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I welcome the first panel of witnesses, who are Bill Jamieson, executive editor at Scotsman Publications Ltd, and Professor John McLaren of the Centre for Public Policy for Regions. I remind members that we received a paper from the CPPR before the meeting as an additional contribution to the debate. I also remind people to ensure that electronic devices are switched off.
Thank you again for your kindness and courtesy in inviting me to give evidence, which I appreciate. I will make a few opening remarks.
I will not say too much by way of introduction, as we have only an hour and the CPPR has commented on the budget.
Mr Jamieson, I would like to think that we invite rather than summon witnesses to give evidence. We are scrutinising the budget and we welcome invited witnesses to participate. I do not think that the committee has ever summoned anyone, although we might have to do that at some point in the future. We invite witnesses to give evidence.
Thank you.
Your opening statements mentioned that support for small and medium-sized businesses is important. Does the budget do that? Could the budget do other things that would give SMEs more support and help to grow the sector?
Yes. One of the problems that the Economy, Energy and Tourism Committee has been looking at is the effectiveness of the rearrangement of the supervision of the SME sector, which was, in broad terms, hived off from Scottish Enterprise to local authorities. There is an issue about how effectively we monitor how good that local authority oversight is. There might have been a case for greater co-ordination of that role. Are we doing the best that we can and spreading the best examples that we can right across the 32 local authorities? That is point number one.
Bill Jamieson talked about the tough trading conditions and the outlook for the economy. That is worrying across the board.
I would like to clarify that point. Do you both believe that it is about advice and support to small companies? Our inquiry into the business gateway—we will consider our draft report later on this morning—is looking at the standard and quality of that service. Over the next year, which you see as the time when many SMEs will throw in the towel, should something else be delivered at that level to help them?
You cannot do enough to help the SME sector at present, as it is the sector that shows the greatest potential for enterprise and expansion.
One issue that might be interesting to look at—this is again a matter for the UK Government, but that does not mean to say that it cannot be lobbied or encouraged on it—is that some people, including people at the Bank of England, have put about the idea of having a public investment bank that helps small and medium-sized companies.
That is a very good point. The latest Bank of England credit conditions survey shows that, in the third quarter, demand for loans from the business sector was flat and its prediction for the fourth quarter is that demand will turn down. We do not know the extent to which that downturn is because businesses are unable to get the loans that they want or because businesses that anticipate a rejection are not even applying for loans.
I want to ask about Bill Jamieson’s comments on the wider economy. I will come back later with a number of more substantive questions.
No. I was paraphrasing the Bank of England’s position—or rather the gamble that it is taking. It is a huge gamble for the bank to hit the QE button and the decision has been taken on the supposition that inflation will fall quite sharply.
But you feel that inflation will fall because of VAT.
It will fall to a certain extent.
Professor McLaren, you say on the first page of your briefing paper:
Perhaps I could have expressed that better. I meant that inflation expectations for this and next year are higher than they were at the time of the previous budget. The inflationary rises that have been built into the budget for national health service resource are based on the Office for Budget Responsibility’s March report. Since March, inflation expectations have gone up, which means that, although inflation next year will be slightly lower than it is this year, it will still be higher than expected. For example, the inflation expectation to match the level for next year and keep NHS resources funded was about 2.5 per cent. Most outsiders now expect inflation to be 2.8 per cent, which means that there is another 0.3 per cent to add on. We have even more of a situation this year: the OBR suggested 2.9 per cent and the latest deflator is 3.7 per cent. As a result, to keep NHS resources up to scratch this year, you will need to add in almost another percentage point to match inflation.
Does that agree with your expectation, Bill?
As the Bank of England—a central bank that has got its inflation forecasts wrong for nine successive quarters—will tell you, this is not an exact science.
I will pick up on a number of suggestions that have been made about what the Government might do. Obviously an amount of guesswork is involved about what might happen in the wider economy—there are factors that we cannot control—and regardless of whether the optimistic or pessimistic expectations come true, we need some helpful ideas. John McLaren suggested the establishment of a public investment bank and I would be interested to hear his view on whether the chancellor’s credit-easing proposal would have the same effect. Will it come good and provide value, particularly to small and medium-sized businesses?
What is the chancellor’s credit-easing proposal? Are you talking about quantitative easing?
No. At the Tory party conference a new scheme aimed at getting credit direct to businesses was announced. I do not know any more detail—I am not sure that anyone does.
There are no details.
In general terms, then, and without knowing the details of the United Kingdom Government’s intentions, do you get a sense that that is its objective? Is it the same objective as that of the public investment bank that John McLaren proposed, which, I presume, would provide loans backed up by public money directly to businesses?
All those things are possible and they could help, but it comes back to the bigger picture. They are being announced during a party conference. If they were that important and people had that much confidence in them, they would have been done before and I suspect that they would not have been announced at a party conference. It comes back to the issue of what we do to kick-start the economy or try to keep it going a bit more, which is incredibly difficult at the minute, because the whole world—at least the whole of the developed world, if I can use that expression—is in the same position. Even on something like quantitative easing, we have to ask, “Did it work before and will it work again?”
I know that this is a difficult question, but our role in scrutinising the budget is to try to figure out whether there is stuff that the Scottish Government can do—I am talking about initiatives that could be funded with the current budget, or different policy decisions that could be made—that will have a chance of making a difference. It is easy to get drawn into a debate about imponderables on the world stage that the Scottish Government really cannot affect very much.
