Finance and Constitution Committee

Meeting date: Wednesday, February 8, 2017

Official Report 662KB pdf

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Budget (Scotland) Bill: Stage 2

Good morning and welcome to the Finance and Constitution Committee’s sixth meeting in 2017. As usual, I ask members to switch off their mobile phones or at least to put them in a mode that will not interfere with proceedings.

Our first agenda item is to take evidence on the Budget (Scotland) Bill at stage 2. The session is intended to allow the committee the opportunity to put questions to the cabinet secretary and his officials.

I welcome to the meeting Derek Mackay, the Cabinet Secretary for Finance and the Constitution. He is joined by Graham Owenson, head of local government finance; Jonathan Sewell, head of the income tax and fiscal adjustments unit; and Gordon Wales, director of financial management. I welcome all our witnesses and I invite the cabinet secretary to make an opening statement.

I take the opportunity to recognise the committee’s work during this year’s budget process, which is reflected in the quality and scope of your report on the 2017-18 draft budget. As I informed Parliament last week, I will respond in full in advance of the stage 3 debate.

There are a number of amendments to consider following the spending changes that I announced at stage 1. As committee members are aware, there are a number of differences in the presentation of budget information between the draft budget and the budget bill. To assist the committee, I will explain the main differences with reference to table 1.2, which is on page 3 of the supporting document.

Column H in table 1.2 sets out the draft budget’s spending plans, as required to be restated for budget bill purposes. Columns B to G in the table provide details of the adjustments that have been made, including the statutory adjustments that are necessary to meet the requirements of parliamentary process.

I take the opportunity to highlight one substantive change to the spending plans that are outlined in the draft budget. To ensure that budgets align with the latest available information, there is an increase of £1.115 billion in the annually managed expenditure budget provision for the teachers and national health service pension schemes. That reflects HM Treasury updates to discount rates that are applied for post-employment benefits, which were announced in December 2016. That is a non-cash adjustment that relates to estimates of future liabilities.

The other adjustments that have been set out include the exclusion of £164.8 million of non-departmental public body non-cash costs, which do not require parliamentary approval and which mainly relate to depreciation and impairments in our NDPB community; the exclusion of judicial salaries and Scottish Water loan repayments to the national loans fund and the Public Works Loan Board, which also do not require parliamentary approval; and the inclusion of police loan charges, which are to be approved as part of the bill. Those are technical accounting adjustments of £111.7 million, which reflect differences in the way in which HM Treasury budgets for those items and how we are required to account for them under the international financial reporting standards-based accounting rules that apply under the Government financial reporting manual.

There are also adjustments to portfolio budgets to reflect the requirement for separate parliamentary approval for the budgets of a number of direct-funded and external bodies. They include National Records of Scotland, the Forestry Commission, Food Standards Scotland, the Scottish Courts and Tribunals Service, the Office of the Scottish Charity Regulator, the Scottish Housing Regulator, Revenue Scotland and the teachers and NHS pension schemes.

The restatement of specific grants was included in the overall 2016-17 local authority settlement, and they remain under the control of the appropriate cabinet secretaries with policy responsibility. Full details of all the grants that are treated in that way are included in the summary table on page 44.

I again make it clear that those adjustments are essentially technical and do not change in any way the budget that has so far been scrutinised by this and other committees and approved in principle by Parliament. I remind members that, for the purposes of the bill, only spending that scores as capital in the Scottish Government or direct-funded bodies’ annual accounts is shown as capital. That means that capital grants are shown as operating expenditure in the bill’s supporting document. The full capital picture is shown in table 1.3 on page 4.

The amendments to the bill will give effect to the changes in the spending plans that I announced last week in the stage 1 debate and will be formally moved in due course. The amendments will allocate an additional £160 million to local government, £25 million to police reform and £35 million to Scottish Enterprise. Details of the allocations of the £160 million at local authority level have been provided separately. It will be up to councils to decide how best to deploy the additional funding.

The commitments will be funded through the use of the budget exchange mechanism, updated projections of the required Scottish Government contribution to bring the non-domestic rate pool into balance and a reduction in the anticipated cost of borrowing repayments next year.

I hope that committee members have found that information helpful.

The Government has claimed that an additional funding package of £220 million will be made available in 2017-18. I have a simple question: where is that money coming from?

It might be helpful if I give you more of the detail on that, after which I will be happy to take further questions. I can give you figures, but the caveat is that they will be quite fluid until we get to the end of this financial year and into the next one. I suppose that that will become clearer as I describe how we arrive at the figures.

