They do not form a blanket category of businesses that we choose to invest in. Instead, we intervene in response to particular situations. For example, in the case of Ferguson Marine, the contractor had failed but island communities still needed the lifeline services. At that point, the Government made a choice about the right way to get the ferries completed, save the jobs and give the yard a future if possible. That was very much driven by a contractor failure; we had to respond to that failure and work out what to do. A range of options were appraised, which eventually took the Government to a final decision to take Ferguson Marine into public ownership.

The BiFab case was different. It was about how the overall market for renewables and the supply chain could continue to operate in Scotland, and a deal was done to support the involvement of a new investor. Sadly, as everyone knows, that has not worked out as was hoped, and an administration process is going on.

The sale of Prestwick airport was driven by different things again. It is a strategic asset for the whole of Scotland and there was a strategy to take it into public ownership with a clear intention to return it to the private sector.

Those cases were all different and they were driven by different things. They do not form a category of cases where people decided to do things for a blanket set of reasons to do with private investment. Those one-off cases are driven by extensive internal and external advice. Audit Scotland has been able to look at all those transactions in detail, both at the time when they happened and subsequently, and everything that we do is underpinned by the requirements of the Scottish public finance manual.

We have been in conversations with Audit Scotland and the committee for some time about how we can crystallise all that into a single framework. I will give you an update on that. We have always believed—and we still believe—that the Scottish public finance manual underpins everything and, over the past couple of years, a lot more detailed guidance has been put into it to help people who make decisions, particularly on loans, equities and guarantees. The principles work that we have done in the context of Covid has added another dimension to the ways in which we can think about the choices that Governments need to make.

As I hope Audit Scotland would recognise, we are continually in dialogue with it on the matter, and we are learning, drawing from experience and continuing to improve. We have a set of principles that we will integrate into the SPFM, which will help to guide the decisions that Governments need to take. I can say a bit more about the principles if you like, or maybe I should pause there and check whether you want to go back to anything that I have said.

My question was, “Do you have a set of principles?” I think that you are saying that the answer is yes, but we have not seen them. Are they going to be published?

They will be integrated into the SPFM. We are finalising the process of developing them, but I can talk to you in broad-brush terms about what they are. I do not think that they will come as any surprise to you. They are the sort of principles that you would, I hope, expect us to use. As I said, they sit in the context that much of this is already expressed in the SPFM and other documents. I will mention the key steps that we would expect people to go through, which will be in the principles.

First, we should always ask ourselves whether the company that we are considering has exhausted all other forms of support. It is an important principle that options in the private sector finance capital markets, options for other forms of support—such as some of the current UK schemes—and options of other existing Scottish Government or other agency mechanisms have all been exhausted. The first step is to check whether all other options have been exhausted.

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Secondly, we go through a very clear business case process. We use Her Majesty’s Treasury’s five-case business model, which works extraordinarily well—it is a very helpful set of things, and we use it anyway. As I am sure you are aware, the five cases are the strategic case; the economic case; the commercial case; the financial case; and the management case. The strategic case looks at what we are trying to achieve, what the purpose of intervening would be and what the impacts would be. For the economic and commercial cases, we look at the risk and return and what the market would do—whether it would operate in a similar way. There is a whole set of detailed due diligence around the financial and management cases, with regard to what would be necessary to successfully do the transaction, if it were a transaction, and to manage a stake, if a stake were taken.

It is also important to remember that a great deal of what we can do is not always about financial support. There is always an assumption that we jump to financial support, but we do not. We get to financial support only if all other forms of support have been exhausted. For example, Governments have convening power, so we can bring parties together and try to broker commercial arrangements between parties rather than necessarily intervening ourselves. All those things have to be absolutely exhausted before we get to the point where we say, “This is the right thing for us to do,” and then there is a very detailed process of due diligence, which is laid out in the SPFM. Obviously, any deal that we do with the private sector needs to meet the accountable officer tests of regularity, propriety and value for money. That is all in play.

Graham, does that answer your question?

I guess so. I suppose that it is encouraging that that is being worked on, so I will wait to see the final details. My final question is related to that. Have you developed a database of companies that are strategically important to Scotland?

Over the course of the pandemic, we have been doing work with Scottish Enterprise, which also informed some of the work on the pivotal enterprise resilience fund. Scottish Enterprise has developed a database of a range of companies that looks at issues such as which companies are sectorally important, which are important for exports, which are important for particular supply chain criticalities, and which have particular local economic impacts—a company might not be of a scale that makes it critical nationally, but it might be critical in a particular area because, for example, it is the biggest employer. Therefore, Scottish Enterprise has a database—the work is a live thing—that is pulling together insight and intelligence from its own interactions with business and intelligence from the other enterprise agencies and Scottish Government.

That enables us to do some interesting modelling. For example, we can run scenarios through it. We were able to use it to assess what the economic impacts of exit from the European Union would be on which kinds of firms. We have been able to look at what happens to particular kinds of firms with respect to the pandemic and to cross-refer those so that we can see, for example, which firms are most at risk of multiple risks and what might happen if those risks were realised. It is not an algorithm—you do not turn the handle and get an answer out—but it is a database that enables us to understand and play around with that data on the core company base.

I want to move on to the subject of whole public sector accounts. I hope that somebody is familiar with that and can give us an answer. At the end of session 4, our predecessor committee indicated in its legacy paper to this committee that it had

“received an undertaking that the Scottish Government would share proposals for progressing Scottish consolidated accounts for the whole ... sector”

with the committee

“in the early part of 2016.”