Sure. With the bigger picture in mind, the budget should be geared at getting the fundamentals right, so that when growth comes back, we are in the best position possible to do well. That comes back to skills, which relates to schools as well as further and higher education. The higher education budget is extremely important in terms of the quality of graduates and for the innovation and research that is carried out in that sector. It is good that that money is being sustained, but the long-term position is less certain.
The issue of credit easing suddenly popped up out of nowhere because of implicit doubts about whether QE on its own would work. The Bank of England could launch QE tomorrow. It could kick off with £50 billion, which could rise to another £300 billion, but where does the money end up? It ends up sleeping within the banking sector; it does not automatically get lent out to the business sector. That is a big problem.
If there is time for one further question, I would like to raise the issue of non-domestic rates. There is disagreement about the scale of increase that is proposed, but it seems to me that that disagreement is more a case of people talking at cross-purposes than it is of their fundamentally disagreeing on what is proposed. It also seems to me that the Government is hinting at doing something a bit more creative than just raising revenue from non-domestic rates—it is thinking about the types of business that should pay more, such as the alcohol and tobacco retailers and the large retailers. It is talking about continuing the small business bonus scheme, which would mean that the impact on small businesses would be different.
Bill Jamieson is probably better able to answer the second part of your question.
I never quite understood why the powerful and compelling logic for a council tax freeze for domestic rate payers did not automatically carry over into the business rates system. Why do we assume that businesspeople are more capable of withstanding rate increases? It seems to me that, given that a real problem is coming up over the next financial year—the figure that I saw for the real-terms change in departmental expenditure limit spending for 2011-12 was a 7 per cent cut—we will see an acceleration of labour shedding in one form or another by the public, or Government, sector over that period. At the same time, there are real pressures on the private sector, to which we are looking for employment creation to soak up the people who are leaving the public sector.
A more creative use of business rates—whether at national level or devolved to local level—might involve offering incentives for more socially and ethically responsible behaviours, so that businesses have the opportunity to reduce the rates that they pay by adopting those behaviours.
Yes.
Yes?
I accept your point, Mr Harvie, but you will find that most businesses do everything that they can to comply with the law of the land. Within that law, and within the general business milieu, there is a tremendous incentive for businesses to be more concerned, for example, about sustainability and not using wasteful products. That is increasingly built into the culture.
Not even to crack down on the businesses that siphon their wealth to Monaco?
Mr Harvie, very few SMEs in Scotland are run by fat cats.
That is the point: such a change would benefit the SMEs and attack the bigger guys.
Yes, but please do not run away with the idea that every single little entrepreneur has a tax haven in Grand Cayman.
No, I never suggested that about SMEs.
I see that Chic Brodie has a question. Is it a supplementary?
I had a question on what Patrick Harvie said, and I have a question for Professor McLaren.
I will bring in Mike MacKenzie first.
Thank you, convener. I have a number of questions for the witnesses, which I will ask one after another as that might speed things up a bit.
I will ask the witnesses to answer the first three questions. You can then ask your final question, Mike.
Sure.
The question on anti-Keynesian policies is a difficult one that some economists and commentators pretend is not difficult. They say that they know the answer and either that we should definitely have a fiscal stimulus or that we should definitely reduce borrowing as fast as we can. The truth is that we do not quite know, but Governments tend to take a policy and stick with it because they are criticised pretty heavily if they move away from it.
I felt that the approach that the chancellor set out in his speech earlier this week showed him to be a closet Keynesian. He is Keynesian up to a certain limit, and I would not say that the Conservative Government has abandoned Keynesianism at all. By the way, the same Government has also somersaulted on its monetarism. You may remember the 1970s monetarism. That is totally out of the window and we now have reverse monetarism—nodding and winking to the Bank of England that it should go ahead with quantitative easing and with expanding the money supply, because that is what we need it to do. It is perhaps indicative of the complexity and seriousness of our situation that fiscal and monetary policy is being taken to the utter extremes of its known limits. I think that you will find that the Conservative Government is prepared to be interventionist because of the concerns about recovery.
It was about short-term or long-term stimulus or interventions that would gie us a boost.
I slightly part company with John McLaren’s answer on that. For the restoration of confidence in the longer term—certainly at the household level—it is good that households are paying down debt. That may mean that there is a squeeze on consumer spending now, but I cannot see a revival in consumer confidence happening until most people feel more comfortable about the balance of their household debts and assets. When that comes, as it will, we will have a far more confident and resilient recovery. We have to go through it.
You mentioned the idea that banks are still not lending, but they say that businesses are not asking them. To what extent is that due to the fact that, in 2008, banks tore up lending agreements and overdraft agreements with impunity, irrespective of the legality of doing so? Little seems to have been done to restore the trust between the businesses that need to borrow money and the banks as their financial partners. Given the Scottish Parliament’s limited powers, what can we do to restore that trust, which is fundamental to business and to a successful economy?
That is a very good point. Everything that you say is on the button. Lending is the single biggest concern and complaint that I have come across as a business journalist in Scotland over the past two years. It is not the interest rate on the loan that has aggravated and irritated businesses so much as the breach of terms and conditions and the breach of trust or agreement. What can be done? There might be a case for the Scottish Government to be the ringmaster in a series of meetings between the banks and business organisations such as the Scottish Chambers of Commerce, the Federation of Small Businesses and the Confederation of British Industry to sort out what would help to make a business application more successful, and to provide assurance that the tearing up of terms and conditions of loans can be stopped or mitigated. You are absolutely right and you have identified a real problem.
