Finance and Public Administration Committee

Meeting date: Tuesday, November 7, 2023

Official Report 744KB pdf

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Subordinate Legislation

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Budget (Scotland) Act 2023 Amendment Regulations 2023 [Draft]

The next item on our agenda is an evidence session with the Minister for Community Wealth and Public Finance on the Budget (Scotland) Act 2023 Amendment Regulations 2023. I intend to allow up to an hour for this session. The minister is joined today by Scottish Government officials Craig Maidment, who is a senior finance manager, and Niall Caldwell, who is corporate treasurer. I welcome the witnesses to the meeting.

Before I invite the minister to make a short opening statement, I would like to apologise for the fact that the previous session overran by more than 30 minutes. I certainly hope that this session will not do likewise. I apologise to the minister and his officials.

Over to you, minister, for your opening statement.

Thank you very much, convener, and good morning to the committee.

As the committee can appreciate, we continue to face challenging economic circumstances. Continued inflationary pressures, particularly around public sector pay, are putting real pressure on the Scottish budget. Given those circumstances, tough choices have to be made on how we prioritise spending in order to meet those pressures and support priority areas. Those challenges are not unique to the Scottish Government; other devolved Governments and departments across the UK are struggling with the same issues. The autumn budget revision reflects our response to those challenges.

The funding changes increase the budget by £361.3 million and include providing £265 million to local government to support pay deals, £50 million to health, £44 million to police pensions and £30 million to Ukrainian resettlement. To help to fund those areas, it has been necessary to reprioritise budgets. The technical, Whitehall and internal transfers are presented in the document in the usual way. Some of the technical adjustments, in particular under international financial reporting standard 16, get to the heart of discussions around budget presentation transparency.

I welcome the dialogue that the committee recently had with my officials and the recent correspondence on the issue with the Deputy First Minister. We are considering the issue in the context of the 2024-25 Scottish budget. The supporting document to the autumn budget revision and the finance update that was prepared by my officials reflect some of those discussions and provide further background on the net changes.

With that, I am happy to conclude and to answer any questions that the committee may have.

Thank you for that—as always—helpful opening statement, minister. When we look at the top-line figures, what is interesting is that, although the addition is around £361 million, which is about 0.6 per cent of the total budget, once again we see considerable movement within portfolios. There has been, over the years, as you said, a difference between policy intention and delivery. If we look, for example, at health and social care, we see movement of about £1,059.6 million into other portfolios. There are detailed explanations of that; I am heartened by the information that the minister and his officials can provide. Compared with how it used to be, the information that is provided is, obviously, very extensive.

When we are looking at movements of such scale in-year, would it not be better, in terms of delivery, for the funds to be baselined into the areas where they finally end up? Many of those movements appear to happen almost annually. It almost seems as if, when the policy intention is created, there is a real mismatch between it and, ultimately, delivery. What is your comment on that?

As ever, convener, those are fair and reasonable points. I previously set out in committee the rationale for the approach that you touched on in your question. In the context of the discussions that officials have been having with the committee, we are considering those points in detail in order to meet the ambition for improved transparency as part of our deliberations ahead of the budget for the forthcoming financial year. That is under active consideration and it is being done in the context of the Verity house agreement, given that a number of transfers to local government take place. It is very much a live issue, to which we are giving active consideration.

Clearly, we would not want to do anything to unintentionally harm transparency, but the points that you make are fair and we are considering how we can address those matters and how that will inform the presentation of the forthcoming budget.

The transparency that you have delivered means that we are not going to spend huge amounts of time, as we would have done otherwise, asking why amounts went here or there. You have provided detailed explanations for many of them. There are, however, one or two areas that still cause concern, so I am going to ask you something that I have asked in the past.

An additional £44 million has been provided for police pensions to help to fund the gap between the budget that was provided at the start of the year and current forecasts of costs. Last year, I asked something very similar to what I am going to ask you now. The amount is demand-led but, surely, given that you know at the beginning of the year how many police officers are likely to retire, there should not be divergence of £44 million from the initial sum—although you could give or take £1 million here or there. How much is now paid in police pensions? That would give a better picture of what the percentage differential might actually be.

11:30  

That is an important point. First, as I have said previously, the nature of such budgets is that they are demand-led, as you have highlighted, and volatile, given the flexibilities that exist around retirement options. That is why, historically, that has been something that we have sought to manage in-year. In this particular instance, it is just in police pensions that a transfer has taken place. The total allocated to date for police pensions is £335 million.

However, £44 million is quite a substantial percentage of that, which is why one asks why that cannot be envisaged at the start of the financial year. As I said, if it was just £1 million here or there, you might think, “Ok—fair enough.” It seems to be a significant amount that one would think could have been predicted when the budget was being drawn up, therefore we would not have to have the portfolio transfer that we are witnessing now.

