Good afternoon, and welcome to the 13th meeting of the Finance Committee in 2010, in the third session of the Scottish Parliament. I ask everyone to turn off any mobile phones and pagers.
It might be helpful if, by way of introduction, I comment on three elements to do with the paper. Obviously, we are happy to talk about the detail as much as you would like us to, but it might be helpful if I say a little bit about the purpose of the paper, a little about the methodology and the key assumptions—I will not labour that too much—and something about the key conclusions. As I said, I am happy to come back on any of that.
Even if we allow for the assumptions, the trend is obviously clear.
Openness is an extremely important issue. We have been working on our report since around the time of the PBR, and we have had the sense that there is a longer-term issue that is worth looking at, which runs well beyond the normal timeframe. The fact that the adjustment period is long tends to suggest that there is a different sort of solution to the problem.
No one should be in any doubt that we are entering a very different environment.
I would like to concentrate on the next spending review period. I will leave capital aside, as others will ask about that.
That is indeed a critical assumption. The Fiscal Responsibility Act 2010 sets out the basic framework for the rate of adjustment of the flow of debt—the borrowing each year—and for the adjustment in the stock of debt as a proportion of gross domestic product. From that, it flows in the budget report that total managed expenditure will, basically, be flat over the next four or five years. AME is therefore critical to the definition of what DEL will be. DEL is fundamentally a residual in that calculation—that is true.
I do not know whether the IFS gives upper and lower limits. Unemployment is not as high as some people expected it to be a year ago, for example. If unemployment is not as bad as people expect it to be, how much difference could that make to the estimate?
I cannot give you a number for that, unfortunately. To my knowledge, the IFS gives a single estimate, but unemployment and claimant count assumptions for the next few years are set out in the budget document. The assumption that the Treasury uses is that a claimant count of 1.75 million in 2010 at the UK level will decline to 1 million in 2014. I am sure that you are aware that it tests its assumptions with the National Audit Office, which is comfortable with the assumption of a flat figure of 1.74 million throughout that period. Therefore, there is quite a discrepancy between the figures by 2014. To my knowledge, the IFS has not translated that into AME numbers, but the obvious conclusion is that, if the economic growth assumptions in the budget are towards the optimistic end of the spectrum and the labour market figures are also, as a result, towards the optimistic end of the spectrum, one would expect the AME assumption also to be fairly optimistic. I cannot give you precise numbers, but you are absolutely right. If growth is more subdued than expected, one would expect AME to be higher. Therefore, if total managed expenditure is constrained by the Fiscal Responsibility Act 2010, which it currently is, DEL will obviously either contract more or grow more slowly.
How much of the 3.4 per cent figure is accounted for by things such as unemployment benefit and social security payments, and how much is accounted for by debt?
I wonder whether Gary Gillespie knows the balance.
I will come back to the balance. The other point to remember about AME is that it is counter-cyclical. We would expect it to rise in a downturn when social security payments, unemployment, the net debt and net debt interest increase. The figures from the budget show net debt interest repayments in 2010-11 of £42.5 billion. It has been projected that those repayments will increase to £66 billion in 2014-15, in 2010-11 prices. They will move from 2.9 per cent of GDP to more than 4 per cent of GDP. Obviously, that is a key component.
I would like to start by asking process questions for background to the report. Did you decide to publish the report when it was published?
I think that I understand the question. I first got into this particular work around the time of the PBR in December. At the time of the March budget, we revisited it to see what changes had been made in that budget and what impact they might have on our thinking. In practice, the impact of the budget in March was relatively small compared with that of the PBR but, on the back of it, we updated the report and we were keen to publish it—the permanent secretary was keen that we publish it—in time for it to form part of the context of the work of the independent budget review. Therefore, we updated the report following the budget and published it as soon as we could after that.
The committee received the report on 22 April. When was it published?
The report was submitted to the independent budget review on Monday 19 April.
I have just refreshed my knowledge of the guidance that is issued to civil servants on publications, analytical work and commentary on UK policies during a general election campaign. The report comes under all three headings—did you check the guidance on the publication of materials?
We had some discussion, as we did with all the work that we were doing during that period, about the correctness of publishing something during a UK general election campaign. In collaboration with the permanent secretary, we reached the view that it was appropriate to do that under the guidance and that, given the work of and timescale for the IBR, it was important for the report to come into the public domain at that time. It was our view that that decision was in accord with the guidelines to which we work.
It is probably worth adding that the summary report states that it passes no judgment on the wisdom or otherwise of UK Government plans. Looking at the UK Government part is a first step to getting the Scottish numbers, and the focus of the report is the Scottish budget outlook.
I am well aware that the foreword says that the report passes no judgment, but it makes a number of assumptions on policy decisions taken outwith the Scottish Government. There is inevitably a fine line between the two, given that Dr Goudie said that the report shows one possible picture.
As I think I said in my introduction, we were keen to base the report on a picture that people would recognise, and people are familiar with the UK budget. Irrespective of our value judgment on it, which is irrelevant, we felt that that budget was a sensible starting point on which to base the discussion.
Was a draft provided to ministers?
I think that the document was provided to ministers on the Friday before we submitted it to the independent budget review. I am not sure what the date was, but it was on that Friday.
And there were no comments back.
The work was conducted entirely by me and the office, which is independent of ministerial judgments.
Who took the decision to use the 2009-10 DEL, with the accelerated capital included, as the peak year on which to base all future projections?
That was fundamentally my judgment.
Why is that the most accurate baseline in considering what DEL is provided?
We used 2009-10 as the base partly because it is the year from which we have just come and for which a comparison is most suitable. If you are asking me why we included accelerated capital in the figure for the base, the answer is that it was absolutely in line with the way in which the UK budget documents are prepared. You will be familiar with a table at the back of the budget document that sets out expenditure by departments across the UK. The basis for that table, which is basically what we followed, is defined as expenditure including accelerated capital.
Does including accelerated capital not skew any of the forward figures?
I do not think that it skews figures in any great sense. The difference between including and excluding accelerated capital obviously has a small effect, but I would be very surprised if it affected the general shape of the arguments. I guess that we could work either way; we simply tried, for consistency, to go along with how the UK Treasury put its work together.
Does it follow that housing associations and local authorities should similarly use the money that they had in 2009-10 as the baseline for their forward funding from the Scottish Government?
It depends what question we are trying to answer. If we are trying to answer the question, “What is the appropriate baseline for their expenditure?” that is a rather different question and I am not sure that it is within my remit to answer it.
As you said, you prepare your reports independently, so I think that it is an appropriate question. From a further panel of witnesses this afternoon, the committee will learn about education funding—college and university funding—and we have heard about funding for housing and health. When we consider growth or non-growth in those areas, we have to take a baseline. The baseline that you have taken in your report, which ministers have approved, is the peak of 2009-10, including all the accelerated money. Should future housing association, council and health budgets be considered in a comparable way?
That is a complicated question because—I do not wish to be disrespectful—the acceleration of capital necessarily means that, in a later year, there will be a deceleration as items are offset. When we deliberately accelerate, the acceleration is followed by a dip in the series, so the year in which we accelerate will tend to be above the previous trend.
Is that context outlined in your report?
No, I do not know what specific comment we make about the acceleration of capital, but I suspect that we say little about it because the fundamental question is the extent to which the size of the accelerated capital is relevant and material to the basic picture that we are trying to paint. As I said earlier, in the report, I am not interested in plus or minus whatever but in the shapes. I would be happy to consider something like what you ask about but, given the sensitivities to the accelerated capital—the long-term picture, the depth of the recession, the depth of the contraction of public expenditure and the duration for which we will be below the previous peak, however defined—I would be very surprised if the material argument changed at all. I do not dispute that we could do it differently, but I suggest that it would not fundamentally change the picture.
I am just asking why it was done in that way.
If you look at page 209 of the Treasury budget documents, you will find that the departmental expenditure limits—which are set out for the resource and capital budgets for 2009-10 and 2010-11—include capital acceleration. Therefore, for the rest of the report, we tried to define our assessment tightly alongside the UK budget. We have adhered to the same convention as the UK Treasury.
I understand that and I heard it in your previous answer. In the budget debates, my colleague Malcolm Chisholm highlighted the way that ministers use the information. Any UK Government figures taken from the peak year highlight the reduction. However, in considering its forward budgets, a housing association is not allowed to say that the reduction is higher because it has accelerated capital. I am trying to find a comparable way of presenting information on such budgets. Do you wish to comment on that?