In moving from the draft budget to where we are now, we have had further time to look at forecasts, demand-led budgets, actual expenditure and the potential carryover from one year into another year, which is the budget exchange mechanism that all members are familiar with. We have also looked at our forecasting of and how we adjust non-domestic rates, as well as the change in borrowing that I touched on. Furthermore, we have changed our tax position, which will generate a sum of money.

I will give you figures for each element but with the caveat that, as we reach the end of the financial year, the profile of some of the figures in the £220 million may change. From budget exchange—that is the carry-forward from one year into the next, which can apply to demand-led budgets or underspends as we understand them—there is £47.5 million in resource departmental expenditure limits, £42.5 million in capital and £35 million in financial transactions.

From non-profit-distributing programme borrowing, the figure is £6 million. Officials can assist with the technical detail on all the figures, if that is required. From the non-domestic rates pool, we have £60 million. In addition to all that, the cash freeze on the higher-rate threshold should generate about £29 million.

From resource DEL, the total is £142.5 million; from capital DEL, the total is £42.5 million; and from financial transactions, the total is £35 million. That takes us to the figure of £220 million.

I make it clear that those figures are fluid and may change. The £220 million will not change, but the profile will be subject to what is required and appropriate at the time. Some of that will feature in budget reports later in the financial year. I can go into further detail if required to do so, but that is where the resource comes from.

To put it another way, there is always some element of budget exchange from one year to the next, when an underspend is carried into the next year because we cannot overspend—we can only underspend or get it bang on. To achieve a spend that is absolutely bang on target is next to impossible for any organisation of this scale.

To put the matter into context, the level of carryover from one year to the next—budget exchange—is quite normal. In the past, finance ministers might have been able to allocate that to specific purposes over the course of the year—last year, we allocated funds to the fiscal stimulus of £100 million. At the start of the coming financial year, I propose to allocate the budget exchange figures to the purpose that I have described, to respond to requests in Parliament and the clear budget negotiation process that was undertaken.

You are right that members will want to get to some of the detail that is underneath that information. I would like to go into more detail on the non-domestic rates pool, which you tell us will produce £60 million for expenditure in other areas. I hope that you agree that there would be an almighty outcry from the business community if it thought that that money came from business rates. Can you assure me that none of the money from the NDR pool will come from business rates and that there will be no impact on Scottish businesses as a result?

There is no impact on businesses or business rates as a consequence of the budget decisions that we have taken. The non-domestic rates pool is incredibly complex, but essentially, although it involves multiyear budgeting because of how it is calculated, distributed and forecast—because of all the moving parts that are in it—it is true to say that every local authority area keeps every penny of non-domestic rates. In the pool, there are the contributions and the distributable amount; we assess the forecasts for that and then profile the amount for distribution. That is what we have done.

We have looked at the profiling, the considerations of the pool and the nature of the operating account and have ensured that the decision on the £160 million will not impact on what I have proposed for business rates—the poundage is still being reduced, the small business bonus is still being enhanced, we are still taking thousands of businesses out of the large business supplement and every council area will still keep every penny that it raises. We have changed the forecasting for all that—again, I can go into further detail—but the basic point in your question is correct in that there is no impact on businesses paying rates as a consequence of my decision on how to deploy the resources.

Liam Kerr has a question on that area.

My question follows on nicely. If I am hearing you right, there is an extra £60 million that you did not realise that you had, which relates to business rates. As you know, up in the north-east—I know that you have been up there—there are intolerable hikes in local business rates, which mean that there will be big cuts in businesses’ resources, and some are threatening to shut their doors. That begs the question of why you would not use the extra business rates money to ameliorate the significant problems that businesses in the north-east and elsewhere face.

Mr Kerr asks a good question. I am well aware of the issues in the north-east and particularly in Aberdeen city and Aberdeenshire—that is why I went there at short notice, following a timely request to go. The meeting was described in the media as fiery, although it was actually very positive and constructive for all the attendees.

We can go over the facts on business rates, but there are further actions that can be taken. The committee is a useful place to understand and discuss that.

Some people do not think that business rates money stays in the local area—I have heard that charge in Aberdeen and Aberdeenshire—but that is not true. I was able to explain that half of all properties in Scotland will pay no business rates whatever.

09:45  

There is an issue in hospitality that is worthy of further exploration, but half of all hotels pay no business rates whatever. In the north-east and across the country, there will be many beneficiaries from expanding the small business bonus. Raising the threshold for the large business supplement to £51,000 is lifting thousands of businesses out of paying that supplement. The poundage rate and the large business supplement together are lower than the 50p rate, and I have matched the poundage rate south of the border. All that is a good, nationally determined package of reliefs, and there is the expansion of rural reliefs as well.

The Ken Barclay review of all the individual issues around business rates will report in late summer. I want to look at how the methodologies for some sectors’ rates were arrived at. Maybe it has been the case for decades that the formula is the formula, but I am interested to hear the panel’s thinking on that.