That is a fair point and is something to which we are giving further consideration. Clearly, devolved pensions differ in terms of the ways in which pensions are handled—through annually managed expenditure lines, for instance. In this case, we are seeking to manage in-year. We will give the matter further consideration and reflect on how we can refine our forecasting in order, we hope, to move to having, at the outset, a number that is much closer to the outturn. Because of the volatile and demand-led nature of the particular line, there is a need to manage it in-year.

However, the points that you make are fair and reasonable, and I am happy to consider how we can refine our forecasting in that area.

Colleagues around the table will want to dig into some of the figures. I will just touch on a couple of them, especially given the fact that I overdid it in the last session. [Laughter]. I will give folk a chance to claw back some time.

Under rural affairs, land reform and islands, I will not go into detail other than to mention that you have said the portfolios were reduced by £31 million as part of the budget revision, and you gave some context to that. You also talked about services for agricultural support being reprofiled in future years with no loss of funding. Why does that change have to take place in the first place?

Is that question specifically on the agriculture reform line—the £4 million?

Yes.

Recently, there has been further development of business cases and assessment of multiyear plans. That has identified scope for reduced spend on that programme of activity within this financial year, so we have an opportunity for funding to be returned to the centre. As I touched on in my opening remarks, we face a very challenging set of overall economic circumstances.

Craig, do you want to provide more detail on the portfolio?

I will just make the point that that is a specific £4 million reduction in the agriculture and reform programme line. The £31 million includes additional amounts on which I can provide some detail; there are a few lines that I can touch on. There is £6 million that relates to Forestry and Land Scotland, which has been able to utilise its reserves and return that to the centre in the current year. That will be realigned with some multiyear financial planning. There are demand-led elements to the savings, as the minister has touched on.

There is a £3 million funding reduction for Scottish forestry because the forecasts are lower than were previously anticipated. For the larger amounts, £40 million is coming from a combination of common agricultural policy pillar 1 and environmental and agricultural reform funding, which is also funding that has been returned to the centre because forecasts were lower than anticipated. There is a commitment to return those amounts to the rural portfolio in future financial years. It is a profiling point.

Is there a reason why the rural portfolio does not get additional funding, rather than the funding being returned in future years? Why is it not just kept within the rural portfolio? Is it because there are pressing needs elsewhere?

Yes—exactly. That is done to fund the significant amounts that are going to other areas as part of the budget revision.

With regard to using reserves, we have heard that Creative Scotland also did that. Is it now the Scottish Government’s position that, as we go forward, we will be looking across the public sector to see where reserves can be utilised to try to optimise spend in the next year?

What you are seeing is a reflection of the very challenging fiscal environment that we are in. You referred to Creative Scotland. We have committed to reinstate that funding in future years, and the First Minister has made a broader commitment to increase spending in culture and the creative sector by £100 million over the next five years. Of course, we do not want to find ourselves again in a situation that is as challenging as this one is. We have to ensure that we are able to fully fund our priorities, to meet demands that emerge in-year, such as public sector pay settlements and, of course, to ensure that we are in a position to balance the budget.

I find it intriguing that so many areas appear to have reserves in the first place. Has there been any assessment of the quantity of those reserves across the portfolios that the Scottish Government manages?

I am not able to speak about that in any detail. My officials might want to come in on that.

I did not know that Forestry and Land Scotland and Creative Scotland, for example, were sitting on reserves before that was announced by the cabinet secretary in the chamber. It seems a bit odd, to me.

That varies by organisation. Whether it can hold reserves or not depends on the classification of the organisation. I do not have a figure, off the top of my head, for a quantum of reserves.

We have spoken about local government reserves ad infinitum over the years, but we have never really covered reserves that are held in other areas. It would be quite interesting to have a response on the level of reserves across the portfolios that the Scottish Government manages.

The “Guide to the ABR 2023-24—Finance Update for FPAC” says that

“Marine Scotland have been able to surrender”—

that is a disappointing word—

“£2 million of budget following savings exercises involving enhanced recruitment controls, maximising income and continuing focus on delivering operational efficiencies.”

I have to say, as someone with two islands in their constituency and large sea borders, that there are concerns that Marine Scotland does not have enough resources to ensure that fisheries are effectively and efficiently managed and that conservation is also taken into account. When there are breaches, Marine Scotland has to be called on. I could give an example from my constituency. Over the years, there have been concerns that there is not enough resource in Marine Scotland. Why is it felt that £2 million should be removed?

I want to highlight how that £2 million has been generated. There has been delivery of greater income streams through higher marine licensing fees. There are also more shared service arrangements and collaborative working, as part of a range of efficiency measures. That saving has been generated in a number of ways.