No.
You make points on the impact on taxation. When you put your report together, was there any consideration of what the Scottish Government is currently doing with taxation and the impact that that might have? I did not see that within the report and wondered why.
The most important point is that the document was fundamentally designed to inform the debate about the nature and scale of the challenge. We have explicitly not gone into the potential ways of reducing the scale of the challenge that is laid out in the paper. Among the ways in which you might respond to that challenge, you could change expenditure or taxes. However, we have not gone into that territory in the document.
I had one other point on taxation. Implicit in the analysis from the central budget is a fiscal tightening of £57 billion, two thirds of which comes from expenditure. That is what we have modelled—£38 billion from expenditure and £19 billion from taxation. That is on the assumption that you can vary, depending on your outlook, and it has an impact on the results. It is one of the things that we change in the later scenario.
I understand that but, as far as the public—anyone reading this—is concerned, all of the taxation that is being referred to is from the UK Government. I understand that relating to this is an assessment of what may well be the UK picture but, as far as readers are concerned, the cost this year in Scotland of the council tax freeze and the small business bonus is £700 million. There is a Scottish devolved context, which is absent from an assessment by the Scottish Government.
It is absent from this document. We were not trying to get into a discussion of the policy options. Apart from anything else, I did not feel that it was my place to do that. That is a discussion that ministers will no doubt take up with you as you wish. As far as the Scottish Government and the Scottish Parliament are concerned, there is a range of policy responses to the document, some of which revolve around the expenditure side and some of which revolve around the taxation side. The areas that you are picking out, such as income tax variation and council tax variation, are areas in which options could be derived that address that issue. However, we did not go into that set of choices in the document.
Just so that I am clear, you are saying that you were sufficiently aware of the sensitivity of the document that you discussed it with the permanent secretary, whose view was that, even in a period of purdah during a general election, it was okay to publish.
Yes.
The work is to inform the independent budget review. Given that the review is not due to report until July, would it not have been better to have waited until after the outcome of the general election, when you knew what the make-up of the new Government was and what its spending proposals were?
The judgment that we reached was that the implications of this piece of work were sufficiently useful that it was important to get it into the hands of the independent budget review team as quickly as possible after the UK budget. The first phase of the team’s work has been fundamentally to try to define the challenge that it faces and the way in which to address that challenge. As we set out in the document, we were not looking at a three or four-year period of contraction and then a sudden bounce back to some kind of normality; instead, it was a picture of significant contraction for many years, followed by a relatively slow recovery and a long period of time when expenditures were well below their previous peak, however you might want to define that.
You said in your opening remarks that there are no definite details and no precise estimates. By your own admission, a lot of the work is based on IFS forecasts. You will have seen the work from the Centre for Public Policy for Regions and others, all of which informs the independent budget review. I would have thought that it was incumbent on you as the Government’s chief economic adviser to give a factual outcome rather than a series of estimates.
To my knowledge, the key difference between the piece of work that we presented and the work of the IFS and the CPPR is that they have not considered the long-term horizon. What distinguishes our work is the fact that the longer-term analysis throws up some important contexts about the length of time that the adjustment path will take. There was a strong argument that that added something to the debate that was not provided by the other pieces of work, although I agree that they were very important.
Just to be clear, it is you who is forecasting that cuts of £3.5 billion to £4 billion will occur. That is your assessment.
All the numbers in the document are generated by the work that I have done. However, as before, I stress that our starting point—reflecting no preference on my part whatsoever, and chosen simply because it seemed logical to do so—is the UK budget, and we have made fairly reasonable assumptions about how that would translate into a Scottish picture. We end up with numbers that are illustrative of what that implies, but the intention of the paper is not to get stuck on the precise numbers but—this is much more important—to address the key messages that flow from that piece of analysis.
Are the data that are set out in chart 2—the projections for DEL and AME—your estimates or the Treasury’s estimates?
As I said earlier, the 2010-11 numbers are taken straight from the budget document. The AME figures are, broadly speaking, based on the IFS approach and the work that has been done in that regard, and the DEL numbers are the residuals that flow from that.
In response to questions from Mr Purvis, you talked about the accelerated capital. On page 28, you say
I refer you to the point that I made earlier. We have picked up on what is in the Treasury documents. There are two different ways in which you can present the data.
We are well aware that there are two different ways in which you can present the numbers.
Depending on what you are trying to argue or demonstrate, both sets of numbers have a place. As I said before, we have simply followed what is in the Treasury documents. That reflects no judgment about whether, in that particular year, it is preferable to record the data with or without the accelerated capital. The question depends on the use to which you are putting the data.
You are the chief economic adviser to the Government. You know full well the way in which these bits of numbers are interpreted. Saying that DEL expenditure will be lower in 2010-11 than it was in 2009-10 is not factually correct. You could just as easily have put in a caveat that said that, if accelerated capital is included, there is an increase of 0.9 per cent.
We have noted the point that capital acceleration is included—in fairness, the document sets that out. I can say no more than I have said. We were keen to align the contents of the document with what was being published by the UK Treasury and, as far as possible, we have tried not to vary from that starting point.
I realise that you, as a senior civil servant, have no say in how ministers use the information, but I suppose that it might have been disconcerting for you to hear the First Minister trumpeting it so much and using it to partisan advantage during the election campaign.
As you would imagine, I neither control nor comment on the way in which cabinet secretaries and the First Minister use the material that the Government economic service produces. All I can say is that that work has always been and always will be conducted in a professional way, with no intention of reflecting any political bias whatsoever. I assure you that the content of the document, of which this issue is one relatively small piece, is fundamentally designed to set out a picture that is intended to inform a debate as best as it possibly can. Broadly speaking, I think that it has been effective in enlightening the debate around the long-term implications of the fiscal adjustment programme in the UK.
Given that there is such a high degree of fiscal uncertainty at present, I dare say that the document adds to the debate, like every other economic forecast that we have seen so far. Is it the intention—I hope that it is—to update the document when a Government is in place and we see whatever budget it comes up with and what that means for Scotland?
I imagine that that will almost certainly be the case. We updated it as a result of the March budget, following the piece of work that I initiated and following the PBR in 2009. We will almost certainly do that again. As I said, the primary driver of the work is that, in terms of planning and managing government, it seems to me essential to note that good government depends on having medium-term knowledge of the financial arrangements and the financial settlement that we have to work with over the period. In the absence of clarity from the UK about what that settlement will be, it is important that we do our best to try to set a framework within which the Government can work.
I am sure that the committee will look forward to those updates.
I have one final question. Dr Goudie, you have been in the civil service for a long time. Have you ever seen a fiscal situation such as the one that we are in just now?
I do not think that I have, no. I am afraid that I have not. I remember 1974, but I do not remember quite the picture that we have at the moment.
Thank you.
Andrew Goudie must have been the office junior that far back.
On your primary point, notwithstanding the conversation that we have just had and my happily conceding to you that there is a softness about it because we have no other basis on which to work, I am confident that the scale of the contraction that we are likely to see will be substantial.
What work is your department doing to address some of those issues? Does it include scenario planning, for example? How detailed is your work on which public services are absolutely necessary and cannot be compromised and which are softer areas?
Obviously, you would not expect me to go into the detail of what we are doing with ministers. We are looking at the scope for efficiency right across the public sector in the different ways that I have described, from the more simplistic areas, if I may call them that, to the more complex, which are to do with public service provision.
Many witnesses have told us that we need to take a completely new look at public services, that we have allowed them to be delivered in a way that does not suit the end user or client particularly well, that it is time for a great rethink, and that we should take that opportunity. I agree with that in theory—it sounds wonderful. However, does the work that you have done, including your work on the document that is before us, lead you to believe that we have the time to take such a new look? Should that work be done in tandem with the cuts that will be necessary to get us through this difficult period?
Work is, of course, on-going on that basis. You will know that, through the remit of the independent budget review group, the Government asked the group to look at many of those issues. In my judgment, areas of service redesign need to be addressed urgently, irrespective of whether they are likely to produce savings in the next year or whether they will not come through for several years. If the savings have a long gestation period, it is important that the process starts now. It would be a mistake to imply that no work has gone on in the past. We have to continue that work over the next few months, but we must do so more intensively if we are to be able to manage the contractions in 2011-12 and handle the necessary savings that we will need further out. That work has to happen very rapidly.
