09:30
We will take two items of evidence in public this morning. The first is consideration of Audit Scotland’s section 22 report, “The 2024/45 audit of the Scottish Government Consolidated Accounts” and its “Financial sustainability and taxes” report.
I am pleased to welcome to the meeting the permanent secretary, Joe Griffin, who will answer our questions on both those reports. Good morning, Mr Griffin. Attending alongside the permanent secretary from the Scottish Government are Gregor Irwin, the director general economy; Jackie McAllister, the chief finance officer; and Shona Riach, the director general exchequer, strategy and performance.
We have some questions to put to you all, but before we get to them, I would like the permanent secretary to make an opening statement.
Good morning. I thank the Auditor General and his team for the report on the Scottish Government consolidated accounts for 2024-25. I welcome the recommendations, in particular those that support our work to address the fiscal challenges and strengthen public sector reform. I am sure that we will get into those areas in more detail.
I will briefly make a couple of key points at the outset. The Scottish Government accounts have been unqualified for the 20th year in a row, demonstrating robust financial management practices. I am grateful to colleagues for their expertise and sustained work over the reporting year to achieve that. The scale of the fiscal challenge is clear, and action is essential to address the projected gaps of £2.6 billion in resource funding and £2.1 billion in capital funding by 2029-30. Last year, the Scottish Government published its medium-term financial strategy, its first fiscal sustainability delivery plan and the public service reform strategy, providing a clear framework for the changes that are required across the public sector, including in relation to workforce, health and social care reform, social security, tax and growth.
I understand the Auditor General’s call for a longer-term approach to fiscal sustainability, and the Government is taking forward work in that regard around three pillars, which are set out in the financial sustainability delivery plan. The first pillar is:
“Ensuring public money is focused on delivering government objectives, underpinned by reform and prioritisation to maximise impact.”
The second is:
“Supporting sustainable, inclusive, economic policies with the greatest potential to grow Scotland's economy, expand and broaden the tax base to fund public services.”
The third is:
“Ensuring a strategic approach to tax revenues which considers the longer-term impact of our tax choices and competitiveness.”
I am grateful to the Auditor General for his recommendations on that point in his report on fiscal sustainability and tax, which the committee is considering today.
There will be a Scottish Parliament election in May, and the civil service stands ready to support the incoming Administration with robust advice and an objective assessment of the fiscal environment in which its policy priorities can be delivered.
As a team, we look forward to the committee’s questions and welcome its scrutiny.
Thank you for that opening statement. Do you accept the findings and recommendations of both of the reports that we are considering this morning?
We do, convener. As I said in my opening statement, the recommendations are very helpful, and we have taken action on a number of them, but we accept them all.
Thank you very much for that clarity. You will be aware that we have a second public evidence session this morning on Historic Environment Scotland, which has been the subject of a section 22 report by Audit Scotland. We have also carried out an inquiry into the Water Industry Commission for Scotland over the past year or so. Following the unearthing of issues through that investigation and the identification of issues through the audit, we were told by the cabinet secretary last year that the Scottish Government was planning “deep dives” into all parts of the public sector to review risks and that an examination was being conducted to make sure that the behaviours and practices that we had seen in WICS were not being replicated elsewhere in the public sector. Did that deep dive include Historic Environment Scotland?
I do not know specifically the context of the cabinet secretary’s remarks. As the portfolio accountable officer, Shona Riach might know.
Yes, that is right, convener. The deep dive looked at all of the public bodies with which we have a sponsorship arrangement, which included Historic Environment Scotland.
Did that unearth any of the things that subsequently came out in the section 22 report?
The sponsorship team has had an active and on-going relationship with Historic Environment Scotland. The issues that were mentioned in the report refer in broad terms to governance issues and issues that were, in our view, a matter for the management of Historic Environment Scotland. We have been working very closely with it to address the issues raised and we will give more detailed evidence on that later this morning.
Yes, but that is not strictly true, is it? One of the findings of the Audit Scotland report was that, for six months, there was not an accountable officer in place inside Historic Environment Scotland. If I look at the Scottish public finance manual, it is absolutely clear that if an accountable officer is expected to be absent for four weeks or more, an interim arrangement should be reached and a replacement should be put in place. For six months—not just four weeks—an accountable officer was not in place. That does not sound as though the sponsorship arrangement was working very well at all.
Throughout the period of the absence of the chief executive and accountable officer, the Scottish Government was working very closely with Historic Environment Scotland to resolve the issue. We completely understand the seriousness of the matter and of having such an extended period without an accountable officer in post.
There were some particular circumstances that proved very challenging. Throughout that period, the Scottish Government’s first preference was to have Ms Brown, the chief executive, back in post and acting as accountable officer. For the first two months of that period, Ms Brown was on sick leave; for the remaining three and a half months of the period, she was in discussion with the board about returning. Repeatedly throughout that period, we believed that Ms Brown was about to be able to return to that role, which was our first preference.
Due to the seriousness with which we took the matter, we also worked in close partnership with the board of Historic Environment Scotland to look at options for appointing an interim accountable officer. Unfortunately, nobody within the organisation was able to take on that role, as would be normal practice.
We also worked with the board to look at options for appointing an interim chief executive officer. The Scottish Government provided the board with the names of three possible candidates for that role. The board then came back to us with an alternative candidate, who we interviewed, and we said that we would be happy for them to take on that role. Unfortunately, that did not happen, and we are very pleased that Ms Brown is now back.
That was a very long answer, but when I look at the Scottish public finance manual, it is crystal clear. Under the heading “Absence of Accountable Officer”, it says that if an accountable officer is expected to be absent for longer than four weeks, the principal accountable officer should be notified and action should be taken to appoint an interim replacement. The principal accountable officer is you, Mr Griffin, is it not?
I get that if somebody was off for four, five or six weeks, there might be some bridging arrangement, but if they are off for six months, that means that an organisation that is responsible for 1,600 members of staff and has a turnover of public money does not have an accountable officer for that period.
I absolutely understand the point, convener. I think that the answer that Shona Riach has given sets out the attempts that the team was making to ensure that an accountable officer was appointed by the board.
I will not repeat what Shona Riach has said, but she has set out both the efforts that were made and the constraints present at each turn that prevented them from being able to do that.
There was no shortage of effort on our behalf; there were just a number of pretty extraordinary constraints, including, as has been pointed out, the unpredictability of when the chief executive would return to work. After all, it is by far the best outcome to have a stable chief executive operating as accountable officer.
But what is also extraordinary is that this was all happening at the same time that the Water Industry Commission for Scotland was the subject of section 22 reports highlighting various characteristics that later emerged as being present in Historic Environment Scotland, such as travel expenses and the use of credit cards. Do you not think that that really ought to have been identified as a problem, given that the Scottish Government had been made aware, through the exposure by Audit Scotland and the Public Audit Committee, of what was going on at WICS? Why was the same approach not applied when the Government was looking at what was going on in Historic Environment Scotland?
The sponsor team was looking at what was happening in Historic Environment Scotland, and it made a number of interventions to avoid decisions being made that we do not think would have been correct, including, for example, a rebranding exercise that came at a cost that we did not think was justified. The team was in close contact, as Shona Riach has said, and it intervened on a number of matters. All reasonable efforts were made to try to appoint an accountable officer during the period in question. I think, therefore, that the sensitisation emerging from what happened at WICS was there.
As for the isolated incidents that have now emerged, there clearly has to be a responsibility on the board, the executives and the individual themselves. Of course, the Scottish Government sponsor team needs to take all possible steps that it can to intervene, and it did so in a number of areas. To be honest, I think that the sensitisation as a result of what happened at WICS was there, and the team did everything that it could, but there were some incidents that it was not possible to intervene in and, ultimately, stop.
Do you think that the sponsorship arrangements are fit for purpose?
