Finance Committee, 10 Feb 2004

Meeting date: Tuesday, February 10, 2004

Official Report 301KB pdf

---

Budget Process 2005-06

Our next item concerns consideration of a paper from our budget adviser on "Government Expenditure & Revenue in Scotland 2001-2002"—GERS. At our meeting on 16 December, we agreed that Arthur Midwinter should prepare a paper on the subject. He has also prepared a supplementary paper that updates the information in his original paper. I invite Arthur Midwinter to speak.

The paper is the first of three background papers to the spending review. The second, which will examine the link between spending and outputs, should be ready in March; the third will, as requested, consider trends in capital expenditure. I think that they will help the committee to get to grips with what has happened—as opposed to working with statements in planning documents about what is intended to happen—before it goes on to take decisions about the new allocation of resources.

In light of the comment that was made this morning, the committee should be clear that the figures are the Executive's own figures, so if there is a problem of robustness with the data, it lies within the system. The figures are the Executive's; only the percentages are mine. The figures have been taken straight from GERS over the years.

A comment was made that the figures were not comparable over five years. Someone should perhaps tell Andrew Goudie that, because the Executive has five-year trends in the GERS data. I do not find any problems of comparability over the years, because the Treasury uses actuals, so we are talking about cash spent.

Members should be clear that the actuals include not only the Executive's spending but local authorities' spending. That is important for the discussions that we have had in the past about ensuring that priorities are targeted and the difficulties with the block allocations to health and local government. The total spending by the different agencies is recorded in the paper, and that is important because, if local decisions are making it difficult for the Executive to achieve its spending priorities, that needs to be examined.

The budget exercise that we always do is concerned with the adequacy of the totals and the allocation of priorities. On the GERS data, the paper clearly shows that the Scottish share of the total UK budget has remained almost exactly stable and, because of our population decline, that comes through as a growth in spending per capita.

The five people's priorities and the two cross-cutting priorities were systematically agreed only in the 2002 spending review. Although they have not been the priorities over the whole period, I wanted to flag up the results on those because they are now the stated priorities. Prior to that, things were fairly unsystematic. However, when I was trying to find out what happened to water end-year flexibility in the 2001 announcement, by chance I came across a statement that 90 per cent of the EYF had been

"allocated to our highest priorities of education and health."—[Official Report, 28 June 2001; Vol 3, c 2098.]

The sum of money involved was £489 million and—this is an aside, but an important one—£200 million of it was for free personal care. I say that in light of discussions in the past couple of days. There was £86 million of additional money for health and £200 million of new money that was allocated to free personal care. There is no mention in the Official Report of 28 June 2001 of money being transferred from cancer services, and I felt that I should bring that to the committee's attention in light of the current controversies.

Angus MacKay, who was the Minister for Finance and Local Government in 2001, said that education and health were the two priorities. What is really significant is that, when we consider the outturn data—the amounts that were actually spent—we find that the increases for education, health, transport and law and order, which are all current priorities, have all been well below the increase in the Scottish average over the period considered in the paper. I do not think that I should mention who was the minister with responsibility for housing at the time that a big increase in the housing budget took place, but it is a significant difference.

The committee should also be clear that we get the figures for the budget—the budget estimates—then the supplementary allocations and then the transfers. Then there is what local authorities actually spend and then, of course, there are underspends and EYF. All of those affect the outcome, and the message that I take from that is that the Executive ought to consider tightening up how it implements its decisions, because I have no doubt that it allocated additional moneys to health in each budget, but the outturn does not square with the allocations.

Would it be possible for Professor Midwinter to circulate to us in a greater level of detail the budget figures for housing and for other environmental services? There are various components to the housing budget and various components to other environmental services, and I would like to understand what sub-components drove a doubling in one budget and almost a doubling in the other.

I will try to pursue that with the Executive. Those are not data that are in the public domain, but the Executive might provide them for me.