In response to David Whitton, you said that you will revise the paper that is before us once the new Government is in place. Will you constantly monitor and revise this piece of work as times change and things vary?
Assuming that there is a budget sometime in the next few months—a subject into which I have no greater insight than you do—we would aim to update the document at that point. As a matter of principle, around the time of the PBR and at budget time, we would always look to see whether there was a case for updating it.
We also monitor other external work. The Institute for Fiscal Studies published work the week after we published ours. That work took the proposals from each of the three UK parties and estimated how far their expenditure changes were specified. We did some quick checks on that analysis. Compared with our central case, it shows little difference in real-terms change up until 2014-15. It shows the same shape.
Do any changes in the Scottish economy’s performance—as distinct from that of the UK—impact on the assumptions in your report, given that it is predicated on AME expenditure in Scotland?
The answer is: indirectly. The Scottish economy’s performance will have an impact on Scottish revenues that are generated by the economy and that will feed through into the UK figures and their buy-in to the Scottish figures. Similarly, the transfer payments recorded in AME will be affected in the same way. I do not immediately see any direct influences, although perhaps Gary Gillespie does.
No.
When you answered Malcolm Chisholm’s earlier question, you said that one of the biggest elements of AME is employment benefits, social security and UK pension contributions, in this case for the Scottish demographic. I cannot see how such changes would not have a considerable impact if you are forecasting until 2021.
I agree absolutely that they will impact, but through UK AME and therefore into UK DEL—
What modelling did you do of potential changes? The Scottish Government has three top priorities in this regard: GDP, GDP growth compared with other European countries, and demographic change. Why were those not factored into your analysis?
The key point is that the analysis is rooted in the UK assumptions for UK growth and the UK fiscal adjustment path that is laid out in the budget. Within that there are implicit views about what will be happening in all parts of the United Kingdom, including Scotland, which will feed through in that way. However, there is not the direct link that you suggest simply because we used the UK framework as the base for our work.
You are saying that changes in the Scottish economy will have negligible impact and that it does not matter what happens to Scottish GDP, unemployment in Scotland or our demographic when it comes to social payments. Your report is called “Outlook for Scottish Government Expenditure”; I am taken aback that such changes were not modelled in, given that the number 1 purpose of the Scottish Government is to grow GDP and to have population growth. I cannot understand why that was not even figured in.
The answer, as I said in response to the earlier question, is that AME is indeed a crucial part of the logic in deriving our estimates. Fundamentally, the IFS estimates for AME are derived on the basis of its views on the UK growth forecast and on UK labour market projections, which are clearly a major driver of social security spending—
Perhaps I have misunderstood this, but it seems that your modelling and forecasting look at AME as a component of what is happening in the different parts of the UK economy. As I understand it, the IFS has taken a global picture of the UK economy, but I would have hoped that any data that were published by the Scottish Government would be based on work on Scotland’s component of that. Have you simply taken the IFS assumptions about the UK economy, or have you modelled what you think will happen in the Scottish economy?
We have done the former, as is set out in the document. We have been very open about the fact that the 3.4 per cent per year figure that I quoted earlier is based on an analysis of the UK picture.
Given the fact that the UK picture is dependent on what happens in Scotland, England, Wales and Northern Ireland, why did the Scottish Government not do any modelling of the impact on Scottish AME, which is demand-led spending that will be determined by Scottish unemployment, demographics in Scotland and the rate of growth of economic activity within the Scottish economy? Why did the Scottish Government not do any modelling of the Scottish AME component?
I understand your line of questioning. Indeed, that is a feasible approach, but you probably underestimate the difficulties both of design and of resources that would be required to have a model that would pick up that information in a way that might answer the question—
But that information is needed for the Scottish Government’s purpose.
As you know, we simply do not maintain a model of the type that you suggest we should have.
I should perhaps add that that type of information is picked up in publications such as “Government Expenditure & Revenue Scotland 2007-2008”, which sets out total public expenditure in Scotland against total public revenue. Basically, the expenditure shown in GERS includes AME components such as social security, debt interest and other stuff that apply or accrue to Scotland.
Why then was no forward modelling done of the GERS data, which the Scottish Government inevitably needs to do if it is to fulfil its purpose and intentions? Why was that not used as the base model, instead of the IFS projections for the UK simply being lifted?
Fundamentally, as I have said to the committee when I have given evidence on GERS, the answer is that we explicitly do not project GERS. Fundamental to such an approach would be the ability to project economic growth in Scotland and the impact of economic policies in Scotland. We simply do not have a model with the capability to do that. I accept your theoretical point, but practically we simply do not have the resources or the model to do that.
Why is there not a massive health warning on the “Outlook for Scottish Government Expenditure” paper? If you cannot accurately forecast or model the data in the Scottish Government’s GERS publication, there should be a big health warning not simply about the source of the information that has been taken from the IFS, but about the fact that the outlook’s assumptions for the period to 2023 are made in the context that the Scottish Government has conducted no separate Scottish modelling of demand-led aspects of spending within the Scottish economy.
We might not have used that language, but we have certainly made it very clear that the document is based on an assessment of the UK budget, of the UK performance and of the UK public finances. We have made it abundantly clear in the document—we have been quite open about this fact—that we have rested on the IFS approach, which is fundamentally based on an understanding of the likely outcomes for the UK economy, of which the Scottish economy is a part. At no point have we suggested that we have done anything other than lean upon those two key pieces of work. For such time as we do not maintain a model, we will continue to do that. We have been completely and utterly open about that fact.
You have been perfectly clear about the basis of your analysis, but no one should be in any doubt about the frightening aspect that faces all of us. No economy can lose between £25 billion and £35 billion in expenditure and not expect to have some rough, tough times. The committee’s work is, first, to find out the facts, as far as we can, and secondly, to look forward to see how prepared and able we are to respond to the problems.
I have nothing to add to what we have said. We have had a good run through what underlies the piece of work, which is fundamentally important, and its purpose. Its key conclusion relates to why consideration of a 10 and 15-year horizon is valuable when we think about how to handle decision making in the short term. We face a scenario that differs from those that we have seen before. There will be no automatic bounce back to resource levels in the recent past, but a prolonged period in which those levels will be lower than they were. That begs a critical question, as the response in such circumstances is very different from that in circumstances in which there is a relatively short-term contraction.
We are looking for new thinking and new ideas. We need responses to address the situation. I hope that you will be able better to inform us about how the Government is equipping itself to face up to the problems and to help us all to overcome them. Thank you for appearing before the committee.
Our next two panels comprise witnesses from various sectors that are responsible for spending major sums of public money: local authorities, health, education, enterprise and transport. I welcome the first of those panels: Ronnie Hinds, from the Society of Local Authority Chief Executives and Senior Managers; Robert Calderwood, the chief executive of NHS Greater Glasgow and Clyde; and John Stodter and Murdo Maciver, from the Association of Directors of Education in Scotland.
On your first question, from SOLACE’s perspective, the solution is more of what we have done before—but only to some extent. In local government and elsewhere in the public sector, we have a strong track record in Scotland of delivering savings, particularly efficiency savings. We must continue to do that, although it gets more difficult with every year that passes. However, as I am sure that you have heard from other witnesses and in the written submissions that you have received, that will not be sufficient to address the situation that we now face.
Yes, indeed.
From an education perspective, it is easy to see an evolution in the savings agenda over the past few years. The efficiency strategy is well established in services throughout the country, and the level of efficiency savings varies across councils. However, as we have moved into 2009-10, looking to 2010-11, it is clear that the opportunistic approach to efficiency savings has been replaced by a more targeted, strategic approach with an increasing emphasis on downsizing, a concern about services in the future and a continuation of efficiencies. There is increased talk about the privatisation of services and their transformation with the efficiencies continuing.
I wish you had not referred to the 1970s as days gone by.