I agree with Bill Jamieson. Bill and the people to whom you will speak later in the meeting are probably better informed than I am on the issue. It would be a good issue for them to comment on, too.
Three key issues have arisen this morning. One is about flexibility, which Professor McLaren and Mr Jamieson have mentioned. Another is about the restraints on what the Scottish Government can do. The third point is that unemployment has not risen much in the UK, which could be down to labour hoarding. On unemployment, page 6 of the paper that we have received from the CPPR discusses wages. I ask Professor McLaren to explain a bit more about the comment:
More than 50 per cent of the budget is spent on wages, so if that can be kept flat, that takes away a substantial part of the need to find cuts elsewhere. It is a trade-off because if those cuts are made, jobs will be lost, but if wages can be kept down, more jobs can be retained. However, it is easier to do that for one or two years but much more difficult in years 3 and 4. Even if there is a 2 per cent pay increase in years 3 and 4, people who are earning more than £21,000 will already have had a 10 per cent real-terms cut in their wage, which is quite a lot. If that 2 per cent increase is taken away, the cut will be getting on for 15 per cent, which is a lot to ask. The flip-side of such an increase is that more jobs would have to go.
I agree with all of that. However, you must not overlook the imperative of structural reform in the Scottish Government and the drive to ensure that everything that the Government does is done in the most efficient manner so that you get more bang for your buck. That is why reform of Scottish Government institutions and of public services is imperative. I would say that it takes precedence over job hoarding.
From what Professor McLaren said, it seems that he is fairly supportive of the proposals for a few years, but not for the medium to longer term. Is that correct?
The issue needs to be discussed a lot more in public. I support a pay freeze over a number of years, as far as is possible, but that will not happen unless people buy into it. For a number of years in Ireland, there have been agreements between the public sector and the Government, and various plans have been agreed by a number of bodies. In Scotland, we have not had a discussion about how we are taking action collectively, to help ourselves. If we have that discussion, people will be more likely to accept a pay freeze, instead of standing back and saying, “Well, we want our rise.”
On page 8 of your briefing, “Analysis of the Scottish Government’s draft budget 2012-13”, you said
No. The paragraph just highlights the cost of the decision that the Government has made. It is important to remember the flip-side of any policy.
Do the panel members have thoughts on whether business rates in England will rise or decrease over the spending review period?
As far as I am aware, rates will rise, certainly in the first year—I have not seen anything about the longer term. It is interesting that Scotland has not followed what has been happening in England for quite some time. To get rates down to the English level, we have not been having rises. It is not clear to me why we would need to follow what happens in England, as we could build up a competitive advantage by not having rates rise as fast as they rise in England. That is a choice for the Scottish Government.
Do you know by what percentage rates might rise? Will a rise be attributed to increased buoyancy in the economy, the retail prices index or anything else?
From what was in the budget statement, I think that it is intended to increase the rates at the same rate as RPI. I am not sure what growth implications are built in. Whatever they are, they will have been built in before March, since when the growth forecasts have been declining. There is also not necessarily a straight crossover between growth and growth in non-domestic rates. The growth of companies within their existing premises does not affect non-domestic rates. The companies would all have to be in new premises that did not get rates relief for that growth to turn into an increase in rates. There is quite a lot of uncertainty there, which is one of the things that we highlighted.
The figures that we have heard for the money being transferred from revenue to capital range from £200 million to £750 million. How much should be transferred? Obviously, the money would have to come out of revenue spending and that would have an impact. How much do you suggest should be transferred and where should it go to have the maximum impact on the economy?
During downturns, capital is always hammered. In the mid-1990s, before there was a Scottish Government, the same thing happened. Transport and housing were both hammered both at the UK level and at the Scottish level. It is the easiest thing to do because it does not involve taking people’s current jobs away; it just affects some proposed future project. It is politically easy to do that, but studies have shown that it is better to reduce resource. Most countries that have been successful in reducing resource have reduced benefits, which might have got out of hand in certain countries, such as Canada and the UK in the past. Obviously, we cannot do that in Scotland because benefits are retained at the UK level. In Scotland, the decision that has been taken not to reduce capital spend by as much as was going to happen is a good one.
I have to make two points in answer to a very good question. I have a natural inclination to encourage, as far as possible, investment for the long term, and maximising the switch from resource to capital spending. When we undertake these capital projects, we add to the effectiveness and efficiency of Scotland as a platform for investment. In other words, the better roads and infrastructure we have, or the faster broadband we have, the more it adds to the plus points for a company that is thinking of locating or expanding here. Capital spend is a plus and it brings rewards.
I return to Mr Jamieson’s point about the focus on renewables. That is a major sector but, as we go through the spending review, we should not ignore the huge opportunities for the likes of the food and drink sector. We have also seen investment in tourism, and we all go around talking to social enterprises and small businesses. Notwithstanding the major challenges that they face, we would agree that there is a different culture and approach in Scotland these days.
I do not think that I do. I will talk it through and see whether I change my mind as I am talking.
I hate to say this but, some six years ago, I sat in a room like this one with you when you talked about figures and said that you did not know where they came from or how they stacked up. It would appear that nothing has changed.
If you would like to talk to the Government economists and statisticians about that, I would be happy to join you.
They are the people you referred to six years ago.
Will you define exactly what you mean?
Unemployment has fallen by 33,000 in Scotland, whereas it has increased by 44,000 in the UK. There is more employment in Scotland, so what, fundamentally, has changed?