I had a constructive conversation in the north-east. I said that I was more than happy to work with the local authorities on further support and that it might be more appropriate to have local schemes that reflect local circumstances, which is an issue that I will come back to.

I do not believe that a national transitional relief scheme is appropriate, given the nature of the revaluation. Mr Kerr will understand that the revaluation is independent of the Government and is delivered by assessors who are accountable to the courts and local authorities. Two thirds of businesses will pay business rates that are the same as or less than they paid previously. Those whose rates bills are going up will want to understand that and express their views to the Government, while those who will have no bills or smaller bills will perhaps not be as vocal.

Having looked at the data that I have, I believe that, if we were to have a national transitional relief scheme, as exists south of the border automatically because of legislation, the so-called biggest winners would be the national utility companies, at the expense of many smaller businesses. Many smaller businesses would pay more and their rates would be held artificially high to compensate the large utility companies. That would not be the right balance.

I have been engaging with a number of councils on local support. The Community Empowerment (Scotland) Act 2015 provides enabling legislation for a local authority to create any local rates relief scheme that it wishes. For example, Perth and Kinross Council has done that for retail businesses. Any local authority might want sectoral or geographic support for tourism, or, as in the north-east, the oil and gas sector. The legislation enables councils to provide that in a way that is state-aid compliant. Given that local authorities will have an extra £160 million of resource that they were not expecting, they will have the headroom and flexibility to deliver a local scheme if they think that that is appropriate. That is local community empowerment.

I think that we have taken the right decisions on a range of actions around business rates. However, I will continue to engage with the business sector because, although I am mindful that some businesses might have explored with the assessors their rateable values, others might not be fully aware yet of what that means for them. I would not want them to miss out on the opportunity of the appeals process.

All of that is incredibly complex, which brings me back to the non-domestic rates pool that goes to local authorities. The Government determines what can be distributed from that pool. Because there is a multiyear element, the figures for what is raised against what is spent or distributed are not bang on for an individual year. However, there is a balance over a number of years. I have taken decisions about what will keep the pool in balance over a number of years, while looking at further forecasts on appeals and income, which will change as businesses work their way through the system. Utility companies will probably be at the higher end of increases, so they are likely to appeal, which will probably affect the final position.

Convener, I think that I have given a fair degree of detail, but I am happy to bring in Graham Owenson if you require more detail.

Can I just re-ask the question?

Do you want me to do that again? [Laughter.]

I hear everything that you say, cabinet secretary, but the question that I asked was whether you considered applying the £60 million extra to ameliorate the eye-watering increases that an awful lot of businesses, particularly in the hospitality sector in the north-east, are facing.

Mr Kerr, I tried to give you a detailed explanation of how the rates system works—how the contributions, the national reliefs and the local reliefs work. The value of our reliefs is now in the region of £600 million, so the balance is fair. Some elements are automatic and some are not. Giving the £160 million to local authorities and allowing them the discretion to use it is the right balance, as is the balance between the national supports and what can be done locally.

Some of this might be quite specific. If you want me just to make bland political points, I can, but I hope that I have been able to demonstrate a detailed knowledge of sectors and geography. Many people will pay less on their rates bill. People in many parts of the country will have smaller bills as a consequence of the measure. Some people have asked us to postpone implementation of the revaluation or transitional relief but I have tried to describe how each of those determinations would be unhelpful for the people who would pay less as a consequence of the national decisions and their local valuations.

To be blunt, I think that the allocation of resources is the right balance. I am not closed minded on what to do next to support businesses on business rates but I am examining all the evidence in detail. A further allocation of £60 million to national business rates relief is not necessarily the right thing to do when I consider the issue sector by sector.

That is not what I am asking for.

I thought that it was.

No, and I am not making a bland political point. I am simply saying that a business that faces a 250 per cent rise in its business rates, as many of the businesses to which I am referring do, looks at it and says that the Government is taking a significant extra amount of money in business rates. There appears to be a pot for which you did not plan on which you appear to have made a spending decision. You could have decided to help the businesses that face a 250 per cent rise, but you have chosen not to. Did you consider making that choice or not?

I have tried to explain the details and the complexity of how the non-domestic rates pool works. I am happy for officials to assist. I think that you have misunderstood how those resources can be released and how the forecasts are used. It is about the multiyear nature of budgeting within non-domestic rates and ensuring that the pool is in balance. To answer your question and the convener’s question, it is absolutely not the case that I am asking businesses to pay more as a consequence of the spending decisions that I have made or the allocation on non-domestic rates.

We will move to questions from Ivan McKee, because we need to explore issues to do with budget exchange.