From a national health service perspective, first and foremost we have continued to enjoy a year-on-year budget increase in real terms. However, throughout the current parliamentary session we have had to identify and enact a 2 per cent efficiency saving each year, which has given us the opportunity of investing that efficiency gain back into service development. That project over the past three years has seen us take forward significant service developments and new opportunities with regard to shorter waiting times, redesign services to meet the range of new demands placed on the service and, in the case of NHS Greater Glasgow and Clyde, bring forward estate modernisation and new health care build. That said, the opportunity to continue to find efficiency savings year on year, over an extended period, out of the status quo, is of course subject to the law of diminishing returns. We will therefore ultimately have to look over a wider range of issues to see how, over an extended period, we could continue to deal with diminishing public sector spend and year-on-year increasing demand on health care.
Your past gives us a glimpse of everybody’s future.
The public sector in Scotland has grown substantially in the past decade or so, and some people argue that there has not been a corresponding improvement in service. Robert Calderwood covered some of the issues in health, when he talked about changes in the health service, which mean that people are asking for more for their money. However, in other areas people feel that services have not improved, although money has been pumped in. If that is the case, does it mean that we can take money out without losing service?
The difficulty with that argument is that we cannot know what would have happened had the investment not been made in the first place.
The question was well put. Members are probably familiar with the recent work of the Centre for Public Policy for Regions on differential levels of expenditure north and south of the border, which are partly—but only partly—the result of the levels of growth in expenditure that we have experienced in Scotland since devolution. We have begun to do a little exploration of the point at which the CPPR left off, and our work is telling us that across the piece in public services we are spending about £1.20 in Scotland for every £1 that is spent south of the border. That gives rise to the possibility that significant reductions in expenditure might be achieved without necessarily reducing the quality of service to an unacceptable level—after all, the level seems to be acceptable elsewhere in the UK.
You referred to £1.20 being spent in Scotland for every £1 that is spent in England. Will you explain that differential—is it about economies of scale, or what?
We have just begun to explore it, so I cannot give an authoritative answer to that question. However, we think that the issue merits further investigation. You might like to consider that. Some of it has to do with the same considerations that underpin the Barnett formula. There are differences in providing public services in a country such as Scotland compared with providing them in other parts of the UK, but it is still worth looking at the issue. What are the intrinsic differences in providing an education service and funding and running a school south of the border compared with north of the border that give rise to the fact that it seems to cost us £1.20 per pupil here compared with £1 per pupil in England?
We would appreciate any information from you.
First, I sound a note of caution about using the CPPR report that was referred to as a reliable comparison of two very different systems. The assumptions made in the report were entirely different. There was no investigation into what was being compared north of the border and south of the border. The figures for education are something like £1.10 here as opposed to £1 in England. I reckon that a lot of the 10p difference can be explained by demography and geography. In the same way that Glasgow gets more money than Edinburgh, you will find that Scotland gets more money than England to provide an education system. That is the way that grant-aided expenditure works, and some of it is to do with rurality and demography. I can guarantee that the comparisons in the CPPR report were not like for like. However, as my colleague Mr Hinds said, it is worth investigating how those differences can be explained and whether certain things are more efficient south of the border.
Thank you for that explanation.
My question is addressed mainly to Mr Hinds, but if anyone else has an answer, I would be interested to hear it. The Scottish Government will have to take decisions later this year—not much later this year—to deal with spending reductions. I was taken by what Mr Hinds said in his opening statement about joint working, which I think everyone accepts is important. If I picked him up correctly, he said that the scope for efficiency savings was variable and that they get progressively harder to make the longer one goes on, which sounds plausible and sensible.
For me, it is not an either/or proposition. There has to be a mixture of both approaches.
We see the partnership dimension as being extremely important. The concordat and the single outcome agreements provide all of that. Education is a national priority, and the national strategy provides the parameters within which that can be taken forward locally.
In health, it is difficult to describe the balance as a split partnership. As the Cabinet Secretary for Health and Wellbeing has accountability to Parliament, we look for Parliament and parliamentarians to set the policy debate within which health boards look to deliver services in the most cost-effective way. That said, each health board obviously starts from a different relative position, so there is a requirement locally for it to continue to strive for the most efficient way of meeting the health care needs of its population.
There has been a consistent theme from previous panels when we have asked about whether any particular budget areas should be protected. I will ask the same question. For example, has the NHS been given a guarantee that it will receive real-terms increases? Have local authorities or education services received such a guarantee, or are you all looking at the Government’s forecasts for reduced budgets and planning accordingly?
From a health perspective, we have no indication of either the decisions that will be taken nationally in the comprehensive spending review in the autumn or what the Scottish Parliament will decide on the block budget and its spending priorities beyond 2010-11. We were set one certainty, which was that throughout the parliamentary session a 2 per cent efficiency target would be set each year for the opportunity of service improvement. Allied to that, looking at the wider UK picture and the Scottish economy, all public sector bodies are running a range of scenarios based on cuts of 2 per cent upwards.
How would you change that situation?
In health, on the back of the record level of uplifts in spending that we talked about earlier, boards have taken the opportunity, throughout this decade, to modernise our whole pay and terms infrastructure. We have done that by creating a new contract for medical and dental staff that provides a greater opportunity to direct senior medical staff and to deal with the issue of the European working time directive and hours of work for junior medical staff. Under agenda for change, we have equality proofed our pay policy for the vast majority of our staff and have provided a career learning ladder that allows us to work with staff to help them to gain new skills that they can use to take on new roles for which they will be appropriately rewarded.
Have councils been told that their budgets will continue to see growth?
No, we are in the same position as the NHS. There is no definitive picture as far as the level of savings that will have to be made is concerned, or with regard to what our share of any reductions will have to be. As I am sure that others are doing, we are working on the assumption that over the three-year period beginning next year, we are likely to have to make real-terms reductions in expenditure of 12 per cent, which is consistent with Andrew Goudie’s analysis. That is the planning assumption that we are making.
Did you want to come in on that point, Malcolm?
No.
Efficiencies have been referred to a great deal. I was interested in Mr Calderwood’s explanation of where some efficiency savings could be used, but has the Government asked for it to be demonstrated where money that has been saved through efficiencies has subsequently been spent?
From a health perspective, as part of our local delivery plan process, our submissions to the Scottish Government health department identify savings and justify how we arrived at the need to make that level of change. The Government also receives full details of the individual schemes that we propose to make up that change. As I said earlier, the impact of inflation plus service commitments that NHS Greater Glasgow and Clyde has entered into means that, in 2010-11, our service provision costs will be £80.6 million higher than they were last year. We have received an uplift of £46 million from the Government, and we will generate the other £35 million from efficiency savings that will be reinvested—they will be retained in the health economy.
So that is just a matter of defraying additional external pressures, rather than saving £5 million by not doing something and then spending it on something else. You have been able to use the £5 million that you have saved to defray the external pressures that add up. Is that correct?
To date, the 2 per cent efficiency saving has been reinvested in the local health economy each year. That remains the situation in 2010-11.
I want to be clear about this. I asked Audit Scotland that specific question. I do not know whether you saw its answer but, to paraphrase, it said that it was not clear about where the money had subsequently been spent. I am not necessarily making any judgment about it and I understand that, if you have made an efficiency but your pressures are still mounting up and you can defray some of them, you will. Is it a case of that or a matter of providing the same service better and now providing another service with the money that you have been able to save? That would be different.
Yes and, in health, we can demonstrate that. Touch wood and subject to the audit that is happening as we speak, we believe that NHS Greater Glasgow and Clyde will break even on its budget for 2009-10—the year that has just finished.
How would each of the witnesses strike a balance between cuts to current expenditure and cuts to capital expenditure?
I am happy to make the first venture into that. If you refer to Andrew Goudie’s paper, you can see that the reductions that we face in capital expenditure are far greater in percentage terms than those that we face in revenue budgets. That is typical of previous recessions. If we face 12 per cent real-terms cuts in revenue over three years, we are probably, as I remember, looking at 50 per cent reductions over the same period in capital budgets, so the decline in the level of resource for capital expenditure is much more severe and much swifter.
Would ending the policy of zero increases in council tax and allowing you to raise council tax levels help you to do that, as you could use the resulting money to help with your borrowing?
It would help if we had more revenue resources either from increased income or from freeing up resources because of efficiency drives on expenditure.
I qualify my opening comments by stressing that they relate to NHS Greater Glasgow and Clyde; other health colleagues in Scotland might have different answers to your question.
Would anyone like to comment on the education side?