There is a bigger picture here. We also did a paper, around election time, that looked at Scotland’s performance from about 2000. We concluded that, since then, Scotland had done well in comparison with the UK on a number of measures, including GDP per head, productivity, employment and unemployment. That is what the figures said, but it is very difficult to understand why that was.
I am not saying that the CPPR’s report is totally negative, but I would like you to say what is good about the spending review and the proposed budget.
We said a bit about that in the report and the press conference. To me—although perhaps not to Bill Jamieson—the move to preventative spending is well worth it, and should be enhanced. It will be difficult to keep it going, however, because of the amount by which the budget will go down.
I thought that the overall rhetoric of the draft budget was good. I was certainly struck by the recognition of the need to support enterprise in the difficult situation that we are in, and I was glad that the specific budgets for Scottish Enterprise, Highlands and Islands Enterprise and others in that group have been respected.
It seems that we are suffering nationally and internationally because of a failure to properly resolve the banking crisis that arose three years ago; part of that seems to be to do with the tendency of the banks to be the architects not only of our misfortunes, but of their own misfortunes. Given that we are in uncharted territory, we need to question some fundamental aspects of banking. The crude mechanism by which banks deal with risk or attempt to manage risk has historically been one in which the greater the risk, the greater the interest rates. For instance, in the case of Greece, interest rates on borrowed money—not the recent rates, but the previous ones—were as high as 16 per cent. Such punitive interest rates drag Greece down, drag banks down and drag the rest of us down. Do you agree that we should have a fundamental review of the way in which we deal with risk, so that those risks do not become self-fulfilling prophecies?
The failure to resolve the banking crisis is a huge problem. When we were in full crisis, there was an opportunity to re-imagine how things would be, but the banks pretty soon got their act together, and they got their lobbying together in the States and almost every other country. With every little bit that they are pushed back on, there is a wave of negativity. They have 3,000 reasons why something will be bad, and there have been only a few strong people, such as Volcker in the States and one or two people here. We can always get negative points, but we must move away from where we were, and I think that we have lost that aim.
Do you mean the Independent Commission on Banking report?
It was a professor’s report on the future of the banking system, which proposed good steps; I cannot remember what it was called. I was a bit disheartened that he was looking for the proposals to be implemented by 2019, I think. A lot will happen by 2019. Many people who are currently in charge of banks or bank regulation will be dead by then, so I think that a lot of what has been said will be forgotten. I am more with the John Kay-Martin Wolf-type view. Let us be fairly bold. We will always hear siren remarks, but let us treat them with the disdain that they deserve.
Mike MacKenzie is absolutely right. There is a colossal problem with the banks and with our understanding of risk. As the nature of risk has changed, financial transactions have become more complex and sophisticated. That is one huge lesson.
I have a final comment to make rather than a question. We must be careful that the medicine does not kill the patient.
If members have no more questions, I have one or two questions for Professor McLaren in particular. He mentioned the data that is being used in the analysis for how we should go forward, and he referred to ONS statistics. Do we have sufficient data gathering to give us accurate analysis for the way forward? A common complaint has been that some data that is collected is not of the quality or sufficiency to allow us to make accurate predictions or to be as accurate as we can be about the way forward and about what is happening in the UK and Scottish economies.
As Chic Brodie suggested, the data has been a problem for a long time and has not really improved. The only way to improve it is through measures such as conducting better surveys and having larger survey samples.
I endorse what John McLaren said. I hear complaints from those sectors about the quality and accuracy of data. However, I counsel members not to have too-high expectations of statisticians and forecasters. If we thought that the Bank of England’s record on inflation was right off the mark, we have only to look at the OBR forecasts for economic growth to see that forecasters can miss by even more.
In a previous life, I relied on data from the annual survey of hours and earnings. The Scottish data that was collected was a very small percentage of that. The analysis was based on the available information, which skewed particular areas.
The data is published; the problem is that it has no analysis whatsoever. If we analysed it, we would start to say, “That doesn’t seem right,” and perhaps to understand the problem a bit better. However, as no analysis takes place and as the figures are not graded as highly reliable or less reliable because of the sample size, we cannot judge for ourselves what is going on.
I thank the witnesses for their evidence. I look forward to Mr Jamieson’s paper on social easing, which he suggested earlier.
I thank our next panel of witnesses for appearing before us. Our witnesses are: Colin Borland, head of external affairs at the Federation of Small Businesses; David Lonsdale, assistant director at the Confederation of British Industry Scotland; and Ian Shearer, interim director at the Scottish Retail Consortium.
I hope that our evidence will be a refreshing contrast with the erudite contributions that we heard from Professor McLaren and Bill Jamieson. We at the FSB are not economists, and I would not presume to pronounce on macroeconomic issues, on which I am not qualified to speak. I expect that we will focus most of our remarks on those items in the spending review and draft budget that will have a practical impact on our members, and on the areas in which we would like a little more debate or detail. In concrete terms, that means the series of announcements on non-domestic rates; the welcome announcement that the small business bonus scheme will be retained; the reform of empty property relief; the questions around the public health lobby; and—most significantly—the announcement that there will be a major review of how the business rates system operates ahead of the 2015 revaluation.
I thank the convener and the committee for inviting the Scottish Retail Consortium to give evidence. I will make some brief opening comments, on which I am happy to expand in response to questions.