Yes, I do. There are a great many sponsored bodies—just north of 80 or so, I think—with which teams interact, and there has been a lot of learning over the years. We have referenced the Eleanor Ryan review of sponsorship, which made a number of important recommendations; we recently reviewed that, and the Auditor General’s team helped us with that exercise.
We are also seeing an increasing professionalisation in Shona Riach’s area. The function has now been centralised, with a team responsible for more than one public body, to ensure that greater expertise is concentrated among the same number of people.
What you have mentioned today are two egregious examples of behaviours that should not have happened, but I think that, with the vast bulk of bodies that we sponsor and deal with, there are public servants who are doing their best for the public as well as good oversight arrangements from the sponsorship team, which include a kind of risk assessment that is also reviewed through our governance processes, director general assurance meetings, the executive team or corporate board and so on.
Of course, none of us would want the behaviours that we saw in those two organisations to manifest themselves, but I think that they were exceptions and that the sponsorship function overall is in decent shape.
I will finish my series of questions by going back to the evidence that the committee took on 14 January from the Auditor General, who again pointed out that
“It is the responsibility of the permanent secretary, as the principal accountable officer of the Scottish Administration, to appoint the accountable officers of public bodies … We have seen a lack of clarity in why the Scottish Government chose not to appoint an accountable officer”.—[Official Report, Public Audit Committee, 14 January 2026; c 9.]
How would you respond to that?
I would respond to it by saying that it is the board that has to agree who the candidate is going to be. Shona Riach has set out the steps that the sponsor team took, working with the board, to try to identify a candidate; once a candidate has been agreed, it is then up to the permanent secretary to appoint them. However, you need to have a candidate to appoint in the first place, and Shona has explained some of the constraints that, despite the team’s best efforts, meant that we were not able to find a candidate during that period.
But do you not consider yourselves in breach of the Scottish public finance manual?
I cannot appoint someone who is not there, convener. It is the responsibility of the permanent secretary to appoint the candidate who has been agreed by the board, but what if the board does not agree a candidate? I have to have somebody to appoint.
So this situation could, presumably, be replicated in all kinds of organisations. My reading of the public finance manual is that you, as the principal accountable officer and permanent secretary of the Scottish Government, should step in in these situations to ensure that an accountable officer is in place. You take a different view, presumably.
09:45
I do not take a different view, and I do not mean to disagree with you. It was important to me that every effort was made by the team, working with the board, to identify a candidate I could appoint. My initial concern was in ensuring that everything was done, within the realms of what was possible, to try to find a candidate I could appoint. For as long as that did not happen, it was not possible for me to appoint somebody—we needed to have a candidate.
Shona Riach might want to add to what I have said.
I want to clarify that the legislation and the public finance manual set out that the accountable officer should be an employee of HES. Given that a permanent finance director was not in place and that a number of the senior members of the team were subject to investigations into their behaviour—as you would expect, given some of the press reporting—it was not appropriate to appoint any of those people as the accountable officer. Therefore, our only options were to try to get the CEO back into her role as quickly as possible or, as the permanent secretary said, to appoint an interim CEO. We worked very closely with the board to try to make that happen.
Okay, but the Public Audit Committee has seen lots of examples of the CEO of an organisation no longer being in post. For example, Mr Irwin, the CEO of Ferguson Marine was not the accountable officer; other people were designated that role. The accountable officer does not need to be the CEO and, presumably, if the CEO is off, someone else in the organisation should be appointed to the post.
I will move on to the GFG Alliance. In the next few weeks, the committee will be taking evidence from representatives of the GFG Alliance, because we have a long-standing concern about the risk that the Scottish Government is exposed to as a result of its arrangements with the GFG Alliance. As a reminder, I note that that company is facing litigation from Companies House for failing to lodge accounts and is facing investigation by the Serious Fraud Office for fraudulent trading, money laundering and suspected fraud. The company’s auditors have walked out and, just this week, we read that Liberty Steel, which is part of the GFG group and operates the Dalzell plate mill in Motherwell, is not securing Ministry of Defence orders because of cash-flow issues.
What do you understand the level of risk to be from your arrangements with the GFG Alliance?
I will bring in Gregor Irwin to make some comments regarding that specific question.
Ministers have set clear economic and social objectives in their plans for Lochaber. As you rightly say, we are then in the business of effective risk management. We have to deal with the situation as we find it. We draw heavily on expert advice, and we have a good process for the management of securities that are set out against the guarantees. As I said, we receive on-going advice from special advisers, who keep us well informed. Gregor Irwin will be able to say more about that.
Convener, as I am sure you are aware, our intervention in Lochaber dates back to 2016, when Rio Tinto sold the Lochaber business to the GFG Alliance. It was our judgment at that time that there was a severe risk that the aluminium smelter would close, so, on that basis, the Scottish Government, with the approval of the Parliament’s Finance and Constitution Committee, provided a guarantee in order to sustain the aluminium smelter in business.
We made that intervention to protect jobs, and it has been successful in meeting its economic objectives. The smelter continues to operate successfully. It directly employs more than 200 people, and it has taken on a number of apprentices in recent years. Hundreds more people are employed in the supply chain. That is all in a part of the country where those types of jobs are in relatively short supply.
You are right that, if you provide a guarantee, it involves risk. We have a comprehensive approach to managing our interests at Lochaber. We monitor the activities of the business very closely and we receive quarterly cash-flow updates that are analysed by external commercial advisers. We maintain a comprehensive suite of securities to protect our interests should the guarantee be called. However, the guarantee has met its economic objectives and we have not paid out any money from it. We have received fee payments from GFG in return for the guarantee and we continue to monitor what the company does to ensure that our interests are well protected.
Do you not accept the Auditor General’s view that it is a significant gap that the company has not lodged accounts, does not have auditors and is under investigation by the Serious Fraud Office? Are you seriously suggesting that that is the kind of company that you want to be dealing with?
You are right that GFG has been unable to ensure that its accounts are audited. We have been very clear in our dealings with the company that it has responsibility to ensure that it lodges properly audited accounts with Companies House—
But it has not done that for years, Mr Irwin.
That is the responsibility of GFG directors; we cannot force them to do that. We have made our position very clear on that: we expect that they should lodge audited accounts. It is our understanding that auditors have been engaged for the Lochaber entities and that that work is under way, but we will wait to see what actually happens. We want to see the audited accounts being lodged at Companies House. The Scottish Government is not responsible for compliance under the relevant legislation; the responsibility lies elsewhere.
You are also right that, in 2021, the SFO launched a number of investigations after serious allegations had been made. That was five years after the Government intervention that saved the Lochaber smelter from going out of business. Sometimes, you do not get to choose who you do business with. We are in a position in which we have to work with GFG, which we do with open eyes. We use external advisers to test everything that we hear from the company. As I said, we take a robust approach to ensuring that our interests are well protected, including through the approach that we are taking to manage the suite of securities. That includes not only the smelter but the hydro and the estates, where there is a comprehensive landholding. We take a serious approach to managing our interests.
We have an evidence session with representatives from the GFG Alliance coming up. If you can share any of the advice that you get with the committee in advance of that session, it would be very useful. In the interests of time, I will move on. I invite Graham Simpson to put some questions to you.
I will take a step back to where the convener started, when he was asking about WICS and Historic Environment Scotland. It is fair to say that both those organisations had a somewhat cavalier approach to spending our money. We had a number of sessions on WICS, and I vividly recall that we were assured by the Government that there was nothing else to find; it had had a look at the matter and no one else was operating in that manner—and yet, someone was: Historic Environment Scotland. I know that we will come on to ask about that later. How can we be assured that there is not another quango that is adopting those same spending practices?
We have a series of arrangements in place through the sponsor teams, and there are points of escalation through the governance process to bring to light any examples of poor behaviour, as you are discussing, as well as broader culture issues, potential gaps in succession planning and anything that would give us cause for concern. That is managed primarily by the sponsor teams in the first instance. I mentioned some of the improvements that have been taken through in that regard.