I hesitate to answer. However, if we are faced with a choice, the preference would be for service delivery—maintaining learning and teaching, supporting teachers in the classroom, early intervention and all of the other dimensions to that. North Lanarkshire has made a major commitment in principle to maintaining from council resources the building and remodelling of schools, under the schools and centres 21 programme. We have a long list of projects and have seen the benefits that new schools bring to youngsters, education and the social, health and leisure dimension of communities, through the use of schools as community hubs and in other ways. For that reason, I feel sore about the postponement of new schools, not just in North Lanarkshire but more widely. However, if we are faced with a choice, the preferred option would be to maintain service delivery.
In asking my next question, I risk creating a bit of tension between health and education. You will not be surprised to hear that we were told in evidence from various quarters that there is a demographic trend whereby the Scottish population is getting older and services for the elderly will have to be increased. Equally, however, other witnesses told us that we should not cut investment in early years provision because we get long-term benefits from that. I would welcome your views on what choices should be made. How can we square that circle?
I will start with a comment from the health perspective. If my director of public health, Dr Linda de Caestecker, were sitting here today, she would likely wax on the need for both. She would start with the success of the starting well and triple P programme and she would highlight evidence from Australia and other countries that proves that, over what we would consider an extended period of 10 to 12 years, addressing child and family health at that point pays dividends, with good results for the wider society. The challenge in working within such a timeframe is that the payback is beyond most business planning cycles and there is a temptation to do something more immediate. We in health, along with our education partners in local authorities, support the concept of the starting well and triple P programme and investment in it, but there might be a temptation to raid it.
I assume that you are planning to keep as many elderly people as possible out of hospital and in the community.
Yes. The strategy at the moment is to shift the balance of care in dealing with long-term conditions and anticipatory care. Elderly people who have long-term conditions might have an acute episode three or four times a year. They usually come into hospital for only 48 or 72 hours, and they are stabilised and discharged. The view is that, by working in the areas that I mentioned, we can stop that revolving-door concept. That takes us into the areas of adaptations to social housing, early-warning systems, e-health, new technology and, as I said, partnership working.
On the question that David Whitton posed, obviously, we cannot make a choice between the elderly and our young and sometimes vulnerable population. We need to address the requirements of both. Because we are faced with an overall reduction in resources and growing demands at both ends of the spectrum, the onus is on us to get a lot smarter about how we provide services. There is evidence that that can be done with no deleterious consequences for the quality or level of services as long as it is done intelligently.
The committee may be interested to know that there has been some protection of education. Education will account for 40 per cent of councils’ budgets this year, but it has contributed 32 per cent of the reductions in what has probably been a less good year than previous years, so there has been some prioritisation. Given some of our discussions with the Convention of Scottish Local Authorities, my view is that the big pressures for councils will relate to the older age group. As I said earlier, those pressures will be more significant than the budget reductions, because of increased demand and increased costs. Increasingly, council services are corporate services working in a community-type partnership. What Ronnie Hinds said is very important, in that decisions should be made intelligently and what we intend to happen should happen. For example, it has always struck me as odd that people over a certain age are allowed to travel free across Scotland, but we charge children to go to school. I do not know whether that was an intended or an unintended consequence. My plea is for intelligent strategic decisions that have outcomes that were intended.
That brings me neatly to my final question. Should there be a limit on currently available universal benefits such as free travel and free school meals, which are paid for by the public purse?
That question has to be asked. It is not going to be easy to answer it, and I will not sit here and pretend that decisions on it will be easy for politicians to make or get accepted by the population or, indeed, that it will be easy for officials to deliver them in practice. However, we have to go there. I am somewhat blooded already in this because, in the authority of which I am chief executive, we looked hard at concessionary rail travel and decided that, although it is nice when there is enough money for it, given the choice between it and targeting the expenditure at areas in Fife where we could help more people who have significant difficulty in travelling from A to B, we should do the latter. That was a tough decision for the politicians to take. The consequences of it are probably an interesting vignette of the kind of issues that we will face in addressing the situation that is ahead of us.
From the health service perspective, the NHS’s founding principles include providing services free at the point of use, financed through general taxation. To that extent, income generation has not been a feature of health service management and delivery. However, as a group of chief executives from across Scotland who have submitted evidence to Crawford Beveridge’s independent budget review, we have highlighted that it is important to look at choices going forward. For example, we can consider whether free eye tests and prescriptions, which are currently universally available, should be more targeted, and compare that with the opportunity cost of the money for universal provision not being available for another part of the health service in the years ahead. I believe that the Parliament needs to address those issues in the context of future years opportunity costs.
From ADES’s point of view, we had reservations throughout about the roll-out of free meals to all in primary 1 to primary 3, irrespective of need, so the provision made by the Cabinet Secretary for Education and Lifelong Learning in the December letter and the subsequent agreement to retreat or give flexibility on that position was much appreciated. I thought it odd that it was deemed appropriate for many youngsters to come to school hungry and to have to wait until midday for universal provision of free school meals. Perhaps a more targeted approach would have been to home in on the breakfast needs of those youngsters so that they would be in a better position to take advantage of learning opportunities throughout the day rather than just in the afternoon.
I have a couple of questions on the themes that I have been hearing about, which have been really interesting. One of the points that came out clearly in those last comments was that we should target needs rather than wants. I think that it was Ronnie Hinds who spoke earlier about expectations and about how we perhaps have to get a bit harder. However, John Stodter pointed out that often it is difficult to quantify the longer-term benefits—and the benefits to society in general—of some of the things that we are doing that are not seen as being about needs. Within local authorities in particular, much of what is spent is spent in order to meet statute. Does it therefore follow that discretionary initiatives will bear the brunt of any cuts that come along? Does that bode badly for the new way of delivering services that we are supposed to be considering for the general benefit in the longer term?
In essence, the answer is yes. However, I am not convinced that looking at the statutory basis of the services provided by local authorities is the right way to address the issue. After all, there is a plethora of statute in social work, for example, but often it does not produce definitive answers to questions about what must be provided and what must not. It is not a good way of deciding what we will continue to do and what we might have to do a little less of.
That question is probably the most difficult one that Scotland faces. There is much in education that is legally prescribed—in fact, some would say too much. The number of children in a class, the number of hours that they spend in school, when they start school and when they leave are all prescribed by national standards. At some stage, you have to ask from a point of pure logic whether all those constraints and parameters are justified, given the decisions that we might have to make about services that are not necessarily so well defined or protected in legislation.
There are enriching activities in primary and secondary schools, such as music and sport, that are a major part of the satisfaction that many youngsters and parents get from their local school. Such activities are not statutory, but it would be a major loss to our schools if they were cut. The issue of parental responsibility may arise, in terms of charging. The parental responsibility issue could also be brought to bear on the transport issue, and the difficulty of changing the transport entitlement of 1 or 2 miles that still applies in some authorities back to the statutory limits. As John Stodter says, those are difficult decisions to take to do with responsibility.
There must be an element of that in the health service, too.
The element in the health service is slightly more challenging in that we have spent the past decade seeking equity of service throughout Scotland and to eradicate what has been loosely referred to as postcode prescribing. Today, the debate would be based on treatments whose clinical value is questioned. An historical example of that would be tonsillectomy; 25 years ago, most parents were pushing to get their children in for tonsillectomies because they were missing school. Clinical practice has proved that tonsillectomy is a totally pointless operation except in a small percentage of cases. We have gone from performing thousands of those operations throughout Scotland to performing a few hundred, on strict clinical grounds. That has allowed us to discontinue something and move resource forward.
I hear people talking all the time about partnership working. I think that Robert Calderwood referred to community planning partnerships. We must have been talking about partnership working in the community—involving the health service, councils and the voluntary sector—for nearly two decades, but it seems that there is not parity of esteem among the members of those partnerships. What is your honest impression about whether, in times of plenty, we have really just been paying lip service to that kind of stuff? Do you feel that now is the time to consider seriously how we deliver services to people using all the available resources, with the voluntary sector being a very professional—it sounds strange to use that word—resource that can be used in that regard?
My experience has been that there are a number of good examples in which partnership working in the community has resulted in improved services to the consumer, and in which the partners have overcome historical territorial issues about areas of responsibility and accountability.