I thank the committee for the kind invitation to appear before it today. I apologise for not giving members more time to consider our written submission, which I sent to the clerks at lunch time yesterday.
My question is for Colin Borland. The previous panel told us that help for small businesses is crucial to the economy, but is there anything in the budget that provides that help? What would you like to be in the budget that would help and encourage small businesses?
The stand-out measure is the continuation of the business rates relief scheme, or the small business bonus scheme. There is no doubt that the scheme has been a lifeline for many businesses in the past couple of difficult years. The commitment to the scheme for the life of the spending review is most welcome. As we return to growth, we hope that businesses, rather than simply using the savings to keep going, will reinvest them to make it easier to employ people, buy goods and do business.
I make it clear that the SRC represents small retailers as well as large ones. We support the small business bonus scheme, and it is worth pointing out that all the large stores affected by the large retailers levy already pay the large business supplement, which is 0.7p on the poundage. I estimate roughly that the stores that will be affected by the levy pay about £2 million in total towards the small business bonus scheme.
I guess that there is also a question mark about the definition of a small firm.
Are things missing from the budget that would assist small and medium-sized enterprises?
It is difficult for us to comment in detail when we are looking at a budget at this level. We are talking about issues such as how much money will go to enterprise agencies and local authorities. When we get to specifics about, for example, what business gateway will do post-2012, we will probably be in a better position to say, “This is how it should be funded, and we think that this would be an appropriate amount.” When we are still having a high-level debate about how the pot will be divided up, it is difficult for us to comment in any detail.
I guess that the one area for us is the need for more support through direct air links to overseas markets, which I highlighted in our written submission. We can obviously go via London, Schiphol or some of the other airports, but direct air links would have provided some direct support for small firms. The previous witnesses talked about the need to enhance the export potential of the SME marketplace. That is one measure that could have helped but has not been taken forward.
One thing that is missing is an overall reduction in business rates. We support Bill Jamieson’s comment in the previous evidence session when he asked why the principle of the council tax freeze does not apply equally to businesses in general.
I will come back on the health levy. There has been a lot of speculation about it in newspapers and the like, but we have not seen the detail of what it will mean. Would it be possible for the large supermarkets to recoup the cost of the levy through increasing the price of tobacco and alcohol? If not, are they considering whether to sell those products? If they do not do so, they could avoid that tax. Where is the industry on the issue at the moment? What talks has it had with the Government about the levy?
It has been suggested that the large retail levy is linked to minimum unit pricing, the purpose of which is to reduce sales. If minimum unit pricing is introduced, there will be fewer sales and therefore fewer profits from alcohol sales. We know that the level of the minimum unit price is also under discussion—and we should bear in mind the fact that the higher the price, the lower the retail sales.
What discussions have supermarkets had about ways of recouping the levy? Are they considering increasing prices on those particular items, increasing prices across the board, cutting jobs or something else?
All these burdens add to pressure on the supermarket cost base, which can have a knock-on effect on prices. You also have to bear in mind the intense pressures on commodity prices and fuel bills, the effect of inflation and so on, all of which affect small businesses and other retailers as well as supermarkets.
Might supermarkets simply stop selling those products?
You asked about the discussions that we have had with the Scottish Government. A number of business organisations have raised concerns about the levy with the finance secretary. We are looking forward to meeting him in about a fortnight’s time but so far Scottish Government ministers and officials have told us that the levy will apply to retail stores with a rateable value above £300,000 that sell both alcohol and tobacco. Indeed, over the weekend you might have read press speculation about whether the levy will apply if a retailer decides not to sell one of those products. We are trying to clarify all those details.
There are myriad aspects to this issue, some of which we have set out in our submission to the committee. When the Scottish Government publishes the regulations and its policy intention, it must also provide a business and regulatory impact assessment to make clear the proposal’s impact. After all, the impact will be felt not only by retailers. If, as we fear, the measure has a knock-on impact on retailers’ investment intentions north of the border, it will have implications for the construction sector, store fit-out companies and others in the supply chain. There are a lot of questions to answer and we are seeking a lot of detail. Given that it is a large tax and that there is no indication in the budget of the amount that it will raise, it is perfectly reasonable to expect a regulatory impact assessment to be forthcoming. I hope that the committee agrees and that it will say in its report that such an assessment is expected from the cabinet secretary and the Scottish Government.
Do you have any comment to make, Mr Borland?
I suppose the obvious point is that, as the levy will not apply to our members, we do not a direct financial interest in it.
The Scottish Government has opened a door with the new tax on larger retailers. Given fact that the aim is to tackle alcohol and tobacco sales, it is naive and short-sighted to think that the threshold that has been proposed, which is reputedly in the region of £300,000 of rateable value, will not be lowered in due course to target smaller retailers. If we accept the principle of the levy, that question must be asked. The public health lobby is keen to see the rateable value threshold lowered so that more shops and retailers are caught up in its agenda.
I am not sure—
I am keen to develop this issue, but I ask that any answers that are given be brief. A number of committee members want to ask questions.
I will be very quick. The people who believe that the 2010 revaluation of non-domestic properties was fair are possibly in the minority. If the business rates system was not a blunt instrument and was a fair system, we would not be contemplating a major redesign of the system between now and the revaluation in 2015.
Colin Borland mentioned competition between large and small businesses. I reiterate that everyone in Scotland consumes products and services from retail, so there are far more consumers than small business owners. I am often puzzled as to why we do not hear more champions of retail competition and what it delivers for millions of consumers as well as for all the business owners in the FSB, the licensed trade and so on.