More generally, the decisions that we have to take as part of the budget revision process reflect changes that are taking place in-year. Indeed, the context in which all budget decisions will have to be taken is incredibly challenging—not just for the Scottish Government, but for the other devolved Administrations, too. It is among the most challenging since the reconvening of this Parliament nearly a quarter of a century ago. That means that we have to take difficult decisions to ensure that we can deliver our key priorities and meet the demands that emerge in-year, as I touched on, and to ensure that we can again deliver a balanced budget, as we have done consistently, previously.

I touched on internal transfers and baselines. Paragraph 40 in the guide, under the heading “A.5 Internal Transfers”, says:

“The majority of internal transfers are moving budgets from the policy lead area, based on policy accountability at official level, to the appropriate delivery body.”

That was what I asked about earlier. How do we know which ones are being transferred because of policy accountability and which are not? The guide does not seem to say. It gives a list of significant budget internal transfers between portfolios, but it does not say which ones have been moved because of policy or delivery. It just says that they have been moved because of one or the other. Would it not be more helpful if that was clarified?

It is a combination of policy and delivery, as you highlight. Sometimes in those areas, the distinction is perhaps not as clear. I do not know whether there is any detail that you want to add, Niall.

On the quantum of value, a lot of the delivery of the internal transfers or the budget that is moving from one area to another is because local government is the delivery body. In almost all those examples, you can pretty much say that local government is the delivery body, but the policy ownership, if you like, from a Scottish Government perspective, sits in another portfolio. In those cases, it is usually health or education.

That is why I referred to our consideration of the presentation of the budget and why we have to take cognisance of the Verity house agreement as well.

Yes. As I mentioned, if those transfers are to be regular occurrences, they should probably be baselined into those portfolios in the first place.

On the technical adjustments, I know that there will not be any issue with the actual amount that we are able to spend in each portfolio, but the guide states:

“it is likely that the IFRS16 figures will be baselined into the 2024-25 budget, meaning that a direct comparison to starting budgets is not possible.”

One of the issues that the committee is concerned about is that, when we have our Punch and Judy show at stage 1 and stage 3 of the budget, people talk about different figures. Obviously, we on the SNP benches will denounce the evil Conservative Government for slashing our budgets, and the Conservatives will stand up to talk about how incredibly generous that same Government is and say that it has been lavishing us with ever greater record sums. Would it not be easier if figures were put together for the outturns, as we have asked for, to enable us all to sing from the same hymn sheet, at least on the figures that we are arguing over?

I very much welcome that. This is a shared endeavour to ensure that we have as much transparency as possible, consistency of messaging and understanding of what the numbers actually say, so that a substantive debate can take place on whether the allocations are aligned with people’s priorities.

Transparency is a priority for us. The IFRS 16 issue throws up a particular example of the challenges that can be posed in that context. I am conscious that, with transparency, there is a need to ensure that we get the balance right. An overprovision of information, although well intentioned, can add to the complexity and make it more challenging for the budget to be understood and comprehended more widely. Similarly, insufficient information being provided presents a challenge on transparency. We are trying to ensure that we present the figures in a way that they can be intuitively and innately grasped and in a way that is fair and representative. I recognise that there is complexity.

Niall, I do not know whether you want to say something about some of the challenges posed by the IFRS 16 technical adjustments and the issues around presentation and transparency.

There is a three-year transition period for IFRS 16, and next year is the last year of that. The 2024-25 budget will have the IFRS 16 figures embedded into the baselines, which means that prior-year figures will be restated. That means that comparatives will show reductions year on year, purely because a lot of the leases that were capitalised in the balance sheet in 2022-23 will be reflected in that year. We have put some figures in section C of the guide to demonstrate that. You will see that the impact in 2022-23 is £879 million, whereas the impact in 2023-24 is £479 million. That is just from capitalising leases that were not capitalised before IFRS 16 was implemented. The transitional period means that IFRS 16 changes are covered in budgetary terms by Treasury during the transition, but that will come to an end after 2024-25.

We will want to ask further questions specifically on that in the weeks and months ahead, so that we can have it clarified in our heads and, indeed, so that the wider Parliament can get a grip on what it means. That will be an important process for us.

This is my last question before I open up the discussion to colleagues—I said that I would try not to hog the session, as I sometimes do inadvertently. Resource borrowing costs and capital borrowing costs are down. Given that interest rates have gone up, why do we have reduced capital borrowing costs? One of the things that came out of our sustainability report was that the UK Government will cut our capital allocation over the next five years by 16 per cent in real terms. One would have thought that the Scottish Government would seek to maximise its capital spend wherever possible, given the need to invest in physical infrastructure, digital infrastructure et cetera. Why has that happened, and what is the reasoning behind the Government’s move on capital?