Points of escalation go through the director general assurance meetings, which are attended by the non-executives and by representatives of Audit Scotland. The executive team is also able to respond to any emerging matters of concern. We can escalate things through to the corporate board, too. On a bilateral basis, in the monthly meetings that I have with my DG colleagues, there is a set-piece item under which we review any points of concern around public bodies. I also referred to the increasing professionalisation that we are investing in.
An awful lot is done, which means that, for the vast majority of public bodies, things are as they should be. There is also a well-informed process for assessing risk. I am not for a moment saying anything other than that what happened at WICS and HES was wrong and should not have happened. I need to look at the arrangements that we have in place to unearth any such situations in short order, at an earlier stage, to prevent them from escalating.
As I said, I think that we are in a decent position in that regard. We always want to keep improving and learning lessons. We will learn lessons from the situation at HES, too, but I think that the function, as a whole, is moving in the right direction.
Have you improved the way in which you monitor such organisations, bearing in mind that the practices were uncovered not by you but by the Auditor General, in two reports? That is the fact of the matter.
We unearthed a number of things. I referred to the rebranding exercise. There were other matters on which the team stepped in. You are right to say that some of the specific incidents emerged through the Auditor General’s report, or in some cases—with regard to the behaviour of certain individuals—in the media. However, we had concerns about the culture of the organisation in which some of those individual behaviours took place, and we engaged on that.
One of the reasons why the appointment of Kat Brown as chief executive of HES was so important was that we realised that there needed to be a stronger executive grip on the culture of that organisation, and we believed that, in Kat Brown—who the committee will hear from later—we had found the right candidate.
In summary, a lot of things were unearthed, although not all of what was going on. Some examples of behaviour by individuals emerged subsequently, but I think that we were aware of the general culture and were doing our best to respond to it.
I will not dwell on that, because there is a lot more to get through.
I want to turn to the issue of Ferguson Marine. It might be for Mr Irwin to answer these questions, but that is up to the permanent secretary.
We have just learned that the cost of the Glen Rosa has risen again, by £12.5 million. That brings the total for completing that vessel alone to £197.5 million. It is fair to say that the Scottish Government has completely failed to keep a grip on costs. It has been the ultimate blank cheque. We keep on being told that ministers have made it clear that there are to be no more increases. Yesterday, Kate Forbes said that she was “disappointed”. It is all very well being disappointed, but where does the buck stop? Does the Government have a cut-off point beyond which no more money will be provided?
I will bring in Gregor Irwin, as you suggested. I think that the announcement that was made on 30 January about the requirement for an additional £12.5 million was expected, given that Ferguson’s had signalled before Christmas that there was to be a further delay. That was simply confirmation of the quantum.
As far as the overall situation is concerned, the Government did not wish to be here. Gregor can fill in more of the details—specifically on the point about the prospect of any further costs.
It was announced just before Christmas that there would be a delay of two quarters, and the update that was provided last week concerned the costs that were associated with that.
The reason for the delay is technical issues that were identified during dry dock inspections. Those issues need to be remedied, which has knock-on implications for the sequencing of work. The process that the chief financial officer and chief executive have gone through over the past few weeks has been to quantify the impact of that.
10:00
As you know, I have appeared in front of the committee a number of times to discuss Ferguson’s. In May 2023, we did an accountable officer assessment, following a cost increase. We used external advisers to test all the assumptions that were made at that time, based on a narrow value-for-money test, as required by the green book and the SPFM. We concluded that the completion of Glen Rosa, rather than Glen Sannox, did not meet the value-for-money test.
On that basis, I sought written authority, and our ministers provided that, for legitimate reasons. As you know, as well as being focused on the very direct benefits of completing Glen Rosa, ministerial objectives include supporting commercial shipbuilding on the Clyde and the wider economic impact in the region. Those elements cannot be taken into account in a narrow value-for-money calculation. That written authority was provided at that time.
Early last year, we reviewed the AO assessment and once again sought confirmation that the written authority still applied, because of concerns about value for money. When we reviewed the AO assessment again in November, we followed a similar approach of comparing the costs and consequences of completing Glen Rosa at Ferguson’s and the alternative of procuring from another yard. At that time, as you will know, we concluded that that offered value for money, in part because of the advanced stage of the build. I was very focused on the question of feasibility at that point, given the history of cost overruns, and the Deputy First Minister has been very focused on that, too.
That has resulted in intense scrutiny of the plan to complete Glen Rosa. We have also put in place a review group—it includes our technical advisers, Caledonian Maritime Assets Ltd—which is scrutinising progress against the delivery plan. Having the review group and that process is one reason why we have obtained clarity on the position as of now, and that group will continue to operate. We will review that accountable officer assessment again—we will go through our proper processes in that regard—and I am fairly confident that we will reach the same conclusion that we reached in November: that the approach is within the cost increases and tolerances that we considered at that point.
There is a long history of following the correct processes, although the outcome has not been the one that we wanted. I think that everyone wants Glen Rosa to be completed and the yard to secure a sustainable future with a strong pipeline of work. Glen Rosa needs to be completed so that we can move on to the next phase for the yard. However, the processes that we have followed have been the correct ones.
You talk about the approach being within tolerances. You must be an extremely tolerant man, Mr Irwin, when we have reached a figure of £197.5 million—
Let me—
Hang on—I have not finished.
Sorry.
That figure of £197.5 million is way past value for money. It is not value for money. My question is: how much more is the Government prepared to put into this? It seems to me that anything the yard asks for, it gets.
Let me clarify, Mr Simpson. When we did that AO assessment in November, we were focused on the cost to complete the vessel at Ferguson’s and how that would compare with the alternative of going through an open procurement exercise, procuring a vessel from elsewhere and completing the vessel elsewhere. Based on that assessment, it was clear that the value-for-money option was to continue the build at Ferguson.
We took a cautious approach in that assessment, so we considered two scenarios. The second scenario was about what the calculation would look like if there was a six-month delay—we costed and considered that scenario. That is the scenario that has materialised. We did not foresee that happening at that time, but we wanted to build a robustness check into that assessment of value for money. On the basis of that second scenario with the further six-month delay, the conclusion was that Ferguson’s would still offer value for money. That was subject to proper external due diligence and testing by external commercial advisers. The report that they provided supported that conclusion.
I understand that. You are so far down the road that you feel that you just need to finish the vessel. My question was: have you said to the yard that there are to be no more increases? I go back to my original point, which is that anything the yard asks for, it gets, and it knows that. We are the Public Audit Committee, so we have got to have an eye on such things, and so do you.
Of course.
If the yard has asked for another £12.5 million, that has to come from somewhere. Somewhere else will be losing out in the Scottish budget because we are pouring money into that vessel.
I am acutely aware of that, Mr Simpson. That is fully understood.
Let me explain the process that we have gone through over the past nine months or so, since Graeme Thomson came in as CEO. We have wanted the plan for completing Glen Rosa to be as robust as it can be, so we have been quite demanding in our role. We provide oversight—we are not executives or the board, which provides immediate oversight of the yard, but we have been insistent on our requirements to see a robust plan for completing Glen Rosa. It took some time to get that into place after Graeme Thomson was appointed and following the focus having been on the completion of Glen Sannox.
I repeat that we use CMAL as our independent technical adviser. We ensure that the right expertise is in place to test what we hear from the yard. In addition—the Deputy First Minister insisted that this happened and, from my perspective as an accountable officer, it is important—we have put in place regular reviews of progress against that plan. Although an additional cost increase is not satisfactory and is not what we want to see, getting sight of it now is in some ways a reflection of the additional protections that we have put in place.