There has been a lot of talk about fairness and equity, which I want to dwell on for a minute. We have talked about retail competition. My question is for Mr Shearer. What proportion of the consortium’s income comes from large supermarkets, and what proportion comes from small retailers?
The Scottish Retail Consortium is a component of the British Retail Consortium, but we have a sort of devolved structure in Scotland.
What are the income proportions?
Membership of the consortium includes a very wide range of large and small businesses. I emphasise that we represent retailers right across the piece, not just grocery retailers but large and small non-food retailers—
I understand that, but—
Within the membership structure we also have many trade associations representing retail sub-sectors, such as the Booksellers Association and the British Shops and Stores Association, which represents ironmongers shops, for example. In Scotland on my board I have the Scottish Grocers Federation and the National Federation of Retail Newsagents. So, within the membership we have that mix. The SRC has always tried to present a balanced view of the retail sector as a whole.
I am sure you do, but I repeat my question: what proportion of the SRC’s income comes from the large supermarkets vis-à-vis the proportion from the rest of the retail trade?
The members of the organisation are listed on the website. I do not have the information about all the different subscription levels with me.
But in the case of the supermarkets the level is significant.
We have many retailers within the membership of the BRC—and several trade associations, too.
I am clearly not going to get the answer.
The Scottish Government was quoted last week as saying that the levy represented 0.1 per cent of retail turnover in Scotland. That figure is not relevant, because it refers to the turnover of all retailers in Scotland, which is about £25 billion a year. I do not have the figure for the turnover of the companies affected by the levy.
Mr Brodie raises an interesting point. I guess that the inference from the 0.1 per cent figure is that it is not a big deal and therefore the retailers should just accept it. The £30 million tax that will be introduced from next year represents one tenth of one per cent—or 0.1 per cent—of Scottish Government expenditure, so, based on the formula, it is not a big deal for the Scottish Government.
I was not trying to make that point; I was just looking for information.
Before I answer that question, which I will do, I will make a supplementary point about your previous point about turnover. We need to consider individual store profitability, because it impacts on investment decisions.
I take your point about margins and cash on cash—I understand that from supermarkets—but that is compensated for by the volume of sales that supermarkets make. That is aided and abetted by out-of-town shopping centres where you have captive buyers, in that people will not shop around. If they go into a supermarket, they shop there and then go home. Evidence of that belies, to some extent, the retail competition to which you referred.
Every time the Government has made proposals on alcohol and tobacco, supermarkets—and, indeed, all off-licence retailers—have been in close discussions about the proposals. We acknowledge the Scottish Government’s commitment to introducing minimum pricing. Until 10 days ago, we thought that that was the next proposal on alcohol and tobacco and we were about to begin work on the minimum pricing bill. We work extremely closely with the Government by expressing our views and making comments on the principles and practicalities of such measures.
That is fine. However, your first act after the announcement—only days later—was to say that people could buy alcohol online.
As someone who is in a senior position at CBI Scotland, to hear that you are delighted and “surprised” that our report is positive means that we have to do a better communications job. We highlight a number of positive policies that the Scottish Government and other Administrations implement, but a lot of them do not get taken up by the media, which tend to focus on areas of disagreement.
I have a final question for Mr Borland. The Government has committed to making available 25,000 modern apprenticeships. What is the current appetite among small businesses for taking on apprentices?
The appetite remains strong. If we ask our members whether they recognise the potential value to their business of taking on an apprentice, they will say that they do. The second question to ask them is a little bit harder—why are they not doing it? When all these apprenticeships are being offered, why is it the large public sector organisations or public limited companies that take them on?
Before I ask my question, I suggest to Mr Shearer that he should not assume that just because consumer voices are not represented on the panel, the committee will not hear from organisations that represent consumer interests—whether we regard them as consumers or just as people, as I like to think of them.
Yes—absolutely. I think that we can all agree on those points. The proposal that is on the table is to retain 100 per cent relief for the first three months and thereafter to reduce the 50 per cent rate that applies to 10 per cent. As you say, we can model the policy and see what effect it will have.
Yes, indeed. Also, empty shop fronts could be given over to other use, however many units the landlord had. For example, a non-paying tenant could have access until a paying tenant was found.
Precisely—and why does it just have to be about the retail sector? Indeed, why is it necessarily about the private sector? Why not other sectors? I understand that local authorities are significant landlords in this respect. The Government is saying in one part of its budget, “Maximise your assets and get rid of all your empty properties,” and is making it an expensive option to hang on to such properties. Why do not more local authority workers work out of disused units in town centres? We will not sort out our town and city centres and high streets until more economically active people, who have money, are in those towns during the week, in the daytime.
Yes—and until the streets look like attractive and busy places that are being looked after.
Precisely.
Mr Shearer echoed comments that Bill Jamieson, who was on the previous panel, made about why the logic of the council tax freeze was not followed through into a freeze in non-domestic rates. Am I right in thinking that business owners live in houses or flats and pay council tax?
Of course.
So, they get the same benefit as everybody else gets from the council tax freeze.
I was making a point about business-property occupation.
Yes, but the business owners who would benefit from a freeze are already benefiting from the council tax freeze. They get the same benefit as everybody else gets from the freeze.
Yes. We welcome anything that allows all people in Scotland to have more money in their pockets, which benefits retail—but we do not welcome large retailers being asked to fund that through a discriminatory levy.