11:45  

First, I want to make it clear that we seek to maximise our capital spend; we realise that it is fundamental to economic growth and supporting innovation and development. Our capital borrowing powers afford us one of the limited flexibilities that we have under the devolved fiscal arrangements, and decisions around capital borrowing are taken very late in the day. That means that we can have the most up-to-date position, reflecting the most recent in-year budget position. We recognise that, with capital projects, there can be slippage and delay for a range of reasons that are outwith the control of any individual organisation or, indeed, the Government.

Niall, do you want to provide a bit more detail on some of that decision-making process?

I will make one point to give an example of what the minister said. A lot of the profiling tends to be done late in the year, which explains why you can get some late material underspends late in the year. Capital borrowing is the only flexible area, really, of the capital budget, and the borrowing policy allows for that to be reflected. This is the old capital borrowing policy, as per the May medium-term financial strategy.

Excuse me, but everyone seems to be whispering all of a sudden. I do not know whether I am the only one who notices it, but it is difficult for everyone to hear. Minister and Niall, will you speak up a wee bit?

I was talking about the capital borrowing policy under the previous MTFS. About £250 million was the fiscally sustainable level under the old fiscal framework limits, and it is designed to allow for a level of attrition and the late underspends that materialise. The point that the minister makes is that, if late underspends materialise and borrowing is reduced, no spending power is lost, on the assumption that borrowing can be reprofiled into future years. The policy is designed to be flexible. It is one of the few flexibilities in the capital budget.

It is to ensure that Scotland does not lose any money in its expenditure overall: is that correct?

Yes.

Thank you for that clarification.

I will open up the session to colleagues. The first to ask a question will be the returning stalwart, Daniel Johnson, and he will be followed by John Mason.

I am not used to all this lavish praise, convener.

I want to follow up on a couple of points that were discussed, particularly around transparency. I am always struck by the fact that, essentially, the discussion and debate around budget time is always at level 3 and level 4, yet the actual budget bill is, essentially, at level 1, and, critically, when you look at the outturn, you see that it is, by and large, specified at level 1.

I want to ask about transparency. I fully take on board your point that overprovision of information can be a problem, and I do not want to cause officials panic about lots more work, but is there a case to explore on whether outturn could be specified in a greater level of detail? I ask that because, ultimately, my basic point of principle is that, when you are setting a budget, you need to look at how you performed against last year’s budget, and the importance and the level of scrutiny is at level 3 and level 4. Do you think that there is a case to be made for looking at the degree to which we can report back at that level on outturn?

That was a very well-crafted question, because you probably anticipated many of my answers in your preamble.

I have been here before. [Laughter.]

Certainly, we wish to be able to provide as much information as possible. We have to recognise that there is a need for proportionality. I appreciate your recognising the points on the potential unintended consequences of overprovision. We are looking at other provisions around transparency such as COFOG, the classification of the functions of Government. I am keen to ensure that we provide information that is as useful as possible for Parliament and the wider public.

Niall, can you touch on where we are on the level of detail that we can go into on our current provision on outturn?

I will need to double-check. The provisional outturn has a high level of information. We go into more detail in the accounts, but that happens on a different basis. There can be trouble comparing the Scottish budgetary basis with Treasury budgetary basis—that is an important factor, especially because the Scottish Government’s accounts are prepared against the spring budget revision totality. Our outturn versus budget on a Treasury basis is very different, which is, ultimately, what matters for what is left in the Scotland reserve at the end of the year. I will need to double-check the precise level of detail that we go into in the accounts, but it is at a lower level.

It would be helpful if the committee were of one mind on the level of detail that it wants to be provided to it, with reference to what we already provide. I would be very happy to have that discussion and engagement.

Frankly, the classic exchange is that Opposition parties, as the convener alluded to, say, “You must do X, Y, and Z,” and the Government, with some justification, says, “Where does that come from?” Until you have a complete level of clarity about how things, especially those that are below level 1, are flowing through and pan out, it is difficult to have that conversation. That information would improve the level of debate. The level that you get to is for further discussion, but I will make that observation.

You mentioned that I prefigured some of your response; you prefigured my next question, which is about COFOG. I am glad that it continues to be there. I will ask one last clarification question. We had a brief exchange about capital borrowing regimes and, in recent weeks, there has been some discussion about the issuing of bonds. That is interesting, but people’s minds have been racing ahead of themselves in some quarters. My understanding is that the process will fall within the limits of the fiscal framework. It is probably worth all of us being very clear that extra money is not being raised; this is happening within the fiscal framework and would be an alternative to the other sources of capital borrowing that are available to the Scottish Government. Is that a useful clarification?

Yes.

Our paper sets out that the Delegated Powers and Law Reform Committee raised three points, one of which was that

“Regulation 2(b) of the instrument amends the amount specified for the Scottish Parliamentary Corporate Body, but it replaces the existing figure … with the same figure.”