The focus absolutely has to be on ensuring that the yard has to complete the vessel, that it does so in line with that plan and that it lives within the budget that it now seeks. There is £5.5 million of contingency built into the cost increase, so there is a degree of protection. I am not naive and I do not rely on that, but we will be absolutely focused on doing everything that we can to ensure that we live within that increased budget.
I did not want to dwell on this subject, because there are loads of other things that we could ask about, but I am not getting the assurance that, if the yard comes to the Government in another six months’ time and says, “Sorry, lads, we need another £15 million,” you are going to turn around and say no. You will say, “Okay, here, have it—but finish the vessel.”
Mr Simpson, I hope that the experience over the past three years demonstrates that, if we go through the AO process and we see that proceeding does not offer value for money or we do not think that doing so is feasible, of course we will escalate that issue. Our ministers have to take decisions on the future of Ferguson’s, while keeping in mind the value for money from the completion of Glen Rosa, the wider economic impact and the yard’s sustainability in the future, for which I have only ever heard support in the committee.
I will move on, if that is okay, convener. I could spend all day asking the same question and getting the same answer.
I am going to ask about social security. The Auditor General said that an estimated £40 million of overpayments were made to Scottish residents, which is a huge sum. How can you explain that, and what are you doing to get the figure down?
Those payments involved benefits that were administered on the Scottish Government’s behalf by the Department for Work and Pensions in the financial year in question. Unfortunately, with any benefits system, there is a degree of fraud and error, which it is not possible to eliminate entirely. A number of those benefits are gradually being devolved to Social Security Scotland, so responsibility for them will transfer over. Social Security Scotland is building up its capacity to estimate fraud and error, and it is the beneficiary of a recent piece of primary legislation that gives it new powers to require spot checks on individual clients, which will further strengthen its ability to detect fraud and error. However, in the 2024-25 financial year, those benefits were administered by the DWP.
The Auditor General also reported on adult disability payment, which the Scottish Government administers. He said that there is a growing gap between the funding received from the UK Government and expenditure. That is unsustainable and cannot continue. What is the Scottish Government doing to bridge that gap and get Social Security Scotland on to an even keel?
The level of benefits is a policy choice for the Scottish ministers. The point of devolving benefits was to build up Social Security Scotland along lines decided by ministers. There are certain principles in play, which the committee will be familiar with.
Ultimately, the funding of those benefits becomes an allocative choice, to use that jargon. Ministers, in budgets, decide how much they wish to devote to those payments as opposed to other priorities.
You have not really answered the question. There is a gap.
Forgive me—I did intend to.
There is a gap between what you receive and what you spend, and it is getting bigger. That cannot continue, can it?
As I said, the basis on which ministers choose to fund those benefits is, ultimately, a matter for the budget. If a certain amount of money is coming from Westminster through the block grant, that makes a contribution. If ministers wish to proceed on a different basis, they will need to fund the difference.
I get that it is a ministerial decision, but I am asking you whether there is a plan to close the gap.
Not in those terms.
That is a no.
I am trying hard to answer your question. Money is not really hypothecated. As you know, Mr Simpson, it flows through the block grant and the Barnett formula, and then it is up to this Parliament to make decisions about how the budget is distributed.
The analysis of gaps in public spending has been set out in the medium-term financial strategy. I rehearsed some of that in my opening statement. There is a series of measures to respond to that, but there is not an individual plan in the social security budget to bridge the gap, if that is what you are getting at.
That is what I was getting at. That is not your fault; there are ministerial decisions and you are there to carry them out. I am not trying to catch you out.
I think that Mr FitzPatrick wants to come in.
By all means, Joe.
I am slightly concerned about the line of questioning. Government ministers produce budgets, but the Parliament made a decision way back, when the idea of Social Security Scotland was first raised, that we wanted a social security system that was based on fairness and values, and that respected people as individuals. At that point, when the legislation was going through the Parliament, the decision was made that Social Security Scotland would be how we ensured that people who required benefits, particularly disability benefit, would be able to get them. Do you think that we are managing to achieve that aspiration and ensure that folk who require the disability benefit are able to get it, and that there might well be a gap in that respect, because, in the rest of the UK, people are not able to get the benefits that they require?
10:15
I think, convener, that I am being drawn slightly into policy commentary, which I am a little uncomfortable with. If you will forgive me, I might plead—
I think that Mr FitzPatrick has put his view on the record, so that will suffice, permanent secretary.
Graham Simpson has a final question, then I will bring in the deputy convener.
I have one more thing that I want to ask about: agency staff. A specific case was identified of a previous employee who was engaged for four months on a part-time basis through an agency at a cost of £85,612. That was then subject to further direct awards; the appointment was extended to 10 months, with the total cost ending up at £220,689. It was a technical role, related to the closure of the European structural and investment funds; apparently, a value for money case was made, but that is an extraordinary sum for taking on somebody from an agency. How can we be assured that this kind of thing is not going to happen again and that those kinds of figures are not going to be spent?
I might bring in Jackie McAllister to make some additional comments, but we are talking about an exceptional set of circumstances to do with the closure of the European structural funds that followed the United Kingdom’s exit from the European Union. There was a need for the work to be carried out to a high degree of accuracy, and with technical input, to avoid the potential for fines being levied, which, as I understand it, could have amounted to anything up to £30 million.
Therefore, the decision was taken to engage the agency worker at the correct level—that is, at director level. That was the level at which the sign-off needed to be made, and there was an assessment of the potential for things to go wrong along those lines, along with the ability of the person to provide that service. Moreover, there was, at that point, a lot of demand for those skills, because the UK Government was going through similar processes in closing down its own structural funds arrangements.
We have seen the Auditor General’s commentary on this, and his recommendation that we review the level at which such sign-offs are made, and we are happy to have a look at that. However, I think that there were some really exceptional circumstances in this particular case.
Jackie, do you want to add anything?
Yes, I will add just a few more points, if I may.
In respect of this particular case, after the individual was first engaged, the Scottish Government decided to extend the ESIF programme in order to increase the potential to recover moneys from the EU. That was the value-for-money argument. As the permanent secretary has said, there were some quite considerable sums at play.
The permanent secretary has also referred to the incredibly limited pool of experience that exists around this particular role, but another point that I would very quickly make is that there is on-going, in-year scrutiny of expenditure. Every part of the Scottish Government will look at its spend on a monthly basis, and that will be supplemented by management information on contract and agency workers on an on-going basis.
Okay. I will leave it there, convener.
Jackie McAllister, you are the chief financial officer for the Scottish Government, and you have just told us that the amount of funds that could have been recovered by this individual was at such a level that it warranted paying them, for a 10-month period, almost a quarter of a million pounds. Is that really how the Scottish Government views these things?
I think that, as the permanent secretary has set out, this was an exceptional situation in which there was an opportunity to recover significant amounts of funds, and it required an audit authority skill set that was available in only very limited cases.
So that is how it works. I just find it incredible that that is how the Scottish Government does its business.
You said, permanent secretary, that you were going to have a look at what the Auditor General said. What he told us was that he felt that approval for that kind of case should be made not at deputy director general level, but at director general level, or even at cabinet secretary level. What is your view on that?
I am happy to look at that. As Jackie McAllister—
But do you agree that that is about right—that approval should be given at cabinet secretary level?
With the benefit of hindsight—if we had known that that sum of money was in play—there would have been a strong argument for escalating the decision point. I do not think that it is the sort of thing that we see on a regular basis, so we must keep things proportionate and not elevate every decision about engaging an agency worker to the level of a cabinet minister or director general. We have also hugely reduced the number of agency workers—by 70 per cent—from March 2022 to September 2025. The prevalence of such contracts has gone way down. However, as you say, that was a large amount of money and, with the benefit of hindsight, we could ask whether that should have been referred upwards. I am very happy to consider that, but we must keep things proportionate.
Okay, but—
In this instance, I entirely recognise the point that it is a very large amount of money—of course I do.