The session 4 committee commented that, in its view, there was

“not yet ... a clear commitment to realising”

the Auditor General’s

“recommendation for public sector consolidated accounts”.

Throughout this session—every year, I think—this committee, supported by the Auditor General, has raised with the Scottish Government the topic of progress on those accounts. I have asked the permanent secretary about that twice, I think, and been told twice that they were coming. Every year that they do not come, of course, the data from one year drops off. Will one of you explain why, as we reach the end of session 5, we still do not have whole public sector accounts, nor a clear timetable as to when those will be produced?

I will take that question. The permanent secretary wrote to the committee on 19 February to reiterate our commitment to whole public sector accounts—we are similarly keen to progress that agenda.

The exercise is quite significant and not straightforward. It involves consolidating the accounts of a number of organisations, some of which have different accounting standards. Despite that, progress has been made. Prior to the pandemic, draft 2017-18 statements were developed and were shared with Audit Scotland. We also made good progress on the 2018-19 equivalent but, unfortunately, that had to be halted, due to Covid and the conflicting priorities and pressures at that point. The process for the 2019-20 consolidated accounts did not conclude until December 2020, and the whole public sector accounts cannot happen until after those accounts are complete and audited. Unfortunately, therefore, the current context means that the 2020-21 accounts will probably not conclude until December 2021. That will push the process back further. However, we want to make progress on where we have got to, to date.

We also recognise that the process will be iterative and will develop over time. We would like to look at that first level of aggregation fairly quickly—possibly for the 2019-20 accounts. We are very keen to talk to Audit Scotland about what that process will look like, and we intend to do so in the coming weeks. As part of that, we also want to be clear with Audit Scotland about what the audit assurance for those statements is going to look like.

I thank you for that. However, the situation has been going on since 2015. I appreciate that, if someone is a chief financial officer and someone else comes along and says, “By the way, could you just do this extra work?”, that is the last thing that they will be thankful for. If they are going to approach it seriously, either they have the resources or they bring them into their organisation or get someone such as a consultant to help them.

The whole committee, I think, has been frustrated, because we get virtually the same comment each year. Now, of course, Covid is a reason—I will not say that it is an excuse—for delay. Are you able to say that those accounts will be produced and tell us the year for which they will first be produced?

Clearly, an important factor is that the information is timely. We would need to look at the value of producing information for years that are quite some distance in the past. We will go back and look at that. However, I can commit that we will actively look at doing that iterative process—we will be looking to consolidate on a fairly gradual basis, but I can commit to looking at a level of consolidation beyond what we currently have in this financial year—yes.

That does not give me much comfort, to be honest, but I do not put that down to you.

The Auditor General has also made the point that, given that the Covid funding arrangements are getting more complex and that we know that some things are outside the boundary, it becomes more essential—I think that he used that word—that we have those accounts sooner rather than later. I really do not understand why you cannot just say that you will do it and will put the resources there, wherever they come from, to do it.

Thank you for that comment. I will definitely pick that up with Audit Scotland and explore it further.

Although it would be helpful if the whole public sector accounts were published, I am not entirely convinced at this stage that they would materially change the insight into Covid then. One reason is that those are aggregated accounts, so they would provide less detail than would be in the accounts of the individual entities. Also, the nature of the consolidation means that the flows of funds between the Scottish Government and those entities would, in effect, be netted off, so some of that transparency might be lost.

The second point is about timeliness. We would be relying on those entities producing their accounts; for 2020-21, we would expect those to complete in December. The timescale for this might not be helpful.

However, I would flag that the funding from Covid is being dispersed through numerous bodies. Some of that has been core funding, and some of it has gone through specific funds, but all those bodies will have their annual accounts audited—the majority by Audit Scotland, and some by the Accounts Commission. The Auditor General has said that their audit work can follow the pandemic pound. We should still be able to get comfort to do that.

Okay. I am aware of the difference between aggregation and consolidation.

In conclusion, if timeliness is your argument, I have a suspicion that this might never happen, because it always seems to be coming afterwards. We have been trying to get something since 2015. I am sure that, once you have started, the whole process will flow much better. However, from what you are saying, I do not feel that we have any more information or confirmation on when these will happen, if they happen.

Thank you for that.

Alex Neil, do you still want to ask a question?

I think that my questions have been covered, convener.

As no other members have questions for the Scottish Government panel on the report, I thank all the witnesses for their evidence this morning.

Before we move into private session, as this is our final scheduled meeting in the Parliament’s session 5, I want to put on record the committee’s thanks to Stephen Boyle, the Auditor General for Scotland, his predecessor, Caroline Gardner, and Audit Scotland’s staff for their hard work and extreme professionalism in supporting the Public Audit and Post-legislative Scrutiny Committee over the past five years. Their reports and the evidence that they have provided us have been invaluable, and I am sure that our successor committee will be as grateful as we have been over our time.

I also thank all the members of the committee, past and present, for all their work during the session. In particular, I thank my two deputy conveners, Liam Kerr MSP and Graham Simpson MSP, for their support to me and to the committee.

Finally, I thank all the parliamentary staff who have provided support to the committee throughout the session—the clerks, the official report, media, the web team, the Scottish Parliament information centre, outreach, broadcasting and security. We would not be able to do our work without you. In particular, I would like to thank our clerks for their immense hard work—Lucy Scharbert, Alison Wilson, Alanis McQuillen and Keith Currie. Their advice and hard work have been invaluable to me and they have made the committee run extremely well.

It has been a privilege for me to lead the work of the committee. I thank the members for all their work.

10:28 Meeting continued in private until 10:46.