I will ask about the budget exchange mechanism, cabinet secretary. You detailed, I think, three numbers that, if I have got this right, add up to about £125 million. Is that right? It was £47.5 million for resource DEL, £42.5 million for capital DEL and £35 million for financial transactions.

Those three figures are correct.

Aye, so it is about £125 million. If I have got that right, that is the buffer or slack that you need to be able to manage the process through the year and ensure that you do not run out of cash for items on which there is demand-led or other spend that needs to be made. It sounds like a big number, but it is only about 0.3 per cent of a £30 billion budget. Is my understanding of that correct?

As I understand it, you do not lose any of that money by not spending it, because the agreement with the Treasury is that it moves into the next year, which allows you to release it. Therefore, you would have a problem if you had not allowed for that money, because you do not know what it will be at the start of the year but, as you go through the year, it becomes more apparent. Is that how it works?

Yes, that is a fair summary.

Good.

Of course, I could just repeat all that but, if you want concise answers, convener, I am happy to say that that is a fair summary.

That is fine. I just wanted to get that clear. It is all I need to know.

Murdo Fraser wants more clarity on budget exchange.

Yes, and on the broader issue of the split in the numbers that you set out at the start, finance secretary.

When you presented your draft budget to Parliament six or seven weeks ago, you said—I might be paraphrasing—that it was a fair and balanced budget and that you had accounted for every penny. You challenged the Opposition parties to find what other parts of the budget to cut in order to balance it if they wanted to propose increases in spending in any area. It now turns out that that is not really the case. It turns out that you had the best part of £200 million down the back of the sofa, which you were not telling us about. How could it have been fair to the Parliament and its committees, which were trying to carry out detailed and proper parliamentary scrutiny of your draft budget, when you had all that money squirreled away that you were not telling us about?

I was trying to make you work for your money, Mr Fraser. I wanted to see whether you could find any more resources that I was not able to allocate and—

But we are not in government, finance secretary—you are.

Yes, and that is unlikely to change for a while. I know that you love to debate, Mr Fraser—maybe we will return to that at stage 3.

This is supposed to be questions and answers. Let us not have a debate across the floor.

Mr Fraser asks a fair question that relates to the updated forecasts for non-domestic rates and decisions that we are taking around the NDR pool. Through a tax policy change, we are moving the higher-rate threshold from an inflationary increase to a cash freeze, which will generate approximately an additional £29 million, and officials have advised on changing an element of borrowing that will release £6 million.

Budget exchange is a political decision, and it is fair to say that the Opposition will now be very wise to the operation of budget exchange in future years. I have taken a deliberate decision. Normally, budget exchange would carry on into the next year and, over the course of the year, it would be allocated as the Government and Parliament saw fit. However, I am determining at the start of the financial year that this is an appropriate policy decision to make.

That is partly a consequence of the negotiations with all parties, which will remain confidential with me although some Opposition spokespeople have chosen to put their requests in the public domain. I had to work hard to identify resources to make the consensus in Parliament that I wanted to deliver, which meant making policy decisions, taking an early decision on how we would allocate budget exchange and ensuring that officials turned over every stone to find extra resources to allocate in the budget. I can give further information on the non-domestic rates pool element, but that is still fluid because we are addressing issues within that.

I did not have resources waiting to be allocated but was able to make decisions over the past few weeks, since the publication of the draft budget. It is also fair to say that my room for manoeuvre in future years is now somewhat limited.

I think that we all understand that last point, finance secretary. You say that you had to work hard to find those additional resources. The obvious question is why you did not work so hard back in December, before you published your draft budget. Had you done so, the Parliament and the committee would have had a much fuller picture of the resources that you had at your hand. It now seems that the budget that you published was a partial picture, because money was found subsequently. When exactly did it become apparent to you that you had the extra money that you did not know about before?

It is not an accurate characterisation to say that there was extra money for allocation. Political decisions were made on the basis of the profiling of non-domestic rates and our understanding of the assessments that are going on at the moment. Assessors are still looking at evidence, engaging with sectors and considering any appeals that have been made. Our forecasts for non-domestic rates will therefore continue to change until that process ends and the outcomes of any appeals are known. It is a moving situation, and there are many moving parts to that multibillion-pound budget.

Some of it was also down to policy choices such as the decisions to move our position on tax and to find further ways to allocate the underspend and budget exchange. Mr Fraser will be well aware that many budget lines are demand led and that what will be spent will become clear only as we get to the end of the financial year, which will determine what will be available for allocation. That situation changes from day to day and from week to week. As we get to the end of the financial year, we will have more information on what is a substantial amount of money—especially the £160 million for local government—but is still, in the end, a very small part of the total resource that the Government has at its disposal.