Mr Smith from Audit Scotland told us that it was “an extreme case”, and the Auditor General told us that he did not think that there was
“sufficient oversight of the arrangement”.—[Official Report, Public Audit Committee, 17 December 2025; c 8.]
That is something for you to consider, permanent secretary.
Of course it is, yes.
I will move us on and invite the deputy convener to put some questions to you.
Good morning. For the benefit of the record, I note that I usually wear a tie.
I have a lot of areas to cover, which I will do my best to get through. Following on from the line of questioning so far, it will not surprise you that I will ask a supplementary on Ferguson Marine, given the great interest in the topic.
I will not rehash any of the questions that have been put to you. There is a wider question about the yard. This committee and Audit Scotland have taken a great interest in the viability of the yard as a going concern and its future as a major piece of infrastructure that is publicly owned and a big local employer in the west.
The problem that we have as a committee—Audit Scotland has reiterated this point—is that it is hard to see what the future for the yard is at the moment. What is its future?
I will pass that over to Gregor Irwin, who has been deeply involved in those issues.
Ministers—as are members of this committee—are deeply committed to securing a sustainable future for the yards. A number of pieces of work need to come together to ensure that we can secure such a future. That starts with the business strategy that the yard itself has developed and which focuses on identifying the target markets for a yard in the position that Ferguson’s is in just now. The work in the business plan was supported by good external advice from commercial advisers. We are confident that the sector is buoyant, for reasons that I am sure that you will understand. We have identified good target markets for Ferguson Marine—the yard did that based on the advice. The yard is in the process of developing a business plan that requires it to credibly identify line of sight to revenues that are linked to the target markets. There must be a credible plan for delivering vessels that identifies the associated costs, so that the business plan is really solid.
You will be aware that the question of direct awards has come up repeatedly. Ministers consider the appropriateness of direct awards on a case-by-case basis. The framework for making direct awards is significantly legally constrained by both procurement law and subsidy control law and we need to operate within those frameworks. The sector is highly competitive, so we must ensure that any decisions that ministers take are legally robust. It is not in the interest of the yards for ministers to take decisions that cannot be followed through on if they are subject to legal challenge.
We are in the process of assessing the case for direct award for a range of vessels and we will confirm conclusions on that in due course. A number of pieces of work need to come together to ensure that that happens, but all partners are working together to do just that.
Would it not help if the Scottish Government gave the yard some contracts?
That is the question of direct awards. There are two ways in which to win business: one is through open procurement; the other is through direct awards. That is legally complex. There are restrictions in terms of procurement law for the basis upon which you can make direct awards. That may require structural changes. Essentially, the requirement is that you satisfy what is called the Teckal compliance condition, which requires that the body making the direct award needs to have sufficient control over the entity that is receiving the direct award—
—which it does. The Teckal issue has been around since I sat in the Rural Economy and Connectivity Committee eight years ago, so it is not a new issue, nor was it insurmountable at the time, yet the yard has been overlooked on numerous occasions for contracts. I do not understand how it has taken a decade to get to the bottom of this.
Indeed. But it depends on the vessel that is being procured. There are a range of potential vessels that could be subject to direct awards, and the approach that would be required in order to be Teckal compliant is in part dependent on the vessel.
In addition to that, it is essential that we comply with subsidy control rules, and there are two elements here which are important. As I am sure that you are aware, we have got a long-standing commitment to invest in the yard. That is absolutely essential in order to improve productivity and bring down costs.
We have made a number of small investments already, but in order to be able to make that full-scale investment, we need to be able to demonstrate that it is something that a commercial market operator would do, and that that is properly tested by external due diligence. That is, of course, also tied to the business plan.
On the broader question of making direct awards, we are required to go through a process with the Competition and Markets Authority in order to satisfy it that the award is being made in a way that is consistent with subsidy control legislation.
I am conscious that there is a lot in that answer. It is complex. We have to operate within the legal constraints. The work is being done. Consideration is being given now to the potential for direct awards for a number of vessels and ministers will provide an update at the appropriate point. The work is on-going.
Okay. There is nothing that you have said that we did not already know, nor that gives us or the yard any hope that the Government will give it any contracts, either directly or via regular procurement.
The last business plan that the yard came up with was quite a good one, but it was predicated on the award of the small vessel replacement programme, which of course it was not given, so that business plan was ripped up and the yard has had to start again. It is hard to see what the future is for the yard. I have got no idea what the Government’s strategy is. The yard is, of course, a strategic commercial asset of the Scottish Government. Is the plan to keep it in the public sector forever, publicly owned, and subsidise it, and then come up with all these issues around direct awards because it is a publicly owned company? Is there any plan to put it back into the private sector and then let it bid for work? We have got absolutely no idea.
On the preceding business plan, the key factor in that was success in winning the Western Ferries contract. The yard was not successful in winning the Western Ferries contract on open procurement, and that has required a change of approach.
There is also the SVRP, though. The Western Ferries contract would have been a nice-to-have contract, but we were told directly that it was the Government contract that the yard was waiting on, not the private one.
The Western Ferries contract was central to that business plan and the yard was not successful there so we have had to adjust its approach. That is precisely what we are doing at the moment.
Our ministerial objectives are clear. We want to secure a long-term future for the yard and for commercial shipbuilding on the Clyde. We want to maintain commercial shipbuilding skills. We want to ensure that the local economy benefits from a successful Ferguson Marine shipyard, at the same time as ensuring that the needs of island communities are being served. Those objectives have not changed.
Okay, thank you. I will move on to other issues relating to the reports that we have in front of us.
I will maybe start with you, permanent secretary. The main point of note is the big elephant in the room, which is the identified funding gap in Scottish finances of nearly £5 billion across the next three years. Three years is not far away—it seemed far away when we first heard about the potential gap, but the gap has got bigger and the timeline is getting closer. It is still unclear—this was reflected in the Audit Scotland report—what the Scottish Government will do to meet that gap. Is there a plan?
10:30
There is literally a plan: the fiscal sustainability delivery plan was published in June 2025, and it has three pillars. First, it will ensure that public money is focused on delivering Scottish Government objectives in a way that is underpinned by reform and prioritisation. Secondly, it will support sustainable and inclusive economic policies, particularly to broaden the tax base. Thirdly, it will ensure that there is a strategic approach to tax revenues.
On the public service reform side, a lot has been set out in the public service reform strategy and several projects and propositions are already coming through. Alongside the budget, we published a series of initiatives by portfolio that are already being taken or are planned to be taken, which will achieve total savings of £1.5 billion. However, that will not be done on an annualised basis, so you are right that there is still work to be done to identify the big-ticket items of public service reform, which will be what helps us to bridge the gap as per the strategy.
In recognition of that approach, I wrote to the directors general in just the past fortnight to say that we need to be ready to have those kinds of clear, well-worked propositions for the new Administration. For example, two health boards will merge on 1 April. That is a good start.
However, your point is correct that there is a pace and urgency with which the civil service must respond in elaborating on propositions that can be decided on.
Which health boards are merging?
NHS Education for Scotland and NHS National Services Scotland.
Oh, not geographical health boards.
They are two national health boards, not geographical.
Okay, that is helpful. Sorry, you got us panicking there and wondering whether you had just announced something by accident.
I hope that I have not inadvertently created a headline. No, it is two national boards that are merging.
I will come on to public service reform, which is an interesting area, in a moment. However, in layman’s terms, the Government will not have enough money to spend on the things that it needs to spend money on because there are resource and capital shortfalls. That clearly means that the Government must either introduce considerable tax rises to make up the difference—I assume that the Government is considering how far it can go with tax rises to achieve the maximum income—or make cuts to public services. The question is which taxes will go up or which services will be cut. The public has the right to know that.