The Delegated Powers and Law Reform Committee also stated:

“The Scottish Government advised that the insertion of an unchanged figure was unintentional, but that the figure remains correct.”

Will you explain what that means?

That was highlighted to the Scottish Government legal directorate—SGLD—as a figure that was changing when it had not changed. There should have been no inclusion of that figure. It was just an error.

So it was the commentary that was the problem, more than the actual figure.

Yes.

Okay—that has clarified that.

Just to follow up on the convener’s point about reserves, I fully agree that we should use reserves and not leave money sitting. Will doing that put more pressure on future budgets, because it will be something that we cannot do again?

That is an important point. It is about recognising that reserves are there for a purpose. They give bodies that have that facility a degree of flexibility that is commensurate with their roles and responsibilities. We recognise that, in the financial situation in which we find ourselves, that facility is available, which allows and assists us to manage the overall budget position. Of course, implicit in your argument is the idea that the continual use and depletion of reserves would clearly be a cause for concern. They are there for a purpose; there will have been a logic and rationale behind that facility being available. What we have set out in some of the specific items that we have discussed with an agency that has reserves reflects the circumstances in which we find ourselves.

If we take Creative Scotland and Forestry and Land Scotland as examples, they are able to top up their budget from reserves at the moment. In future, however, you would either have to trim their budget or find more money from elsewhere to put back in.

Yes, and, as I said in reference to Creative Scotland, we have committed to the reinstatement of funding in future budgets that we have not been able to provide in the autumn budget revision.

The Scotland reserve, at the start of 2022-23, was approximately £699 million. All of that was then put into the budget but, at the end of the year, there was still £244 million put back into the reserve. Does it make any difference if we take everything out of the reserve and put some back in or if we instead take out just the net amount at the end of the year? Are those simply just different ways of doing things?

The way in which the reserve operates means that it is a facility to allow us to carry forward underspends from one financial year into the next. The nature of underspends is that they can emerge very late in the day. We saw particular examples of that during the pandemic, when late funding announcements were made and there was simply not the means to deliver on that expenditure prior to 1 April, so the reserve provides that facility.

The sources of funding for the reserve were set out in some detail. Niall, do you want to give more detail?

After the fact, there is no difference. For fiscal management over a year, however, there is a bit of a difference because, by drawing down from the reserve in totality, maximum space is left in the reserve for the end of the year. As the minister said, especially during Covid, when there were really significant volumes of funding changes late in the financial year, it was important to ensure that that full capacity was there. If you do not draw down from the reserve, you are limiting your own capacity to absorb that.

Okay, that is fair enough. The point has been made that the Ukraine resettlement costs have been higher in the current year than we had perhaps anticipated. Are those costs completely open-ended? In other words, is there still uncertainty?

Owing to its being demand-led, we have seen the significant popularity of the supersponsor scheme in Scotland. As of early October, some 25,000 people displaced from Ukraine have arrived in the UK with sponsorship from an individual in Scotland or from the Scottish Government, with 20,000 of those arriving under the supersponsor scheme. The additional funding takes the total funding for this year up to in excess of £100 million. Combined with the funding provided last year, it totals over £300 million to date.

However, as a recent position paper published in partnership with the Convention of Scottish Local Authorities and the Scottish Refugee Council sets out, we are now in the new position of pivoting from that emergency response to taking a longer-term holistic approach.

What would a longer-term holistic approach mean for the finances?

We are also working with partners, and we continue to engage with COSLA. We will continue to monitor the situation in-year and, based on our understanding to date, decisions will be taken in the budget on allocations for the next financial year. We of course remain absolutely committed to ensuring that we support those who have come from Ukraine to Scotland.

Does that mean that, instead of there being a specific Ukraine cost in future, a bit more will be spent, for example, on housing, schools and the NHS?

There is a recognition of the need for dedicated provision of support for people who are rebuilding their lives—for example, that could be support for people to gain employment, access public services, including benefits, and, indeed, access long-term housing. Working in partnership with local government and the third sector, we have a continued commitment to provide that support.

I think that £46 million was taken from the colleges and universities budget because of the teachers’ pay settlement. Is that a one-off, or will it have repercussions for the future?

We are not in a position to commit to reinstating that funding. We will consider the needs of the Scottish Funding Council as part of the budget process, and the funding allocation will be set out as part of the budget announcement.

Okay. Finally, on Barnett consequentials, the paper states:

“The Guide also reports an additional £20.2 million arising from a ‘Home Office comparability factor error’”.

Can you tell us what that was?

12:00  

Yes. It goes back to the spending review in 2021-22, and it meant that we had been receiving less than we were due. That error has now been rectified.

Is there anything that you want to add, Craig?