I would echo that. Community planning has been a statutory responsibility for only seven years. The legislation to put it in place was enacted in 2003, alongside the legislation on best value. In most places, some form of partnership working would have preceded the legislation, and the legislation simply strengthened it. In most areas, partnership has been further strengthened by the introduction of single outcome agreements, which have at least placed a clear focus on what we are trying to deliver through partnership working arrangements, and on the evidence that we have made a difference.
I agree with everything that Ronnie Hinds said.
I bet that Murdo Maciver does not.
We have seen significant investment in partnership working over the past five years and we have seen significant improvements in the quality and types of services and in the identification of need. There is no evidence that there has been a more efficient approach, in terms of pounds and pence.
Mr Maciver, do you want to add to that?
I have nothing to add, thank you.
I am surprised. Can I probe a wee bit further about the voluntary sector?
Mr FitzPatrick has been very patient.
I have been patient for a long time, convener. I have a personal opinion about the voluntary sector. It is taken from listening to lots of people. I am thinking particularly of services to the elderly, whether for Alzheimer’s disease, elder carers or other services. Greater wellbeing seems to come when people are being dealt with through the third—or voluntary—sector, as opposed to through the municipal option, but those who work in the voluntary sector do not enjoy parity of esteem. They do not feel that they are treated as professional partners. What are the witnesses’ views on that?
I am sure that the role of the voluntary sector is different in different parts of the country, and I cannot speak authoritatively for everywhere. In the areas that I do know about, I am aware that the voluntary sector is represented in partnership bodies and working arrangements from the top all the way through, if you like. That does not necessarily mean that they are equal partners or are treated as such. I am not saying that they are or they are not. I recognise that I am not answering the question directly.
We had a meeting that reflected some of those issues. Thank you for that. Thank you, convener, I am finished now.
Convener, I was not itching to get in with my questions. I was just trying to ask a supplementary to David Whitton’s question. Ronnie Hinds suggested that increasing revenue could be used for capital build. What sort of revenue support would be required to support the borrowing of, say, £20 million to build a secondary school?
One of the advantages of the parlous state of the economy is that borrowing costs are at an all-time low, so if we are ever going to do that, this is the best time. I am working hard on my arithmetic here. For £20 million, we would be talking about £1.5 million in debt charges per annum over the piece. Borrowing £20 million for a primary school would cost £1.5 million or so per annum over 25 years. You would not get a secondary school for that.
So revenue would have to go up by £1.5 million per annum. How much would you have to increase the council tax in Fife, for example, to raise that?
Coincidentally, the increase would be about 1 per cent.
Do the witnesses have any final comments to make?
I will make one brief remark. I accept the correction that my colleague made earlier. I did not mean to give the impression that we are spending £1.20 in Scotland on education for every £1 that is spent south of the border. I meant across the piece, in all public services, we spend about £1.10 for every £1 that is spent south of the border for comparable services. We have done a bit more research beyond the CPPR to establish that.
I thank you for that correction. Indeed, I thank all our witnesses because there are lessons in what they have said for central Government, as it enters unprecedented times. I thank all the witnesses for their presence here today; their expertise and experience are very helpful to our inquiry.
I welcome our final panel of witnesses: Mark Batho is chief executive of the Scottish Further and Higher Education Funding Council; David Middleton is chief executive of Transport Scotland; and Lena Wilson is chief executive of Scottish Enterprise.
Good afternoon. Thank you very much for giving me the opportunity to be here.
As Transport Scotland is an executive agency of the Scottish Government, we get our priorities from ministers and take their direction on projects that have the highest priority. As Lena Wilson said, the Government’s priorities around sustainable economic growth and its central purpose are well known and understood. In a sense, transport stands ready to contribute both in the short term and in the longer term. In the short term, where resources allow projects to proceed, they can provide valuable employment benefits in the areas where they are promoted. Equally, the benefits in the longer term of modernising the transport infrastructure and making it more efficient are well understood.
I echo what Lena Wilson said about the principle of alignment between public bodies. We are conscious that there is potentially an artificial divide between Scottish Enterprise and ourselves, but we are all part of the same pipeline and we are now forging much closer relationships. Lena mentioned renewables. We are talking jointly about projects for a number of institutions, particularly universities, to develop knowledge exchange from the universities into businesses throughout Scotland in that territory. That is just one example. That alignment will be critical, not only to our organisations but to those that I represent today—the universities and colleges, which are autonomous and independent.
It is all about getting Scotland working and moving. In the context of the budgets to come—we heard about Scottish expenditure forgoing £25 billion to £35 billion—will the alignment that Lena Wilson talked about involve sharing services? How will you face the future?
An example of how services can be shared is our recent alignment or partnership with Skills Development Scotland. We now share a single information technology director and we are outsourcing IT services, which will save both organisations £2 million per annum for the next five years. More of that is not just necessary but inevitable.
Most of Transport Scotland’s services and overheads are provided by the Scottish Government; we do not maintain a lot of services within Transport Scotland. It should be remembered that of the work that we commission with the budget that we have, which is substantial, 95 per cent is tendered to the private sector and is competed for out there in the market economy.
In the context of the funding council, there are gains to be had from shared services and we are looking at that. We are using experts from Scottish Enterprise to consider realignment of the space in which we operate, in a useful way.
Do you want to talk about the VAT issue now, in case it gets lost in our subsequent discussion?
Yes—although I am not an expert on the matter. Broadly, a university does not attract VAT through providing its own IT service, but as soon as it shares the service with someone else there is a 17.5 per cent surcharge. That means that we must save 17.5 per cent before we start getting into profit. The Treasury has been considering the issue for many years. Consultants tell institutions that there are ways of getting round the issue, but those are invariably complex. The VAT issue is undoubtedly one of the big blockers to early shared service.
That will be a matter for the UK Government—when we get one.
My question is for Mr Batho. Will you enlighten us on what changes, if any, the Scottish funding council is looking to make to the make-up of the academic calendar to make your universities work a bit harder? I am thinking of changes to the academic year and shortening courses from four to three or even two years—sweating your assets, as they say.
Those are bigger issues than the funding council alone can address. Ways in which to condense are undoubtedly on the table. The paradigm for universities is the four-year degree, which is done typically in three 10-week terms with significant breaks in between that are justified on the ground that that is when academics do their research. That has been tested in England, where there is talk of two-year degrees and the like. Of course, there is some part-time provision that allows people to break out of that.
But they are being looked at.
They are; they are on the table. That said, they are not being actively pursued. We are not saying, “We will fund you in future to educate students in this programme for three years,” or, “We expect you to increase contact time with teaching staff over the year.” We have not yet got to that stage.
I turn to capital expenditure. You will be well aware of the plans for the super college in Glasgow under which three colleges will merge into one. Is that absolutely necessary in the current climate?
It is important to separate two closely interlinked things. One is the need to replace a very poor capital estate in the centre of Glasgow and the other is the merger of the three colleges. It is important to emphasise that the two things are not a single project. On the first, we have had condition surveys done of the whole of the college estate. The remaining really bad cases include the Glasgow colleges that are under consideration, Inverness College and Kilmarnock College. We are just starting on Banff and Buchan College and a couple of the Forth Valley College buildings. Once that work is done, we will have worked our way through the very worst cases. That is not to say that there is not more to be done. Glasgow sits in that category, so doing nothing in Glasgow is not an option. The professionals tell us that the buildings are in serious need of either very significant refurbishment or replacement.
I just want to ask about the case for capital investment. When we were in Ireland we were told that although such capital projects are always desirable, given the move back out of recession, they could be put off for two or three years, because the money has to be managed better. Is that a possibility here?
In all the colleges that still require work, there are things that need urgent attention. For example, a chimney is falling down at Inverness College, which is a potentially lethal situation. Doing nothing is not an option. If the capital investment is such that the Glasgow project is simply unaffordable going forward, we might have to look at other options. We are keeping that closely in mind and are looking carefully at what comes out of the next spending review and the next budget. We will need to cut our coat according to the cloth that we get.
Ms Wilson, you said that you had worked in a number of countries. What lessons do you think that they can provide us with at this time? Would you focus on any of them in particular?
Admittedly, many of the countries that I was talking about are in the developing world, so they are coming from much further back than those in the developed economies. However, they were able to leapfrog some of the developed world, because they were not shackled by so much industrial development. They could leapfrog straight into aspects of digital communications without having to go through the industrial age. They could work together, crossing political divides, to get behind economic issues, regardless of partisan approaches. Countries that had been at war are coming together in that regard. There are aspects of that that I would never wish on my own country, but I certainly learned from some of that spirit.