10:00  

You mentioned your income tax changes. If I recall correctly, your original position of not matching the United Kingdom Government’s proposal to increase the higher-rate threshold was going to give you an additional £79 million. The further changes that you announced last week will bring you £29 million on top of that, which makes £108 million, according to my calculations. Could you confirm that that £108 million is actually less than the money that you have now been able to find, so there was no need to create an income tax differential between Scotland and the rest of the UK to meet all the spending requirements in your original draft budget?

That is an extra £107 million or £108 million that helps to balance the overall budget, so it contributes to the overall spending plans of the Government.

However, you did not need to do that to meet your original spending plans.

We require that tax contribution to deliver the spending plans that I outlined to Parliament and for the policy reasons that we set out to Parliament.

We have got on to transparency issues earlier than expected, so I will slightly change the process that we were going to go through. James Kelly, you are also interested in transparency issues, so we might as well get them out of the way now.

What does it say for the transparency of the budget, cabinet secretary, when you have in effect been sitting on a slush fund since the publication of the draft budget seven weeks ago? You held that back for your negotiations, so you were not completely open with Parliament at the time of the draft budget.

That is not an accurate, fair or reasonable characterisation of the budget process, which was a process that Mr Kelly’s party also engaged in. It is very constructive of the Government to listen to the parties in Parliament and to do everything that it can to find consensus to make decisions and to get the budget through. It is not unreasonable to make decisions to enable us to do that, and I totally refute any suggestion that I was sitting on any sort of fund that was ready to go. Political decisions were what ensured that I could arrive at the proposition of allocating £160 million extra in non-ring-fenced resources to local government. I would have thought that Mr Kelly would welcome that, but he seems quite bitter about it.

I am not bitter about anything, Mr Mackay. You said that the process is reasonable yet, if we take the budget exchange mechanism as an example, you knew that there was £125 million that had been built up in previous years, but you did not share that information with Parliament when you set out the draft budget in December and you held the money back for the negotiations. Is that not the case?

No, it is not the case, Mr Kelly. You are displaying an astonishing lack of awareness of the budget exchange mechanism and the budget processes of the Parliament. Speaking as a relatively new finance secretary, I am very surprised at that for a man of your years in the Scottish Parliament.

Budget exchange is not carried from year to year; it is from one year into the next. I recall the times when the Labour Executive handed money back to the UK Government, as it did not know how to spend it and, if it had not been for the Deputy First Minister ensuring that Scotland got the money back, the money would have been lost to Scotland. The difference between this Government and some previous Executives is that we ensure that the money is spent prudently and wisely and, when there has been budget exchange, it has been a fraction of the overall budget of the Scottish Government and it has been carried into the next year and spent.

Mr Kelly asked me why I did not explain that at the draft budget stage, but there are underspends in individual budget lines all the way to the end of the financial year—Gordon Wales monitors that on behalf of the Government—and there are accountancy adjustments beyond the end of the financial year. We have hundreds of budget lines, so the figure changes from day to day and the end position is known only at the point at which we close the accounts. We have been able to allocate that as part of the budget process in the fashion that I have described.

I hope that Mr Kelly is reassured that I have been prudent and constructive in my approach, and transparent about how I have funded the extra commitments as a consequence of the deliberations at stage 1 of the budget bill, which his party privately engaged in.

You mentioned local government funding and, as it stands, there are still £170 million of cuts to local council funding. Over the past week, you have heard councils’ stark warnings about the cuts that they face—£50 million in Glasgow, for example. In making the taxation change, is it not the case that you have simply tinkered at the edges and that local government workers and council services will have to pay the price because you have not been bold enough on taxation?

I disagree with that characterisation. Local services will benefit to the tune of not £240 million, which was the figure that I explained when the draft budget was published, but more than £400 million. That will be the spending potential for local services, as I described.

Even if no council in Scotland raises council tax and we take the £70 million out of the equation, there is still an increase of £330 million at local level. Councils are beginning to set their council taxes; let us see what they do. How much they raise council tax by—up to 3 per cent—is absolutely at their discretion. I appreciate the Labour Party’s support on increasing the multiplier for higher-value houses to enable us to make council tax a bit fairer and raise more revenue, which will support local services in every part of the country.

I said before that the local government settlement was strong and fair. It is now even stronger and fairer—I see that Mr Harvie is smiling at that. I think that local government welcomed the £160 million in non-ring-fenced resources, £130 million in resource revenue and £30 million in capital funding, which it can use as it sees fit.

I make one suggestion, which takes us back to Mr Kerr’s point about business rates. I do not want the business rates issue to come as a surprise; councils should give consideration to a local rates relief scheme, in addition to what has happened nationally, given that they have more financial headroom and the enabling powers in that regard. I am happy for Government officials to share information with local authorities about rateable values, sectors and localities.