I would be grateful for that. If we are demonstrating that our budget has doubled relative to that of the UK over five years in both those areas, we need to know a little bit about what is driving that trend. In housing, there is obviously the difference between new build and debt, for example. On other environmental services, we must understand the impact of water remaining in the public domain in Scotland while being privatised in England.

As I understand it from a superficial reading, the paper talks about different treatment of debt in Scottish housing, rather than new build, and that is a challenge. On other environmental services, the driver may be a declining profile in the UK as opposed to a rising profile in Scotland, because the relativity of a rising profile in Scotland may be associated with steady investment in water here while there is a residualisation of spending in those areas in England because they are outsourced.

However, that is not my point. My point is that there are two major changes in relativities and that seeking a bit more clarity on them at the next level of detail would enhance the explanatory power that the table already has.

We should probably just do that as a letter after the committee has discussed the report, asking whether further information can be provided.

It might be interesting to amplify that to get some greater clarification on the figures for trade and industry and for culture, media and sport. In a sense, what we see is the threshold around 20 per cent for significant budget items, which does not really vary by more than 2 per cent in either direction. The substantial increases are the two that Wendy Alexander mentioned, plus those for trade and industry and for culture, media and sport.

There are three different spending agencies for trade and industry. There are the Executive moneys, the European moneys and the money spent by the UK departments in Scotland.

I welcome the paper, which is interesting and will, I think, be interesting for some time to come. However, some more detail would be very useful, especially in the context of early discussions that we had about the current budget. The information that the adviser provided to us was that, since the Scottish Parliament was established, the housing budget had been growing at a slower rate than the overall Scottish Executive budget had been. Set against that, the paper shows that the largest increase of any year since 1997 was in 2002.

That budget was for the next few years; the other figures are for the previous years.

Indeed. The point is that if we consider past experience of cash spent, that is the fastest growing part of spend in Scotland. However, the information that you have been providing us with on forecasts has indicated that the future spend will not be so big. What the committee must reconcile is whether we believe what we are being told or whether we are being too pessimistic about the future on the basis of the information that we have. Does that forecast include an element of Treasury support? I am not sure of the timings of the stock transfer.

The stock transfer came after that, if I remember rightly. The big one came last year, although some would have taken place already.

I think that the transfers in the Borders and Dumfries and Galloway may well have been before that.

The big Glasgow transfer came in last year. You may remember that Mr Peacock came and announced it to us as part of the revision.

More information would be useful and could help us to scrutinise and pin down the forecasts that we are getting for the future. Certainly, those two figures are not reconciling in my mind at all.

I wonder whether we can get some more information about the level of loan debt and about both the outstanding capital and the revenue implications of repaying loans for local government. That is information that I think is available in parliamentary answers. It seems to me that there has been an historical accumulation of debt—not just by councils such as Glasgow City Council—in order to deal with housing that is generally poorer than housing in England. I often think that the broad-brush comparison of those headlines conceals important differences, such as the fact that Scottish housing stock was an absolute disgrace for most of the early part of the previous century. The way in which that was tackled was by massive borrowings by councils, which perhaps skewed the comparison slightly.

Of course, it is only identifiable public expenditure, not non-identifiable expenditure, that appears in the figures, and there are many other arguments that I will not go into.

I think that the item that you are looking at will be in the figures, which will contain the borrowing charges.

I know that. I was not suggesting that those figures would not be there, but it would be interesting to compare the per capita borrowings in revenue terms that are payable in Scotland for local authority debt with the figures for England to see whether we are comparing apples with pears. I suspect that the per capita level of debt of local authorities in Scotland is much higher for historical reasons. It is therefore wrong simply to equiparate those headline figures in the way that we might perhaps be asked to do. I hope that that information can be provided.

It is interesting to note that, when Mr Galbraith was the Minister for Children and Education, he achieved only a 20 per cent increase, whereas the minister who was responsible for housing achieved a 136 per cent increase—some people might say that she was seven times more effective than Mr Galbraith.