In its call for evidence, the committee asked,
As you know, the business gateway is not run by Scottish Enterprise any more. It is not part of Scottish Enterprise. It is delivered by local authorities. We participate in some aspects of how it is marketed, but we do not run the service.
Earlier, Mr Batho spoke about the links between your two organisations, one of which is the graduates for business scheme. Can you bring us up to date with what is happening with that?
Yes. One of the hazards with trying to take bold and brave decisions about what is the right thing to do for the economy and with trying to prioritise in terms of returns is that you occasionally find yourself on the front page of the newspapers in connection with things that you have stopped doing or said no to. That is a constant challenge. It is easy to talk about what you will do more of, but it is much more difficult to talk about what you will do less of. Graduates for business fell into the latter category.
I am always pleased to hear that there is a win for the public purse. Another win for the public purse might be news of a reduction in the amount that Scottish Enterprise spends on consultants, given that you have spent around £26 million on them between 2005 and 2009. Has that figure gone down?
That is an important part of our spend. I want to clarify that those consultants are not advising Scottish Enterprise on how to do what we do. In fact, we have conducted our recent restructurings entirely by ourselves. Over the past four years, we have saved £50 million and reduced our head count by more than 400, and have relied very little on consultants to help us to do that. We do not use consultants to help us with our big transformation programmes.
What has been the result of your efforts to produce the 2 per cent savings that the Government is seeking from all departments?
As I said, we have exceeded that target year on year. Our savings over the past four years have been in excess of £50 million, largely due to significant reductions in head count. Over that period, we have significantly consolidated our premises costs and reduced our head count by a third in real terms—not including those who went to Skills Development Scotland.
You have heard your fellow witnesses say that it will be difficult to keep achieving such savings going forward. How will that impact on your organisation?
It is always a challenge. Our projected efficiency savings this year are £14.3 million, and I am confident that we will achieve those. As you have heard from witnesses throughout your inquiry, and as I have heard today, efficiencies in themselves will not be significant, but Scottish Enterprise will maintain a relentless pursuit of them; the graduates for business scheme is part of that. We are a much leaner organisation than we have ever been, and this year we have delivered more to the business community than ever before.
My first question is directed to Ms Wilson. You spoke about strategic direction. I invite you to spend a few moments defining that. Is there a diktat from Government that you must look at the way in which we are organised here in Scotland and how our major organisations are set up, or must we place different responsibilities on senior people in those organisations to ensure that they work together and seek out opportunities?
It is not an either/or question—there may be an element of all of the things that you mention. I have been in my post for six months. Part of my ticket for getting the post, which I am honoured to have, was that I thought that it was important not just to be a good leader for Scottish Enterprise but to demonstrate good public sector leadership. I made a commitment to work across the public sector with my colleagues; Mark Batho has referred to some of that work. For a variety of reasons, the appetite for such work in Scotland is greater than it has ever been.
Mr Batho spoke about the competitiveness of the university sector. As he will be well aware, universities south of the border can levy different charges, including top-up fees. Because of that income stream, they can sometimes perhaps attract different research projects and different individuals to head up those projects. To what degree does Scotland’s inability to do that at the moment affect competitiveness?
At the moment, I think that we share the view of Universities Scotland on that. There is an incredibly complex mix so it is not possible just to do a quick sum—we currently have a project running jointly with the Scottish Government and Universities Scotland to try to tease this out more—but, in very broad terms, our view is that we are not far from comparability of funding. When our universities need to make the big investments that will attract international stars, they are still able to do that.
Finally, a body such as the funding council will obviously be loved by some organisations and not by others. We are entering a period when the fiscal position is tightening considerably and hard choices will need to be made. In an era when very considerable pain might be felt in different sectors, are you still convinced that the Scottish funding council is good value for money?
What the funding council delivers is a capacity to look at the sector as a whole in a demonstrably impartial way. That is why, for example, there are specific powers that prevent Scottish ministers from engaging directly with individual institutions. We have that capacity to offer. It is for others to judge whether we do that well or badly. I have not yet found anybody who loves us, by the way, but that is par for the course.
Before I bring in Jeremy Purvis, I notice that we have been educated and employed, but we have not been transported yet. Mr Middleton, have you assessed the likely impact of budgetary reductions on your sector and service users? Are you discussing with your service users how the impact of reductions can best be mitigated?
Since we directly commission most of our activity from the private sector in the form of projects, there is an on-going dialogue in which people in the marketplace and in construction business continually talk to us about market prospects. Clearly, they read the newspapers and understand the projections on public spending. In a sense, they can try to position themselves in the market and look at the best way to prepare their businesses to compete in the future.
You have on-going projects but, from what we heard earlier, the danger will be that funding for future projects may be less available.
That is understood. Scottish Government ministers have been clear about their future priorities for the capital budget, and it is clear that, of the projects in the Scottish transport projects review, the Forth replacement crossing—for reasons that are being debated as the legislation proceeds through the Parliament—is the number 1 priority for the direct capital budget.
Being able to move people, services and goods to where they are needed, when they are needed, is crucial to the future and to get us out of the financial difficulties that are about to hit us.
Mr Middleton, I might have heard you incorrectly, but did you say that the regulatory asset base is an option in looking at new rail projects in Scotland?
Yes, it is the primary funding vehicle for new rail investment in Scotland.
Will there be opportunities to use that in the future?
Yes. That matter is not determined at our own hand—it is negotiated with Network Rail as the owner of the asset and the Office of Rail Regulation, which determines whether it is an appropriate economic use of the asset—but the option is open to us.
In a previous meeting, we took evidence from the Forth Crossing Bill team on the scale of the project and Transport Scotland’s choice of funding method for it. The bill team said, in effect, that all other capital expenditure will have to be reprofiled. The report “Outlook for Scottish Government Expenditure” states:
I have no wish to be unhelpful, but I do not think that, speaking from the Transport Scotland end, I can speak for what the Scottish Government or Scottish Government ministers will say to health boards and local authorities.
So what about Transport Scotland?
Transport Scotland is part of the Scottish Government, and I have heard ministers say on a number of occasions that, given the condition of the existing bridge, the Forth replacement crossing is their number 1 priority for the direct capital budget over the coming years.
Yes, we know that, but it is priorities 2, 3, 4, 5, 6, 7, 8, 9, 10 and so on that I am interested in. I want to know whether work is being done to rank them or give some indication about them. If, as Transport Scotland tells us, every other project has to be reprofiled, and if we are looking at the future delivery of services and investment, what work is being done now to reprofile and order the other areas of the Transport Scotland portfolio that are not the number 1 priority?
Obviously, we have to complete the on-going work. However, as my comments were meant to indicate, we are under no illusion: any major projects in the coming years will proceed either on the regulatory asset base or the non-profit-distributing model of raising private finance. There will be a certain amount of direct capital expenditure—perhaps quite a minimal amount—on the road network, depending on ministers’ decisions on affordability. However, all the major projects that it is conceived will be initiated over the next two, three or four years will follow either the RAB model or the NPD model.
Is everything in the STPR still being planned?
The projects in the STPR will be taken forward as determined by spending reviews that take place in the medium term.
So there is no ordering within the STPR.
The number 1 priority in the STPR is the Forth replacement crossing. The other two projects that have been highlighted as priorities are the Highland main line improvements between Inverness and the central belt and the rail improvements between Aberdeen and Inverness.
Let me move on. I was interested in what Lena Wilson and Mark Batho said about closer co-operation and so on. Has the establishment of Skills Development Scotland helped that process of closer co-operation?
Yes. I met Damien Yeates, who is part of the Skills Development Scotland team, quite a few times in my first six months. It is fair to say that Skills Development Scotland is a fairly new agency that is now very externally focused, but at one point the team was involved in creating its own organisation and finding its feet. Skills Development Scotland is now absolutely crucial in renewables, as I have already said, life sciences and leadership and management, which is where we are going to get the talent—Skills Development Scotland is fundamental to that.
That was properly delivered by Scottish Enterprise.
Yes, it was. However, the Government reorganised the enterprise networks and chose to separate out—as it had been before—the skills development element.