Like me, many members have been members of local authorities, and Mr Kelly will be well aware of the difference between the options that officials present during budget setting and what actually happens—those are two different things. Many of the stories about what will happen to local services might not come to pass, especially as local authorities have more resources than they were planning for in what was already a fair settlement for local government.

I have repeatedly rebutted the misleading figure from the Labour Party. When I look at the increases, local authority by local authority, I think that authorities are in a good, strong position to ensure that they can deliver quality services and take a balanced approach on taxation.

There are a couple more questions on this area.

I was smiling when the cabinet secretary said that the budget has gone from being “strong and fair” to being “stronger and fairer”. I think that my characterisation would be that it has moved from being a severe cut to local government to being something that is just about good enough.

The transparency question comes back year after year and session after session. It has been part of the tension between the Parliament and Government, whether we have had a minority, majority or coalition Administration. It can be reflected in difficulties in comparing one budget with another because of changes to headings or to the presentation of figures. The new example is the perceived lack of transparency around the budget exchange and the flexibility that that gives to the Government.

A budget review is going on to try to improve how we manage the process. Does the cabinet secretary have views on how we ensure additional transparency and a more calm and measured approach to the budget, particularly in the context of there being a minority Government? There is an additional case to be made for transparency in that context, if we want to avoid last-minute dramas and brinkmanship in the future.

No one could be keener than I am to find a calmer and more constructive and helpful way forward for the budget negotiation process that we have in the Scottish Parliament. On Mr Harvie’s comment that, in his view, the local government budget is “just about good enough”, I come from the west of Scotland, as he does, and I think that that is about as good a comment as I will get in political life from a member of an Opposition party.

I will reflect on the comment about transparency and how we do the business of the negotiations. Of course, that is a matter for Parliament as well. At this stage, I do not know of a way to do it other than to listen to Parliament and engage publicly and privately. On whether there is an issue about transparency, I have to work in the confidential realm, given what parties bring to me and what I can then explore and share. If parties put their requests into the public domain, I can respond fairly while still respecting private discussions. Ultimately, whatever is decided goes into the public domain by way of tax and spend, and that is clear and transparent in what I am doing through the stage 2 amendments.

I think that we could all reflect on the matter in view of the fact that there is the budget review group. It will have to consider many issues, including timetabling, transparency, process, the new powers and our engagement with the Chancellor of the Exchequer’s timetable this year, when we will have two budgets and not one, as we flip to having an autumn budget rather than an autumn statement. Considering all that, I am minded to consider how we could do budget negotiations differently. Political parties need space to have negotiations with Government, but if there is another way to do it, I will be interested in exploring it. I am not closed-minded.

More widely, there has been criticism of the transparency of the budget documents. That partly reflects just how complex the multibillion-pound budget is, and the many moving parts that it contains. However, we have tried to engage as best we can with people who are interested—stakeholders and opinion formers—in the budget process and in the detail that we have put out there.

The recommendation on that in the committee’s report is worthy of further reflection. Other committees have commented, too: for example, the Local Government and Communities Committee would like a bit more clarity, with information on local government finance all in the same place. Some of that relates to decisions that are taken in other portfolios or later in the year, so it is not just to do with where information features, but the point is valid, and I think that all members would agree that it is worth considering.

Clarity on the local government settlement in particular has been the subject of some contested interpretations of the figures, if I can put it that way. Some people have compared the local government budget with outturn spending, which might be unfair to the Government, but the Government has also chosen to roll in additional spending, which might be unfair from the councils’ perspective.

Have you seen the new Scottish Parliament information centre figures? They show that, even discounting the health and social care money—whether that should be seen as local government budget or health budget is contested—and any increase from the 3 per cent flexibility that councils have on the council tax, which is their decision and not Parliament’s or the Government’s, we are moving from a 1.9 per cent real-terms cut to local government to a 0.7 per cent real-terms increase. Do you accept that those figures are a reasonable estimate that is somewhere between the overly generous and the overly critical interpretations that have been made for party-political purposes?

I never doubt the work of SPICe, of course, but I have not seen that paper or those figures. I think that I have clearly expressed my position on the overall settlement to local government. Mr Harvie alluded to whether the integration joint boards, as the partnership bodies, are local government or health bodies. They are actually both: that is the point of integration, which is about bringing local services together.

I cannot give a judgment on the SPICe briefing because I have not seen it yet. I have always expressed my view on the £240 million for local services moving to £401 million, but even if we take off the figure for integration and the extra resource from council tax, the figures sound credible, in terms of the question and how you asked it. I remind the committee that many other funding streams that do not feature in the figures also go to support local authority priorities—for example, city deal funding and other funding streams contribute to local services.