As I said, the fiscal sustainability delivery plan is based on three things. In short, the first is about reform, the second is about economic growth—particularly broadening the tax base, because the situation with the fiscal framework is that successful economic performance by Scotland will lead to a considerable increase in revenue—and the third is about a strategic approach to tax. Shona Riach, do you want to add anything about the overall approach?
Yes. You referred, Mr Greene, to the importance of public service reform, which is also an important pillar of the Scottish Government’s approach to long-term fiscal sustainability. The PSR strategy was published last June and it set out, in detail, the vision and priorities for reform. It set out the Government’s approach under three pillars: prevention, joined-up services and efficiency. Making progress in each of those three areas will contribute to securing the long-term financial sustainability of public services.
The PSR strategy is built around an ethos of fundamental reform to ensure that we continue to provide excellent public services for the people of Scotland while doing it in a more efficient and cost-effective way.
How many public sector jobs is the Government likely to cut in the next three years to meet the reform objectives? Is there a target?
In the fiscal sustainability delivery plan, the cabinet secretary talks about a managed downward workforce trajectory of
“0.5 per cent per annum on average over the next five years”.
That will provide savings that will grow from £0.1 billion to £0.7 billion, ensuring that public services are sustainable over the medium term.
There is a particular emphasis on back-office roles, if you like, in relation to the Scottish Government core function and the reductions that we need to manage as well. Given that an awful lot of cost in the public sector relates to pay, there will need to be downsizing of those workforces.
So, with 0.5 per cent, what we are looking at? How many people per year will the Government lose? When you talk about back-office roles, you are presumably not talking about nurses, teachers, firefighters and police officers—or are we talking about those roles?
The PSR strategy talks about a £1 billion target in relation to reducing annualised Scottish Government and public body corporate costs over five years, which involves savings in corporate functions such as human resources, estates and so on. However, as ministers have set out, the idea is to protect front-line staff, so the emphasis is very much on those back-office roles.
How many people work in the Scottish civil service?
I am struggling to find the figure in my pack. For the core Scottish Government civil service, the latest published figure is 8,873.
Do you plan to make cuts yourself?
We will need to reduce that figure by some 20 per cent over the course of the next five years.
That is bad news for your staff, is it not? Twenty per cent is a lot of people.
We are approaching it through natural attrition. There is a commitment to no compulsory redundancies as part of the pay deal and there are no plans for a voluntary scheme. As things stand, there are no plans for anybody to leave who does not wish to leave.
In relation to the consolidated accounts for 2024-25, the Audit Scotland report contains some figures on underspend—a £875 million resource underspend and a £134 million capital underspend, which is a total underspend of more than £1 billion. At a time when many public services are seeing quite heavy workloads and tight budgets, and when services are being cut and some capital projects are being cancelled or paused, that does not make sense. What happened to the £1 billion?
I will bring in Jackie in a moment, but the overall underspend does not represent a loss of spending power to the Government. The £1 billion includes non-cash elements such as depreciation and ring-fenced, annually managed expenditure that cannot be used on day-to-day costs or deposited in the Scotland reserve.
The outturn underspend of some £557 million, which we reported provisionally in June, reflects the sum that can be carried over. That £557 million was allocated as part of the 2025-26 autumn budget revision that was published on 25 September, and that is money that can be spent on public services or other spending choices.
The first thing to say is that we cannot overspend our budget. We can underspend but we cannot overspend even by a pound, otherwise we would have our accounts qualified. We must always manage to a level of underspend.
The permanent secretary set out that the underspend in the accounts is against the budget that is voted on by the Parliament through the spring budget revision, and that includes a significant proportion of ring-fenced and non-cash budgets that we cannot spend on anything other than their purpose, including depreciation provisions and changes in valuation.
Inherently, those types of budgets are quite volatile, so we must always plan our requirements for them prudently. The spending power—the budgets that you would attribute to supporting public services—is, as the permanent secretary said, what we report at the provisional outturn and the final outturn. That £557 million was reported at the provisional outturn, so the final outturn will be the amount that we will carry through. That has been fully allocated into the 2025-26 budget. There is no loss of spending power.
With a budget of £60 billion, it is very difficult to manage to 31 March. In particular, and increasingly with the Scottish Government budget, there is expenditure that we do not get confirmation of until well after 31 March. The permanent secretary spoke about the social security spend that is administered by the DWP. We do not get that final information until well after 31 March. In addition, we have the Audit Scotland audit and all the other audit arrangements that happen after 31 March, so we have to provide for audit adjustments. Because they are consolidated accounts, that involves audit adjustments for not just the Scottish Government but all the bodies that are consolidated into the accounts.
In summary, we will always have a level of underspend. We have the Scotland reserve, and we always deliver an underspend within the limits of that reserve. The underspend is always carried forward and utilised in each year, so there is no loss of spending power.
It sounds as though roughly half of the underspend was rolled over to the next financial year and spent accordingly, and that, with about half of it, you could not do that, due to its nature. That is helpful information. I appreciate the wider context, but I thought that it was important to check that.
Another issue that the Auditor General raises in the “Financial sustainability and taxes” report, and on which we have heard evidence in person from Audit Scotland, is to do with tax revenues in Scotland resulting from devolved policy decisions. I appreciate that those decisions are made not by civil servants but by Governments and, indeed, that they feature in budgets that the Parliament passes. However, there is still a wider question.
The Auditor General raises the valid point that, for 2025-26, £1.7 billion of extra tax will be raised in Scotland through policy choices that the Government makes, but that that will net only £616 million of benefit to the Scottish budget. Those are the Auditor General’s numbers. That is about a third of the amount raised—it is slightly better than the figure the year before. However, about 33p in the pound is reaped for the benefit of all your directorates to spend on public services. How are we going to fix that problem? How will we ensure that the £1.7 billion that we raise in extra taxes is available to the Government to spend on public services? At the moment, we are nowhere near that.
I will bring in Shona Riach to cover that in a bit of detail, but that relates to the comment that I made a moment ago about the fiscal framework and the relative economic performance of Scotland against that of the rest of the UK, which has an impact on the revenues that accrue to the Government.
We are in discussions with the UK Government about the next review of the fiscal framework, and the issue that you raise will be under discussion in that review, which is due in 2028. We recognise that, with the previous review, in 2023, there was a significant lead-in time, so we have agreed with the UK Government to begin preparations for the review and, specifically, to begin discussions on the scope of the review and what should be covered in it.
The 2023 review was somewhat narrow in scope, due to the views of the former UK Government, and our ministers are pushing for a broader scope for the next one. That will be the opportunity to consider the appropriate balance between the powers that are devolved to the Scottish Government and the fiscal levers available to it to manage budget volatility. The issue that you raise relates to the calculations around the block grant adjustment relating to taxes, which is something that we will seek to include in the scope of the review of the fiscal framework.
Forgive me, but my question is about why people are paying more tax when the Government does not have more money to spend. The answer to the question is not a technocratic one about the fiscal framework. It sounds to me as if you are pinning all your hopes on a review to fix the problem. Page 4 of the report makes it clear what the problem is. It states:
“The relative performance of the tax base, such as growth in wages and employment, in Scotland compared to the rest of the UK is a main driver of these differences.”
That is what I am looking for an answer on. How will we fix that problem, not the fiscal framework?
I think that there is some debate about the cause of the issue. The Auditor General’s report is very much informed by the view of the Scottish Fiscal Commission, which we have huge respect for—
What is the debate? Where is the conflict? What do you not agree with?
The issue is about what factors are relevant to the size of that gap. Scottish Government analysis suggests that the factors are not purely related to economic performance but include behavioural impacts and, significantly, structural differences between Scotland and the rest of the UK that predate devolution. We believe that that can be addressed and that progress can be made on it in the review of the fiscal framework.
10:45
You do not think that Scotland’s relative economic performance in relation to wage growth and employment growth is the problem.