It is just about the mechanics of these things. When the spending review is set, any increase in the Home Office department budget for the UK will feed into our block grant. That is quite straightforward with, say, education or justice where the figures that are used are the entirety and the comparability factor is 100 per cent. We consider the entirety of the increase of their budgets, and we get a population share of those. Conversely, with defence, we have a 0 per cent comparability factor, so we get nothing. That is quite straightforward, too.

However, with the Home Office, there is a degree to which certain matters are devolved, and the comparability factor used to be 74.1 per cent. What transpired, though, was that that percentage was slightly outdated; it should have been around 82 or 83 per cent. As a result, an additional amount was due, which has been funded partly through an amount in the previous spring budget revision and an amount in this autumn’s budget revision. It will be reflected in next year’s budget as well as the final component of the spending review period. There was just an error in the calculation used.

It is reassuring that the error has been picked up, but it raises the wider question whether the UK Government is making more errors that we do not know about.

The checks go back and forth to make sure that the figures are correct. They get highlighted and discussed at official level to ensure that everything is consistent and correct.

At least it was in our favour. [Laughter.]

Minister, you rightly mentioned in your opening statement how the uplift in the teachers’ pay settlement is a very important and understandable commitment in the financial landscape that you have to deal with. For clarification, do the figures in the table in section A.2.1 in the guide to the autumn budget revision—the section entitled “Gross Funding Changes”—relate to the 2022-23 budget commitments?

Yes.

If teachers and non-teaching staff have had that uplift, what are the implications for the next budget with regard to those pay settlements?

Those settlements have been agreed and we have committed to them going forward, and future rounds of negotiation will take place in the usual way through the joint committee. We have worked constructively to ensure that we can support those pay settlements. As the committee will appreciate, they have necessitated our taking some quite challenging decisions, but that demonstrates the Government’s commitment to the teaching profession.

Yes, indeed. Overall, we welcome that commitment, but you are right that it has led to some very difficult decisions, with the potential for more difficult decisions coming down the line on commitments in future budgets. Obviously, this is a very large part of the budgetary negotiations. Do you feel that that pressure will be there for the foreseeable future?

We have sought to support public sector pay in a way that is commensurate with the scale of the challenge that we face with the inflationary pressures. Thankfully, we have seen some signs of inflation beginning to fall, which clearly will create a different economic and fiscal context for future rounds of negotiations. However, I entirely agree with the implicit point in your question, Ms Smith: this has created exceptional in-year pressures, and those pressures will have to be carried forward. We are giving very careful consideration to that in our spending plans for the next financial year.

As you will know, we are doing some work on public sector reform and, in previous committee meetings, we have discussed a previous Scottish Government commitment to ensuring that the size of the public sector was roughly what it was before Covid. Is it still the Government’s policy intention for that to be the case?

Our approach is not to set exact numbers or particular targets; the clear focus is on recognising the need to deliver services more efficiently, which means more shared services, more collaboration, and working across administrative and organisational boundaries. It also means looking at the disposition of our estate. All of those factors are in play, but key to this is a real focus on delivery and on ensuring that our public services do not just deliver services to meet the needs of people but are very much focused on a preventative agenda.

I recognise the committee’s interest in medium to longer-term fiscal sustainability, and opportunities to increase revenue—whether through tax or, in the medium term, economic growth—are going to be key. However, we know that we cannot meet that demand simply from increased revenue alone; we have to look at how we prevent that demand and avoid the risk of further demand emerging. It is about looking at how we reform our public services not just to meet the fiscal challenges that we face in the here and now but to deliver a more efficient and effective service that is focused on the preventative agenda. Embracing that approach is not about setting ourselves definite numbers for headcounts; instead, it is focused on those particular priorities and ensuring that we have a workforce that can meet that particular requirement.

I have two other points for clarification, if I may. First of all, money is being taken away from the Scottish Funding Council. Why was that decision made, and where is that money being reallocated to?

Can you refer me to the specific line?

I am sorry—I do not have it in front of me. I cannot remember what the actual number was, but it was for the Scottish Funding Council. There was a reduction in the money being paid over to it.

Was it the money for colleges and education?

Yes.

I touched on that in my answer to Mr Mason. We are not in a position to commit to reinstating that money. We will assess the SFC’s needs as part of our budget-setting process.

I heard your answer to Mr Mason—I was just asking why you had made that decision.

It was to support the teachers’ pay settlement.

All of it?

The position is fully allocated in the budget revision; by definition, everything that has been returned to the centre is supporting everything else in the autumn budget revision. You will see in the funding tables that we provided in the document that there is no unallocated funding.

With regard to returns to the centre, there is no unallocated funding, as Niall Caldwell has said. That overall position supports everything that is set out in allocations. Clearly, though, the majority of funding allocated in the ABR is to support local government pay, including the teachers’ pay settlement.

Right.

Sticking with the education and skills portfolio, am I correct in thinking that some pupil equity money has been returned to the centre?