Briefly, and finally, I would like to ask about the amendment process. The fact that was a revelation to me, as a new member of the Finance and Constitution Committee, is that this is the first time that there have been stage 2 amendments to the budget.

10:15  

Why has the stage 2 amendment process not been used by the Government in the past? Why is it being used this year, rather than other means of making budget changes? Do you anticipate this being a feature of budgets in the future, now that we are in a more complex budgetary system, especially with Parliament’s new powers?

It is fair to say that the Government can make budget revisions through the course of the year. They can come in either the spring budget revision or the autumn budget revision. Obviously, budget lines can change during the course of the year, but the determining part, the transparency part and the authority that is given can come in those events through Parliament.

In view of the political deal that has been done to find consensus on the budget, I judged that the right thing to do, to be frank, is to show up-front and clearly how negotiations have led to changes in the budget position, and to bring the changes to Parliament. I could have made the changes later in the year, through other perfectly legitimate budgeting devices, but I think that there is a good and strong position in terms of transparency and intent by putting them in stage 2 amendments, because I know, before the budget process is concluded, what we are trying to achieve and how we wish to achieve it, so Parliament can take a view on it now. That is happening largely as a consequence of our engagement with the Greens.

Thank you. I think that that sets a helpful precedent.

As the cabinet secretary knows, the Scottish Government normally reports underspends in June, but you have decided to pre-announce £125 million of underspend and to allocate that before the close of the financial year. You said that the projected underspends change from week to week and from day to day. Will you tell us what the current projected underspend is for 2016-17?

Gordon Wales, who leads our financial management team, will cover that. It might be impossible to give an exact figure, but Mr Wales can give you a flavour.

The figures that the cabinet secretary has described are the numbers that we expect to have as underspend to carry forward to next year, so they represent the current expected outturn.

What was the underspend that was carried forward last year?

There was £75 million in resource, £40 million in capital and £40 million in financial transactions.

So, you are projecting less underspend this year.

That is the current state of play, but we still have a good number of weeks to go before the end of the financial year. There is a large number of demand-led budgets, so the situation could change.

On what budgets or projects in 2016 is there the greatest underspend at the moment? I am talking about where that £125 million comes from. What department budgets are the most underspent at the moment, and to what extent?

We could give you a flavour of that.

I can give some examples. It is important to remember that we are talking about the budget exchange number here, which the cabinet secretary quoted as being £47.5 million for resource; it is not the full £125 million. It is also important to remember that we are dealing with many hundreds of individual budget lines that cumulatively form an overall outturn forecast. We are not talking about a small number of budgets that all provide the budget exchange; it is a very large number.

Examples that I could cite range from reasonably large amounts of money to small ones. Within the sums that have been set aside to pay Her Majesty’s Revenue and Customs, to support income tax provisions for the collection of income tax this year, the assessment of costs for this year is around £4.5 million less than the budget that was set at the start of the year. It goes right down to organisations including Scottish Natural Heritage, which is reporting an underspend of something like £100,000 in its overall resource grant.

What is currently the biggest departmental underspend?

There is a variety of underspends across lots of areas.

I am asking which is the biggest area of underspend that is currently projected.

I think that Mr Bibby is almost trying to find a big project that has not been delivered as a consequence of these decisions.

No. I am just asking what you are underspending on. You are carrying forward £125 million. What is the biggest departmental underspend? It is a simple question.

When you refer to departments—

You have allocated spending to departments and you are projecting an underspend of £125 million. Where is the largest underspend? The underspend is obviously coming from some departments, so which departments are they? We will find out when you tell us in June, so why not tell us today where the projected underspend is from? You surely know the answer to that.

What we have tried to say, convener, is that there are hundreds of budget lines. If you want a portfolio breakdown—

Yes.

—I am happy to write to the committee within 48 hours with the portfolio breakdown of underspends. However, you will see that there are hundreds of budget lines, and funds within each of them add up to that total figure. I am happy to share that with the committee so that you will see where the underspends come from. The figures come out in due course in Parliament. We will happily give you them.

It would also be helpful if we give examples of what those kinds of underspends look like. I am happy to share that information.

That would be very helpful and welcome. Thank you.

You are talking about political choices and decisions. Was the extra money for Scottish Enterprise and the police budget a condition of the Greens’ support for the budget?

No, it was not.

My question is related to Neil Bibby’s previous question. Cabinet secretary—you have been accused of sticking money down the sofa and hiding money here, there and everywhere. Is the reality not that any Opposition member could ask these questions at any time and get a flavour of the ebb and flow of how the departmental budgets actually work? Should they not, in a sense, be doing their homework in the course of the year and asking those questions, rather than accusing you of hiding the information from them?