I was interested in the adviser's report, which has again forced me to think. Any corporate would be spending to achieve results beyond those of just spending; any corporate would be celebrating the achievement of those other results rather than celebrating spending for the sake of spending; any corporate would be considering how to increase its market share and how to maximise its turnover, its bottom line and its share price. I would have thought that any country should be spending at least to halt population decline, to have a healthier demographic skew, to achieve a long-term relative increase in incomes growth rate and to minimise economic inactivity; it would not factor adverse results in those categories back into improving the numbers, which seems to be what is happening here.

I am not at all sure that that is what is happening. I am the only person who is factoring them in; I am doing that to interpret why the spending is growing per capita. That is in stark contrast to the situation in Northern Ireland, where the population is growing rapidly.

I understand that, but I find the calculation almost incestuous. The fact that the diminution in population is seen as a positive thing, because it ameliorates the spending per capita—

No, it is just an explanation.

I am much keener for us to have time-series data on spend; that would be much healthier and would allow us to measure spend against fundamental outcomes, as would be done in any normal situation, either at corporate level or in a country that managed both sides of its profit and loss account.

To be fair, we start from where we start from. Arthur Midwinter has done a service for us in identifying the profiles of spend. Over the next three or four years, one of our tasks might be to establish the link between the spend and the outturn or the delivery, depending on how one wants to put it. That is a more complex task, which the committee has committed itself to carrying out, even though it will not be easy to achieve.

The outcome deliveries are the key issue. When Scotland eventually gets to the position in which it has one oil well offshore and one pensioner, gross domestic product per head and public spending per head will be pretty high, but the country will be a pretty depressing place.

I am not sure that I have a question, but I am interested in the line of thought that the committee is following. The paper—not least in tables 1 and 2—is certainly useful and revealing. However, I am not sure that I go with the flow of the conclusions that are in the paragraphs that accompany tables 3 and 4, on which I invite comment.

For example, if we consider expenditure on health in table 3, we see that spending in Scotland relative to that in the United Kingdom is declining. If one takes the view that the political decision in England is that the target should be to reach continental European levels of public spending on health, of course spending in England will go up relatively, whereas spending in Scotland will decline relatively, because we are already at that level. That says nothing about the Executive's priorities. If one examines the outturns of the spending by comparing the two columns in table 4, one can see that spending on health has gone up, at least in the outdated paper that I have—I do not have the newly circulated one—by some £1.7 billion, which is a significant increase in anyone's terms. I am not trying to do the Executive's job; I am just trying to take an objective—if oppositional—view of the situation.

Table 4 shows spending on education going up from just under £4 billion to just under £5 billion—an increase of about £1 billion. Clearly, there have been moves towards McCrone pay settlements, which will incur a great deal of expenditure. That may be only a relatively benign increase in expenditure of about 25 per cent, compared to the increase in spending on culture, tourism and sport; however, the committee must look at the base at which spending starts. Expenditure on culture, tourism and sport starts at just below £300 million and is, undoubtedly, more than doubling; nevertheless, that is still an increase of only £355 million compared to the £1 billion extra on education spending. Therefore, although it is interesting to see whether the priorities are being addressed—I note what Professor Midwinter says about future years and the new priorities that have been defined—I am not wholly convinced that reading percentage increases is the way in which to measure priority in spending. As I am new to following such things in the committee, I would be interested to hear the views of Professor Midwinter or the convener on that.

I disagree completely. I think that a fundamental task of the committee, which is written into its remit, is that it monitors the Executive's success in tackling its priorities. If the Executive is not hitting its priorities, we are failing in our duty if we do not bring that to its attention.

I accept the points that Brian Monteith makes about the scale of the increases. It is probably always the case that budgets that are small in percentage terms have higher increases. However, more important is the fact that the key priorities—the existing, big-spend priorities—are still receiving significantly less than the average increase, as opposed to the housing and culture priorities, which start from a small base. Given the fact that the minister has appeared before the committee saying that the Executive has reorganised the financial management system to ensure that the resources are ever more closely aligned to its priorities, it is the committee's job, through robust scrutiny, to check whether that is the case.