There has been a reprofiling, but there has been no loss of spend on the front line. It is just a reprofiling across years.

Are you in a position to tell us about that reprofiling?

Yes. I am just trying to pull the exact details together.

If you do not have them at your fingertips, you can get back to us.

I would be happy to get back to you on the matter and provide some more detail. I stress that part of that reprofiling is a flexibility that is given to local government. There is no loss of spend on the front line—I just want to be clear on that point.

My final question is on the First Minister’s statement about the £300 million extra that is being allocated to the national health service. As I understand it, we are talking about £100 million in each successive budget over three years. Are you able to say where that money is coming from?

It will be set out as part of the budget process for future years’ budgets. Of course, we are still to see the autumn statement and forecasts ahead of setting our own budget, but it will be taken as part of that process.

Good afternoon. First, I draw members’ attention to my entry in the register of interests as a partner in a farming business and a member of National Farmers Union Scotland.

The convener mentioned earlier the £31 million that has been taken out of the rural affairs budget. Can you confirm that that money was ring fenced for agricultural and rural affairs use?

In the savings that have been set out to support the overall fiscal position, we have identified particular items. We have, for example, already had a conversation with the convener about the Marine Scotland line and have looked at some of the detail there. There are areas where the overall budget has been maintained through, for example, the use of reserves; there are areas where the associated forecasts have been reduced; and there are areas where funding will be deferred but will be used in full in future years.

Craig, can you provide some more of the specific detail on the point about ring fencing?

The amounts surrendered are not ring fenced. There is ring-fenced funding in the rural portfolio; we provide additional funding on top of that, and it is some of those amounts that have been returned to the centre as budget revisions. I think that £14 million of the £31 million that we are talking about relates to what is sometimes grouped as ring-fenced funding, but it is supplemented by additional funding from outwith what has been ring fenced.

The £31 million is being reprioritised. Can you say where it is being reprioritised to?

As I have said, the money goes to the centre, and where it has been reallocated to is set out in the ABR document. For example, we have already touched on the resource for local government and the £30 million of support for Ukraine; the resource savings go to the centre and are reallocated. Is there anything that you want to add, Craig?

No, except to say that, as has been pointed out, just about all the funding is allocated as part of the revision. It has all come in to the centre and then been utilised for the pay offers and the amounts for Ukraine that the minister touched on.

I do not know whether you are able to talk about this, but what kinds of internal discussions or consultations happen with your Government colleagues about these matters? Obviously, when it comes to the £31 million that is coming out of the rural affairs budget, that money is intended to be used for agriculture, rural communities and so on. As somebody who lives in, represents and is part of a rural community, I know that that significant sum would be very welcome in a lot of sectors in those areas. How do discussions on these matters happen?

First, there is, of course, a dedicated rural affairs, land reform and islands portfolio, but we also recognise that rural affairs interests are supported across a range of portfolios. In certain areas, we have sought to be more effective in getting money out the door earlier through, for example, the basic payment schemes and greening advances.

As for the decision-making process, with a set of circumstances such as those that we have faced this financial year—and, indeed, the previous financial year—we have to look for opportunities to generate efficiencies that can then be returned to the centre to support the in-year fiscal position, particularly to meet emerging pressures such as public sector pay. The particular example that we are considering here relates to the rural affairs, land reform and islands portfolio, but opportunities to generate savings will be looked at across Government. Sometimes that can mean rephasing or reprofiling particular budget lines, but the aim is to generate revenue internally in order to support the in-year budget position to meet challenges.

For example, if you have a demand-led scheme but demand is not what was forecast, that provides a source of revenue that can be redeployed. If there is slippage, perhaps in a capital project, that, too, provides an opportunity for redeployment. It is a continuous, on-going process that is part of the in-year budget management process.

Is there anything that you want to add, Niall?

No.

12:15  

How closely is that money itself—the original source of funding, I suppose—linked to the uplift from the Bew review?

Pardon? I am sorry—I missed the last part of your sentence.

This is money associated with the uplift from or linked to the Bew review. Is that right?

I do not think that those things are directly related. The Bew review funding is part of the broader, ring-fenced agricultural funding. As we have discussed, the budget cover provided for schemes that are associated with ring fencing have historically been higher than the ring-fencing threshold. That has been the case throughout the years. Despite the reprofiling, the terms of that ring fencing have been met.

When do you hope that the money will be returned to the portfolio?

Those decisions will be taken as part of the budget process.

But there is a guarantee that that money will be returned.

We have made that commitment.

Okay.

I have a quick last question. With regard to rail services, I note that £5 million of technical adjustments have been made in respect of the sleeper service. Can you give us more details on that? Does it relate to the move into public ownership?

As that is a technical matter, I will ask Craig if he wants to explain.