“Discriminatory” is a strange word to use. You suggested in your oral and written evidence that the alcohol and tobacco levy is not really a public health measure, but is simply a way of raising revenue—or, at least, you questioned whether it is a public health measure—but when you were questioned you acknowledged that a potential outcome would be that supermarkets decide to stop selling alcohol or tobacco. Again, that might depend on the detail of how the levy is implemented. If a lot of supermarkets were to stop selling tobacco products, surely that would be a great public health measure. The supply of an addictive poison would be reduced. How could that not be a positive public health outcome?
Tobacco remains a legal product and adults are free to choose whether to purchase cigarettes. Likewise, retailers can choose whether to sell cigarettes—some do and some do not. We do not know what effect the levy will have on retailers’ choices in that regard. The major retailers who sell tobacco provide among the most responsible and tightly-controlled environments in which cigarettes are sold. There is more legislation in the pipeline, because the display ban that was agreed to in the previous session of Parliament has not yet come into effect. If only those major retailers are penalised, and in such a way that they consider stopping selling tobacco, I am not sure what, if anything, you will achieve from a public health point of view. You will simply switch demand to smaller outlets or, in some circumstances, to illicit suppliers.
Surely the reduction in the number of outlets—in the physical extent of supply of those products—would be a positive public health outcome. I cannot think of a public health professional who would disagree with that.
I am not sure that that would be the outcome. People who smoke would still buy their cigarettes from other outlets.
Perhaps we should be designing the detail to try to achieve that outcome, rather than simply turning up our hands and saying, “We cannot have this.”
I am not sure that a supplement on business rates is the right approach to tackling tobacco consumption.
You are extremely welcome to submit written evidence after the meeting to suggest how the supply—from your sector or anywhere else—can be reduced, if not by that measure.
It sounds as if we agree that the levy is a raid on profits.
I did not use the word “raid”. I am asking whether the belief—which you say the Government has—that those businesses can afford to pay the levy is correct.
The Government seems to accept the principle that if you are a small sub-sector of large and successful businesses, the Government may come after you for an extra share of your profits.
So, you would actually be happy if you were selling more cigarettes.
I beg your pardon?
You would be happy if you were selling more cigarettes. Is that what you are saying?
You are talking about companies that also sell clothing, electronic items and food. They are the largest suppliers of healthy food in the country—
The companies make no value judgment between the two.
I like healthy dialogue between witnesses and committee members, but the witnesses should be given an opportunity to answer the questions that you put to them.
I appreciate that. I am sorry. Would Mr Shearer like to continue?
I think that I have said what I wanted to say.
In that case, I have one brief question for Mr Lonsdale on another aspect. You have welcomed the protection of higher education funding. Do you have anything to say about the impact of the budget cuts in the further education sector, with regard to the role of colleges in providing the skills that will be needed if and when the economy picks up?
I am not on top of the detail of what has happened in that regard, so I will take at face value what you say. It is barely two weeks after the budget, and in our submission we have taken on board the discussions that we have had with members. However, there will be a lot more detail on that issue and on a range of other aspects of the budget, which we will deal with in due course. If we produce policy positions on those areas, I will be happy to submit that information to Mr Harvie and the committee.
Mr Borland, do you want to respond to that?
We share the concern that while the higher education budget has increased, it appears that further education will be under pressure. That is worrying for small businesses because, frankly, we work much more closely with our colleges than we do with our universities, although not as closely as we would like. We could do a lot better. We are more likely to recruit from colleges and they are more likely to have a hands-on role in developing modern apprenticeships—especially with the current emphasis on tackling youth unemployment. For a number of reasons, if economic recovery in Scotland is going to be linked to small businesses, it will depend on there being a strong further education sector.
Much has been said during the meeting about the large retailers levy. Mr Shearer said a few moments ago that retailers have a responsible attitude to the sale of tobacco and work within a tight legislative framework in that regard. Do retailers have a responsibility to work with parts of the public and private sectors to tackle health issues?
Of course they do. The retail sector takes social responsibility extremely seriously. On alcohol, for example, the sector has led the industry by contributing substantial sums to the Drinkaware Trust, and major retailers pioneered and led the challenge 25 initiative for preventing underage sales. In addition, on own-brand goods, it is the major retailers that have led the branded-goods sector on clear labelling of units and on providing information about alcohol consumption on product labels.
That has been very helpful. It has certainly put some things in context. However, given what you have just said, how would you justify a major retailer selling four bottles of beer for £1? Further, how would you justify a major retailer continuing to sell three cases of beer or cider for £11? Where is the responsibility there?
I think that we are entering into a separate discussion about minimum pricing, which is a debate that is to come in the Scottish Parliament. I was asked here today to answer questions about the budget.
Absolutely, but the evidence that we have received and what we have discussed during the meeting has been about responsibility and the retailers’ feeling that the large retailers levy will punish retailers for being successful. However, the wider context is about responsibility and where the levy will go to once it is collected.
The witness has clearly indicated a preference not to go down that route and he has the right to do so. I suggest that you move on to another question, Stuart.
Okay, convener.
I honestly do not know at this stage, because we do not have sufficient detail about the basis of the levy, how it will apply or what the definition of the affected sites will be. I would simply highlight why we have described it as discriminatory, because the businesses who would be affected are only a proportion of the alcohol and tobacco markets. We could end up with a situation whereby some stores in a locality would be hit by the levy which, as I explained earlier, could mean an overnight 22 per cent increase in business rates and substantial levy costs going forward. Elsewhere in the same locality there might be a store—potentially a large store—that sells only alcohol or tobacco rather than the range of other goods that a supermarket sells, but it would not be penalised by the levy. We therefore do not understand the health basis for the levy.