I do not doubt that. I do not dispute the committee's job.

Brian Monteith makes a fair point. We need to take a multilayered approach that looks at base levels as well as percentage increases. Picking up Jim Mather's point, our approach should also look at what is delivered for the money. The test is only partly what money is spent; it is also the effectiveness with which the money is spent and, going beneath the level of overall departmental budgets, the level at which the budgets within that are reconfigured to deliver more successful outcomes. The percentage increase is just one part of the picture.

The next paper will interest Mr Monteith even more, as it begins to try to get to grips with outputs. In all these things, we are constrained by what the Executive produces—what is in the public domain. The paper is in draft state at the moment, and Ross Burnside and I are going over it. It contains quite interesting data about outputs—not outcomes. I do not know what Jim Mather means by outcomes. Outcomes are going to be useful in budgets in about 50 years' time, after I am dead, whereas with outputs we can make progress. We will produce an interesting paper for the committee on that in March, which will take this one step further.

Unusually, I have some sympathy with the points that Brian Monteith makes. We need to be aware that, in some cases, other people are catching up with us. It is not that we are falling behind, but that some people may be catching up. It is useful to have this analysis. I would not hit the Executive over the head about percentage changes from 2001-02; it is what happens after that and the way in which things were funded following the spending review in 2002 that will indicate whether the Executive is addressing its stated priorities of that time.

I did not really have a handle on the issue of the figures not being in real terms. In some respects, taking into account inflation and so on, would—

That would not affect any of the four tables. We have consistently acknowledged that there has been rapid overall growth in real terms.

Are the figures in real terms?

Using real-terms figures does not matter as regards the tables because they attempt to compare percentage increases in budgets in cash terms. Real-terms figures would reduce the scale but they would not alter the trend.

They would not necessarily alter the trend in that sense but, according to the tables, everybody is getting a lot more than they used to get. It could be that some budget lines are not doing as well as they were because inflation has overtaken the increase that they received.

I would be astonished if that were the case, judging by the budget figures that I have seen over the past three years. I cannot believe that some figures might have fallen in real terms—if that is what you are suggesting—given the scale of the figures.

No, but it would be useful to know, although it is probably unlikely given the scale of the figures.

Converting the figures into real terms would only narrow the numbers; it would not change the trend. The trend would still be the same.

But the magnitude of the figures is open to interpretation as well. That was not a major problem when inflation rates were low. Generally speaking, however, if a large part of an increase is just an inflationary increase, the relative differences between the numbers are less significant.

I am not convinced. We have had 3 per cent to 4 per cent real-terms growth each year since the Parliament was established.

That is unusual, historically.

I will take up Brian Monteith's point. In table 4, would it not be better to see as a percentage of change the increase in the total budget? If the spend in education goes up by £1 billion, what percentage is that of the total budget compared to the minuscule rise in the sport and tourism budget, for example? That would give us a far more accurate reading in that third column.

I do not follow that.

I will explain it to you later, Professor Midwinter.

You are asking me to calculate simply how the shares of the budget have changed, which I think is not likely to be as clear cut as the table that exists. It is easily done, but it will not add much. I will do that happily for you if you want me to.

We have had a good kick around at the topic. On behalf of the committee, I thank Arthur Midwinter for his good work on the paper. We look forward to receiving further papers from him, together with the points of clarification that Wendy Alexander and I suggested we seek on the high-growth items in the budget. Fergus Ewing also made suggestions.

We would normally deal with item 6 on the agenda now, but bearing in mind the time, do members agree to defer the item? It is on a paper that outlines proposals to amend the procedure for the scrutiny of financial memoranda and can wait, if members agree.

Members indicated agreement.

Meeting closed at 12:54.