It is a recurring adjustment that has happened in, I think, three of the previous financial years, where a prepayment relating to the sleeper has been unwound. It is more to do with the accounting perspective than with anything else.

Right. Okay. Thank you.

I have a couple of brief questions off the back of what has been asked.

Going back to the issue of police pensions, minister, you said correctly that this was demand led and that there had been more volatility. That has piqued my interest. To what extent is that an overhang from Covid, when we saw more people choosing to retire as they realised that there was a life out there to be lived? In other words, have you any sense of the extent to which that will continue, or was it a one-off? You might not know the answer to that.

I am not in a position to give a detailed answer, but I will ask my officials at the Scottish Public Pensions Agency to contribute to a response to the committee and see whether they can shed any light on the matter.

I am asking the question, because if it looks like something that will continue—and you are right that there is more flexibility in the way in which people take their pensions—it would be useful to know that. Indeed, it applies not just to the police scheme—I am thinking across the board.

I have a second wee question. I know that you have already agreed to write to us with what reserves are actually in place, but it would also be useful for me to understand the rules around agencies that are able to gather reserves or not, as you have pointed out, and whether there is any policy thinking in that respect. I think that most of us on the committee are pretty comfortable with agencies being required to use existing reserves where we have this fiscal tightness, but I am interested in, for example, the situation with the Scottish National Investment Bank. When it eventually moves into profit, I think that we will want it to be able to keep its reserves, because that is how we will get to scale. It would be useful to put a bit of meat on the bones of that.

My third wee point is to thank you for your contribution today. I recognise the extra effort that has gone into this, and as a member of the finance committee, I find that heartening. It does not happen often, so thank you very much for that. I also wonder whether you can speak internally to your colleagues about this. The kind of rigour and discipline that we are seeing in this session contrasts with what we saw in our previous session, when we examined a financial memorandum. It made us run over time, and the committee felt that there had not been a sufficient level of rigour, as what we were dealing with were estimates. I do appreciate that, but it would be nice if we could square that circle a bit with the actuals represented in this document. I know that things can only be accurate when we have the actuals, but we are increasingly finding ourselves in quite a fluid position with FMs that are coming to the committee with estimates.

Thank you. I will ensure that the points that you have highlighted are reflected in the correspondence.

I very much want to thank the committee for its constructive engagement and to thank officials for the work that has been undertaken to get us to a position where we have been able to take the financial update forward. This is a process, rather than an event, and we are always keen to get feedback to ensure that we are presenting information as transparently as possible. It is all part of an on-going discussion and a process of refinements. I am grateful for the committee’s input, and I will certainly ensure that the points that you have highlighted on financial memoranda are relayed to relevant officials and ministerial colleagues.

Thank you.

I have just one more question, which goes back to the issue of reserves. As we know, Scottish Government reserves represent about 1.1 per cent of the budget. At local government level, it is recommended that about 3 per cent of annual expenditure be held in reserve, although many councils have less than that and some, such as Shetland Islands Council, have more, for historical reasons. I was intrigued when it was revealed in recent weeks that Creative Scotland appeared to have a reserve of £17 million against a £66 million Government award that had been reduced by £6.6 million. That means that about a quarter of its annual award is kept in reserve. I am not sure what the £6 million would represent for Forestry and Land Scotland, say, but does the Scottish Government have any guidelines on what the level of reserves should be?

What we are talking about is those reserves being dipped into, as appears to have happened with Creative Scotland and Forestry and Land Scotland. If that has been going on, surely there has to be a set of guidelines—I am sure that there is. It would be interesting to hear your view on what level of reserves should be held. If the Scottish Government reserves represent 1.1 per cent of the budget, why does Creative Scotland hold reserves of 25 per cent of its award? What are we looking at here? There has to be consistency across the public sector.

With your permission, convener—and this also applies to some of the questions that Mr Mason asked—I would be happy to respond in detail in writing when I have had the chance to have further discussions with officials and to look at the matter in some detail myself. The committee has raised an important point that warrants a more substantive response than something extemporised by me at this stage in the session.

Okay. I absolutely agree with that, and I am sure that colleagues will feel that that would be helpful. Thank you for the evidence that you have given.

We move to agenda item 3, which is formal consideration of the motion on the instrument. I invite the minister to speak to and move motion S6M-10683.

Motion moved,

That the Finance and Public Administration Committee recommends that the Budget (Scotland) Act 2023 Amendment Regulations 2023 [draft] be approved.—[Tom Arthur]

Motion agreed to.

I thank the minister and his officials for their evidence. We will publish a short report to the Parliament, setting out our decision on the draft regulations, in due course.

That concludes the public part of today’s meeting. The next item on our agenda, which we will discuss in private, is consideration of our work programme. We now move into private session.

12:23 Meeting continued in private until 12:32.