There is certainly an issue with wage growth, but it is compounded by Scotland’s wage structures being different from those in the rest of the UK and, in particular, the fact that the UK economy is driven to such a large extent by the economy of the south-east of England, where there are particularly high salaries in the financial services industry, whereas wage growth in Scotland tends to be distributed across the whole of society.
Would a high-wage Scotland not be the answer to that problem, rather than blaming another part of the UK?
The Scottish Government is committed to increasing growth and, therefore, wages in Scotland. That is at the heart of the Government’s priorities. However, I do not think that this particular issue is the only problem that is causing the gap.
In the interest of time, I will leave it there.
I will follow a slightly different path. Let us have a wee chat about the transparency and public understanding of devolved taxes. I think that everybody’s understanding of taxes these days is pretty tenuous, given the complexity of the tax system, but the annual survey of Scottish taxpayers’ attitudes indicates that about 50 per cent of Scottish adults feel that they do not understand Scottish taxes, while about 40 per cent say the same about UK taxes. That has been the case probably for the past five years.
The Scottish Government considers it important that there is transparency and that people understand their taxes, but clearly they do not. What are the Government’s plans to improve the transparency and presentation of information on the devolved tax system, so that more Scots can understand where their money is going and, as part of that, the impact on the Scottish budget?
I will kick off and then invite Shona Riach to come in.
The Auditor General’s report in November includes some really helpful recommendations that cover exactly what you have suggested. In the budget that was presented to the Parliament last month, we were able to do a couple of things to take account of those recommendations and respond to the Auditor General’s point of view. I ask Shona Riach to talk about that in a bit more detail.
As you said, Mr Beattie, the Government is committed to improving transparency and increasing understanding of tax across the whole population. The budget document sets out a range of information on tax, including the Scottish Government’s tax policy decisions and forecasts of tax revenues. This year, in direct response to the Auditor General’s recommendations, we published, alongside the budget, an additional document that sets out forecasts of devolved tax revenues, block grant adjustments, net positions and policy costings. We also published a short key facts document, which was designed to be as accessible to as many people as possible.
We continue to work on improving transparency and understanding. As the permanent secretary said, the Auditor General’s recommendations are very helpful in that regard, and that will continue to be a priority.
Given that the survey results show that attitudes have not changed in the past five years—the level of understanding has stayed the same—whatever is being done is not enough to get through to people. Otherwise, after five years, we would see some changes in the percentages. Why are UK taxes easier to understand than devolved taxes?
Improving transparency continues to be a work in progress for us. As I said, additional measures were taken around the budget that was published in January. We will continue to do all that we can to make progress on the issue.
I am interested in knowing what is being done to improve tax literacy. The Government has published tax literacy objectives, but what further work is planned? You have talked about putting out a simplified document to improve public understanding and awareness, but how will that differ from what you have done before, and how can you assess its impact?
As you said, we publish information on tax literacy. We will continue to do that and to monitor progress. The Scottish Government’s view is that tax literacy is an important area where we seek to make progress. That is why we took further steps to increase transparency around the budget in January.
The concern that I keep coming back to is that there has been no movement for five years. What will you do differently to change that?
It is probably fair to say that we do not have a specific, detailed plan yet. The Auditor General’s recommendations came out in November. They were a helpful stimulus to address a situation that had already been identified. The team that would be responsible for doing so were heavily engaged in producing the budget in January. It is an issue that we want to work on, and we will happily come back to the committee when we have a more detailed prospectus, but it is work in progress, and there is nothing that we can describe to you this morning, Mr Beattie.
I will move on slightly to tax and economic strategies, which go very closely together. Without economic growth, there is no tax growth and, therefore, no improvement to public services—it is very simple. It makes sense that those two strategies should be completely aligned. What impact will the Scottish Government’s economic strategy have in terms of strengthening the tax base in order to support the fiscal stability and sustainability that we are looking for over the medium term?
I will ask Gregor Irwin and Shona Riach to do a double act on that question.
I will pick up on some of the related questions that have been answered already. The data on gross domestic product per capita, which is an average across the population, suggests that, over a reasonably long time period, Scotland has been doing a bit better than the rest of the UK. That is an important reference point for considering Scotland’s economic performance, although it does not mean that there is not room to improve that performance.
The key to strengthening the tax base is to build on that. Shona Riach has already mentioned the distribution of income in the economy and how it compares differently from that in the rest of the UK, which is partly because of the effect of London and the south-east. We need to be mindful of that.
However, to be blunt, what is good for growth is good for the tax base, and that is by and large the Government’s approach. The budget includes considerable investment through the enterprise agencies to support growth through exports and investment. It also includes funding through the Scottish National Investment Bank to support place-based growth and to invest in some of the most important scaling businesses in Scotland. That will help drive up productivity, which is relevant to gross domestic product per capita and the richness of the tax base. I could point to various other elements, such as our place-based work through city and region deals and our work to strengthen regional economic partnerships. We can do more through those partnerships to improve productivity across the whole of Scotland. We currently see differences in productivity across Scotland.
There are other programmes where we can point to quite good progress having been made in recent years, such as the work that we have done on employability and fair work, which helps to bring people into employment and increases the employment rate. The work that we are doing on fair work helps to improve people’s terms and conditions while they are in employment. We have seen good progress on that and there are good comparisons with the rest of the UK in relation to the percentage of people who are being paid the real living wage. That work is important and is relevant to the question of the tax base. It also helps to reduce the burden on public services.
That does not get directly to the question of the distribution of income and how it compares with the south-east of England and London, which is one of the factors that influences the overall tax position. We have seen progress on the linkage between the growth programme, the support that we provide through enterprise agencies and others, and the imperative of raising the rate of investment, which must be done if we want to raise productivity and is intimately linked to the question of the tax base. Obviously, there is more progress to make on that.
The report notes that there are developing relationships across tax and economy teams in the Scottish Government. That implies that it is not quite there yet and that there is some distance to go. However successful it might have been until this point, why was that work not done before? It is pretty basic: tax and economy go together and impact each other.
Indeed. Shona Riach may want to pick up on that. To be honest, I think that we work closely together. Of course, the fiscal framework has evolved over time, as has the Scottish Fiscal Commission’s methodology and approach. We work very closely with exchequer colleagues on the linkage between growth and the tax base and on other areas as well.
I very much agree with what Gregor Irwin is saying. Colleagues in the exchequer and DG economy work extremely closely because of the very point that you have raised, which is the central importance of the economy and economic growth to the tax base.
How do you quantify the direct impact of any individual set of economic interventions on tax revenues? The report notes that that is difficult to do, but there must be some way to do it; otherwise, fiscal policy would be a bit wobbly.
We are in close dialogue with the Scottish Fiscal Commission about that. The commission provides costings for all tax policies and has increased the work that it does to look at the broader impact of economic policy measures on the tax base.
Are we satisfied with the outcomes of that?
It is difficult to measure. We are pleased that the Scottish Fiscal Commission is looking at it and taking the work seriously, but ministers believe that more work could be done on that.
I am concerned that there is any gap between the economic policies and the tax policies that are being developed, because they are so interdependent. It is simple: one impacts the other. I would like to know how we are going to strengthen the alignment between tax and the economic side. In reading the report and from some of your responses, it seems to me that it is not quite as tight a relationship as it should be.
The medium-term financial strategy sets out a clear and comprehensive view of the extent to which tax contributes to closing the projected fiscal gap, which absolutely goes hand in hand with the Government’s economic planning. I assure you that teams are working extremely closely on these things and that, when we look at tax policy, we consult closely with colleagues in DG economy about the impact of such policy on economic growth. When Gregor Irwin and his colleagues in DG economy look at economic growth interventions, one of the issues that they are thinking about is the potential for positive impacts on the tax base.
11:00
Mr Beattie, we have been exploring with the SFC and exchequer colleagues a more formal methodology for doing just that—scoring the growth impacts of economic policies. That remains work in progress, and it is, of course, ultimately a choice for the SFC.