If 25 per cent of a store’s profits come from alcohol, you would not expect the retailer to stop selling it.
I do not know where that figure comes from.
My colleague Chic Brodie touched on what were called sacred cows. I am keen to understand what those sacred cows are. Do they include stopping the council tax freeze or free personal care? Do they include stopping free concessionary travel, which obviously has a positive effect on tourism, with people travelling around the country? Are those policies that you would like to be removed so that the money could be spent elsewhere?
I thought that I had answered that question earlier in response to Chic Brodie when I talked about Scottish Water, its ownership model and how it is funded. I also referred to public service delivery and the opportunities to bring in the private sector. You will see from our written submission to the committee after the budget that we are glowing in our endorsement of the council tax freeze.
What about free concessionary travel and free personal care? Do you have any comments about those two policies?
No.
My final question is again for Mr Lonsdale. In the submission that we received yesterday, in paragraph 22 on page 5 you talk about pay in the public sector compared with the private sector. You say that it continues to grow, you make some comparisons, and you call for a pay freeze for public sector employees until 2013-14. Does that mean that you are calling for the salaries of senior bankers to be frozen as well?
I am sorry. Can I be clear? I think that you referred to page 5 of the document that I submitted yesterday, but I cannot see where you mean.
The heading at the top of the page is “Where the Scottish Government can save money”.
It is the pre-budget submission.
Is that our submission from before the budget?
Yes.
I apologise for the confusion.
Take me to the reference. Was it page 5?
It is page 5, at paragraph 22. On the fourth line, you state:
Yes. What was your question on the back of that?
That being the case, are you calling for the pay of senior bankers to be frozen as well?
That is obviously a decision for the companies and the remuneration boards of those companies. The budget submission was about what is within the powers of the Scottish Government. I might add that, in its budget, the Scottish Government announced that it was freezing staff salaries for another year, so one might suggest that it has listened to our submission on that. In that submission, we are talking about the total bill. We have not said that certain people’s pay should be cut and so on. We have just said that the wages bill and wages-related bill of the Scottish Government is more than half of total spending and that, therefore, if it has to get a grip on spending, it has to deal with that—and Mr Swinney announced a further year’s extension of the pay freeze the week before last.
Indeed. Do you welcome the announcement that people who earn less than £21,000 will have a pay increase? They are minimum increases, but do you think that that is positive?
That is why we focus on the global picture for pay restraint and on the wage spending envelope. It gives ministers the flexibility to do things to protect those who earn less money.
As representative bodies, you hold a fair amount of power. We have had conversations with power companies. Given that they can make it easier for people to have more money in their pockets and therefore to have a greater propensity to consume in retail stores and so on, what pressure do you bring to bear on them? In some cases, it might be a clash of the Titans, particularly if the supermarkets were involved. What approach do you take to working with your members to put pressure on the power companies in relation to their fuel prices?
We represent a number of companies that generate power and a number of companies that are consumers of power. That presents its own challenges when it comes to policy making, but we are a representative body.
From the retail sector’s point of view, the SRC gives its attention to matters that are high priorities specifically for retail. The SRC is not involved in any direct discussions with power companies although, as I said earlier, retailers have substantial concerns about the effect on household budgets of rising costs and prices across a range of areas, including fuel prices.
That was the purpose of my question; it was not a one-off. Fuel prices are relevant to the overall budget position that the Government has adopted. When it comes to free spend, it is all very well talking about a council tax freeze, which gives people some ability to have a social income, but if they did not have to spend so much on fuel, they could spend more in your stores.
It will not come as a surprise to you that the FSB spends a lot of time putting pressure on, and making representations to, the bodies that increase our members’ costs—whether those costs relate to finance, utilities, licences or whatever. Because we are talking about an industry that is UK-regulated, most of that direct lobbying will be done by our colleagues who operate on a UK-wide basis, but as you would expect, we are more than happy to make that case and to explain just how difficult energy-price rises are, particularly for small food businesses and small convenience stores that have to keep fridges at certain temperatures. Given that the previous licensing legislation made it necessary to buy an extra fridge for alcohol, reducing energy consumption is not particularly easy.
Members have no further questions. I have just one, which is for Mr Shearer and Mr Lonsdale.
As we articulated in our written submission to the committee, we are very supportive of that. I believe that it was a previous iteration of this committee that called—in 2006, I think—for a step change in spending in Scotland so that more would go on capital projects than on revenue or current expenditure. We are highly supportive of that. I read what the SPICe briefing said about the need for clarity on where the money to spend on capital projects comes from, which John McLaren alluded to earlier. We are 100 per cent on side with that agenda.
As I mentioned at the beginning, we support the CBI position on wider aspects of the budget and on capital spending, which clearly has knock-on benefits for the economy as a whole and for the retail sector.
I apologise to Mr Borland. Would you like to make any comments?
I will not be specific. As I said in my opening remarks, we do not get into how things should be divided up. The only thing that I would say about capital spending is that if it is to have an immediate effect, it must be ensured that small businesses get a slice of that action.
I thank Mr Lonsdale, Mr Shearer and Mr Borland for coming along and giving evidence. I remind the witnesses that they are free to make further written submissions once they have reflected on some of the questions that were asked and some of the answers that they have given.
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