I would like to be fair to Opposition members. It is perfectly legitimate to ask at any time where the Government underspends are. However, I would caveat any answer to such questions by saying that the figures are likely to change. That is the nature of in-year budgeting and in-year adjustments. Of course, figures will change as some expenditure goes up and some expenditure is not fully met.

The same goes for income now. We are not just a spending Parliament; we are a tax-raising Parliament, so I am frequently asked questions about our tax position and our devolved tax powers.

It is fair for members to ask, but it is also fair to expect members to reflect on how the figures change from week to week and from month to month. As I said, the scale of our financial operation is massive and we undertake a huge number of transactions. That number will continue to multiply, given that further powers on social security payments and tax are coming our way.

I think that some of the colourful language is unhelpful, given that it is a perfectly ordinary budgeting and policy-making process.

Would it be helpful to members if you could provide some kind of monthly gathering together of the movements in these budgets, similar to what you have just said that you will do for the committee?

I am sorry to say that some members of the Opposition have a strong track record of misrepresenting the budget exchange and the underspend issues, so I am not sure whether that information would be of assistance. However, I have portfolio questions to answer this afternoon, and members are entitled to ask questions on underspend at general questions or portfolio questions—I should not say First Minister’s question time, because she would not thank me for that. Members can also ask about underspends via written questions. There are many parliamentary opportunities to ask the Government publicly for its current position on budgeting and finance. I am more than happy to engage in that process, but I do not think that it would be a helpful exercise to produce further reports on the Government’s day-to-day budget position.

Maree Todd will be the last person to ask questions before we get to the formal bit of stage 2.

I have a fairly simple question about the £6 million that was found from a reduction of borrowing costs. I would like confirmation that the reduction in Scottish Government costs is not a reduction in capital investment.

That is correct. Mr Wales will give you the detail of how that transaction changes, but it does not in any way diminish our capital investment plan.

The reduction is tied to reclassification of a number of non-profit distributing projects in which the Government is using its borrowing capacity to offset the effects of those coming on to the Government’s balance sheet. The Government’s capital borrowing powers have been exercised to cover those projects, but it does not actually need to borrow money as a consequence. We had planned prudently that we might have to borrow, and obviously there are interest costs associated with borrowing from the national loans fund for that purpose. We no longer need to do that, so there is a saving on those interest costs for next year, which, as the cabinet secretary has explained, is £6 million.

We now turn to the formal stage 2 proceedings. At this stage, I remind the cabinet secretary’s officials that they are not permitted to speak on the record during this item. Everyone should have with them a copy of the bill as introduced, the marshalled list of amendments that sets out the amendments in the order in which they will be debated, and which was published on Monday, and the groupings of amendments.

Section 1 agreed to.

Schedule 1—The Scottish Administration

Amendment 1, in the name of the cabinet secretary, is grouped with amendments 2 to 6. The cabinet secretary will speak to and move amendment 1 and speak to all the amendments in the group.

Amendments 1 to 5 relate to authorisation to use resources that are provided for in schedule 1, and will adjust individual portfolio allocations within the budget to reflect the spending announcements that were made at stage 1 of the Budget (Scotland) Bill 2017.

Amendment 1 will remove £6 million of borrowing costs from the finance and constitution portfolio. Amendment 2 will allocate an additional £25 million for police reform to the justice portfolio. Amendment 3 will allocate an additional £160 million for local government to the community, social security and equalities portfolio. Amendment 4 will allocate an additional £35 million for Scottish Enterprise to the economy, jobs and fair work portfolio. Amendment 5 will increase the total allocation for the Scottish Administration by a net uplift of £214 million. Amendment 6 will increase the overall cash authorisation by the Scottish Administration under section 4(2) of the bill by £214 million, in line with the additional spending that was announced at stage 1. That net increase is the £220 million of additional spending, less the £6 million of funding that was previously set aside for borrowing costs that has been reallocated from the finance and constitution portfolio as a contribution to funding those commitments.

I move amendment 1.

Amendment 1 agreed to.

Amendments 2 to 5 moved—[Derek Mackay]—and agreed to.

Schedule 1, as amended, agreed to.

Section 2 agreed to.

Schedule 2 agreed to.

Section 3 agreed to.

Schedule 3 agreed to.

Section 4—Overall cash authorisations

Amendment 6 moved—[Derek Mackay]—and agreed to.

Section 4, as amended, agreed to.

Sections 5 to 11 agreed to.

Long title agreed to.

That ends stage 2 consideration of the bill. Members will note that the bill will now be reprinted as amended.

I thank the cabinet secretary and his team and suspend the meeting to allow for a change of witnesses.

10:30 Meeting suspended.  

10:36 On resuming—