However, it is quite important for us, too, not only because of the impact on the growth forecasts that we will see in due course, but because such an approach creates a good feedback loop into policy making within Government. I think that that is one of the issues that you are alluding to—it is that virtuous cycle of good policy being reflected in forecasts for the economy, thereby growing the tax base and, in turn, impacting on our approach to developing good policy. We are seeking to develop that framework further.
You will, of course, take evidence from the SFC on similar issues, but I can say that it is mindful of the Office for Budget Responsibility framework for the rest of the UK. The Governments are different, as are the circumstances in which we operate, but there are parallels between what the OBR does and what the SFC does in this regard. From my perspective, though, we are making progress there, and it is a very positive development.
Thank you.
I have just one very quick question related to what you have been talking about. Is there any plan to provide an updated analysis of GDP versus gross national income? Is there not an issue with relying on, say, foreign direct investment for economic growth in that it might bring income tax receipts and benefits but the overall impact can be quite extractive?
There is no specific plan to do that at the moment, but our chief economic adviser’s team produces a range of statistics and analyses, and that is one of the issues that it will consider on a regular basis.
Okay. Thanks. I have got that on the record, anyway. I now invite Joe FitzPatrick to put some questions to you.
I want to go back to some of Jamie Greene’s questions about the fiscal framework and the difference between the tax take and its financial benefit to Scotland. I think that Shona Riach mentioned the structural differences, one of which is the financial sector. Across the world, perhaps, but certainly in Europe, it is not unusual for financial jobs to coalesce around the capital city, because that is where the institutions are. I just want to probe that a little deeper. If we were to take London and its very overheated economy out of the fiscal framework calculations, what impact would that have?
It also seems to me that, when it comes to some of the other structural challenges that we have, one in-built challenge is that jobs in London have a London weighting, which means that someone doing exactly the same job in the civil service in London gets paid more. How can we ever overcome that, given that it is built in?
I will give that a go, and Shona Riach might want to come in, too. Indeed, I think that this was what she was alluding to with regard to the next review of the fiscal framework. These things happen periodically, but the fact is that, if you are basing your tax revenue or intake partly on a differential economic performance between Scotland and the rest of the UK, including London and the south-east, reflecting earnings growth, you are always going to be presented with the sorts of structural problems that Shona was describing. That is the relevance of the review of the fiscal framework. It is to establish whether these things are still fit for purpose or whether there is a different way of addressing the situation.
One of the challenges that we face, which I think the Scottish ministers have recognised, is the risk of behavioural change as we change tax levels in Scotland. We need to be mindful of that risk, and the Government has said likewise.
We are keen to understand what work is being done, so that the Government can understand what behavioural change is happening and what the risks are in that regard. Are more tools being developed to finesse the Government’s understanding as the tax policies in Scotland and the rest of the UK diverge?
The issue of behavioural change relates not only to divergence between Scotland and the rest of the UK but is an issue that the Scottish Government—indeed, all Governments—will look at as a routine part of developing tax policy. We work very closely with the Scottish Fiscal Commission on the issue. As I have said, it is responsible for costing proposals for changes in tax policy, and the analysis that it does very much informs the decisions that the Scottish Government takes about the setting of income tax and other devolved taxes. We are very grateful to the Scottish Fiscal Commission for the work and analysis that it does, including an assessment of the behavioural impacts of different options for changes to tax policy.
Are you confident that the tools and the relationships that you currently have provide robust answers with regard to the risks of behavioural change?
I am. We have a great deal of confidence in the work of the Scottish Fiscal Commission, whose independence and expertise we benefit hugely from. The commission’s level of expertise and degree of independence mean that we can be confident of the robustness of its analysis. It is an important part of our policy-making process that that analysis is fed in to us at such a point that it informs the decisions that the Scottish ministers take.
My last question is about VAT assignment. Where is that sitting? There is great concern about the fact that that process is not moving at any pace. Where do you think we are with that?
You are right to say that that process is not progressing quickly. We continue to discuss the issue closely with the UK Government. Following the conclusion of the most recent fiscal framework review, and in the light of the concerns that were raised by the Finance and Public Administration Committee, the Scottish Government and the UK Government agreed to work on future options for VAT assignment. The matter was most recently discussed at the recent joint Exchequer committee meeting between the Cabinet Secretary for Finance and Local Government and the Chief Secretary to the Treasury.
Despite collaborative engagement between the Scottish Government and the UK Government, concerns remain about the substantial uncertainty and the volatility associated with the proposed assignment methodology, which would pose significant risks for the Scottish budget without conferring on us any further fiscal or policy powers to help us to manage that.
Similar concerns have been raised with the Scottish Parliament’s Finance and Public Administration Committee and the UK Parliament’s Scottish Affairs Committee, which have been told by external experts that they agree that VAT assignment would cause problems.
Although we remain committed to fulfilling the Smith commission’s recommendations, we need to protect the Scottish budget from unnecessary levels of risk. Our ministers will continue to discuss the matter with UK ministers.
So, there is currently no timescale. Is the issue of VAT assignment likely to be rolled into the fiscal framework discussions?
It would be our hope that that could be discussed as part of the fiscal framework discussions. However, it is also regularly discussed whenever the UK and Scottish Governments meet to discuss fiscal issues.
We have time for one final, short question from Jamie Greene.
I apologise—I forgot to ask this question earlier, when we were looking at strategic commercial assets. I am not sure whom to direct it to. Prestwick airport came into public ownership some 16 years ago, and the plan was to return it to the private sector. A deal was in play in 2020, which fell through. Five years on, another deal was on the table, which fell through in November last year. We get little information about the nature of the deals—everything is cloaked in secrecy on the basis of commercial confidentiality. However, at the end of the day, the airport is publicly owned, so I am seeking a bit more transparency today.
Why did the latest deal fall through? Should the Government give up trying to sell the airport?
I will ask Gregor Irwin to comment on that.
As, I am sure, Mr Greene will be aware, we ran a market testing process over an extended period that resulted in a number of expressions of interest. We ran a good process using external advisers, where appropriate, commercial advisers and legal advisers. We reduced the group of interested parties down to a single preferred bidder and progressed very detailed, intensive negotiations over the sale of the airport. As you will have heard the Deputy First Minister announce towards the end of last year—I think that it was in November—the preferred bidder withdrew from the process. That was a decision for them. I am afraid that I cannot give reasons on their behalf as to why they chose to—
They must have told somebody in the Government why they were pulling out. They would not just walk away from the deal with no reason or explanation—I just find that hard to believe.
They chose to withdraw, which was their prerogative. I am afraid that I cannot speak on their behalf.
That is inherent in a process of this sort. These processes always get to a negotiation with a single party, although one or two other parties might still be in the background. It is a process in which you enter into exclusivity and you have a negotiation with that party on a confidential basis, and it is possible that no satisfactory conclusion is reached for either party or both parties. In this case, the preferred bidder withdrew.
I am absolutely confident in the strength of interest in the airport as a commercial entity, which the process has revealed. Its economic importance is growing, its operational performance has improved throughout, and it now has a very well-diversified set of operations. It employs more than 500 people, which, in itself, is an extraordinary performance. The increase in freight business cargo has strongly underpinned the recent improvement in performance, but it is a well-diversified business.
We will, of course, advise ministers on the full set of options for Prestwick airport, and I am sure that they will update Parliament as and when that is appropriate. The airport continues to play a really strong, important role in the Ayrshire economy.
It sure does.
On behalf of the committee, I thank Jackie McAllister, Gregor Irwin, Shona Riach—although you are not going anywhere, as you are on the next panel, too—and the permanent secretary for your evidence to us this morning. There may be some areas that we will want to follow up with you. Thank you for your candour.
I will now suspend the meeting to allow for a changeover of witnesses.
11:13
Meeting suspended.
11:20
On resuming—