I guess I ask because the Government has told us, “We are going to streamline public services and combine bodies to do a lot of that work,” but the evidence that we have heard today is, “Actually, no—setting up brand-new separate agencies is the way forward. You can deliver much better with that.”
You can shift institutional deckchairs around and make a lot of institutional change, but in and of itself that will not achieve anything—we have to act like we are aligned and one team, and co-deliver. Setting up multiple agencies will, in and of itself, not achieve that. You could have almost any institutional model but deliver a lot more with a spirit of collaboration and working together.
Would that be stronger than simply reconsidering the number of bodies that exist?
It must be much stronger than that. One must have common goals that align around issues, not mind who gets the credit and be less territorial. It is about how one acts as a leader, which permeates down through the organisation. Institutional models and frameworks do not achieve that in and of themselves.
That is something to consider when we hear that the Government’s key objective is to reduce the number of public bodies in Scotland.
Mark, would you like me to go first again, at the risk of hogging the floor?
It is more a question for you than for me, actually.
It seems to be.
If the picture is comparable in education and health and it is possible to take out a considerable number of staff without harming the end results, there should not be any problems for public services in Scotland if we refocus public agencies as the Government has refocused Scottish Enterprise. We could follow that model in further and higher education. We could take out a whole swathe of senior staff within our universities and colleges and not have any impact on the students, if the basis is comparable. Is that correct?
I argue exactly the opposite. A choice has to be made if one is going to reduce expenditure on universities and colleges. That choice, which I have articulated in my submission, is between reducing quality, broadly speaking, and reducing volume—the number of students. To put it in simplistic terms, we can have either bigger class sizes in universities and colleges or reduce the number of people who come through the doors in the first place and have the same, smaller class sizes taught by the teachers. That is hugely oversimplified, but it illustrates the point. To make a reduction in expenditure at the academic staff level, we are therefore faced with giving way either on quality or on the number of people whom we teach.
Sorry to interrupt, but I want to ask about that specific area. Many of the universities that have spoken to me over the past few months have asked whether there could be flexibility in the cap, so that they are not penalised if they attract more students. They want to guarantee that there will not be an increased burden in the future. At the minute, there is a significant penalty for universities that take more students than you say they should take. Is the cap a political decision by ministers, or is the funding council strongly of the view that the cap should remain?
The cap is significantly less tight in Scotland than in other parts of the UK; nevertheless, it is driven by the fact that the more students an institution gets, the greater its student support budget. That is the driver of the cap. The Scottish Government asked us to introduce consolidation limits in relation to different subject areas precisely because, if we let rip and universities brought in a lot more students, those students would come with student support costs attached to them, which would be significant. That is the driver.
Can technology intervene? In the 1970s, history lecturers thought that they would be out of a job because people could see A J P Taylor on television. Can technology assist on numbers? Do student support costs automatically follow?
That is one of the great holy grails internationally. Everyone seems to think that, somewhere just over the horizon, there is a transformation in the way that content and teaching can be delivered. However, we have seen successive failures of interactive university in Scotland, the e-university in England and experiments in Australia and across the piece, whereby the technology has not quite taken off. That says something about the nature and humanity of teaching.
The Open University is a major success story in the field.
Indeed.
Perhaps the models that you have mentioned, which failed, were not modelled on the Open University.
Indeed. There are different models throughout the world. In Scotland, as in most countries that have significant higher education systems, we have a mixture of different kinds of delivery. It is possible to argue that the Open University in Scotland could be very bold and say that it will deliver most of its content through the media that the Open University uses, without significant face-to-face teaching. Of course, one must not forget that the Open University is not one of the major players in research.
I hope that we can learn. I declare an interest—I enjoyed the traditional method of university education, but I am undertaking a course on the Chinese language with the Open University. In the face of the massive cutbacks that will hit us, we should all be open minded about how best to approach the issue in the interests of our students. That should be paramount.
I go back to my point about competitiveness. At the moment, Scottish universities attract around £500 million-worth of income to Scotland through their international student activities. We must always bear in mind the fact that we must have a competitive product to offer the students who come here.
What burden do overseas students bring with regard to student support?
None.
Is there a cap on the number of overseas students?
No, although European Union students count as Scottish students, of course.
I have a final question on pay. I do not want to be personal, but among the leaders of the agencies in Scotland, is there an understanding that there is quite a big gap in public perception between those who are paid the most—such as university principals, the chief executive of an agency that is now considerably smaller than it was and the project manager for the Forth crossing, whom Transport Scotland hired on a six-figure salary while we continued to be told that the Scottish Futures Trust should be doing a lot more—and porters and ordinary employees in institutions? Is there an understanding that the pressures on budgets mean that a differential approach to pay might need to be adopted in the agencies that you represent? I know that the funding council does not control the institutions, but what work is being done as far as that is concerned? Do you believe that that is nothing to do with the respective agencies and that individual organisations will simply do what the Government asks?
Our relationship with the institutions is such that we have no influence over the pay that they offer. They are autonomous institutions with their own governing bodies. At college level, there is pay bargaining at institution level, whereas a more national bargaining process takes place at university level. The pay of universities’ top staff is a matter for their governing bodies. We have played no part in that process. If we were to start to play a part in it, the nature of our relationship with those institutions would change.
Are there any further questions?
Yes.
I assume that the other witnesses did not want to answer my question.
I do beg your pardon.
Would you like me to say something?
If you would like to—I cannot force people to respond.
As someone whose pay has been the subject of relentless—I do mean relentless—highly personal media coverage for the past six months, I am well aware of the issues. I am honoured to have the role of chief executive of Scottish Enterprise. I did not set my pay—I competed in a global field. My pay is benchmarked against a range of factors. I do not set my own pay. I think that public leaders should be fully scrutinised and should be worth every penny, and that their performance should be exemplary.
For completeness, I should comment on the question. My salary and those of others in Transport Scotland are part of the civil service system, so there is not much to say.
Again, for completeness, Mr Batho was asked by my colleague Mr McCabe if we could do without the Scottish funding council.
That is not what I asked—I asked if it was value for money—but carry on David.
Mr Batho interpreted your question as being whether we could do without it. I would like to ask Ms Wilson and Mr Middleton the same question. In these straitened times, could we do without Scottish Enterprise and Transport Scotland, or would we have to find something else to provide the same service?
I would love to work Scottish Enterprise out of its role, because that would mean that we had a really successful and vibrant economy with no issues. I firmly believe that we need to take a driven approach to national economic development and making Scotland much more competitive internationally. We could do that in many ways, but if we had no Scottish Enterprise we would have to find another way of doing it, whether that meant creating another agency or whatever. In my opinion, there has never been a greater need for a national consensus on economic development and a high-performing agency.
Transport Scotland is overseeing a major programme of transport investment and the ownership and management of the trunk road network. In comparatively recent times, we have had a relationship with the rail industry—that relationship was not previously part of the Scottish Government—to deal with the rail franchise in Scotland and Network Rail.
We have had a very long session, and I sense that everyone is wilting a little bit. However, Linda Fabiani is still full of beans and has the final question.
Questions.
Oh well; I did try.
I have a question for Lena Wilson—sorry, chaps—which takes us back to what we said about the public service ethic. We are all here to serve the public. You said that you have a policy advocacy role when you talk to Government and agencies. Very often it is the small things that mount up into a bigger picture and make things successful. What is your view on that?
You raise two significant issues, which we have regularly picked up in intelligence. Liquidity and access to finance has probably been the number 1 issue for the Scottish business base during the past 18 to 24 months. Scottish Enterprise has diverted a lot of its resource into helping companies to survive and stay afloat through access to other means of finance. We have sometimes gone to the banks alongside companies, bringing our expertise and vouching for the companies—we did that for a business in the past few weeks, but of course for reasons of commercial confidence I cannot go into that.
Would you do that just for account-managed businesses?
I am talking about businesses with which we have a relationship. We intensively account manage about 2,000 businesses, but we are involved more widely with up to 10,000 businesses in any one year. Remember that we have about 30,000 businesses in Scotland, so the rest are sole traders. It is easier than you might think to get to more of our businesses. Liquidity is definitely an issue.
On the point about public sector procurement, as I said, 95 per cent of our spending is on contracts that are tendered in the marketplace. More than 90 per cent of the contracts that have been awarded since May 2007 have had a tender value of less than £5 million. Our impact on small enterprises in Scotland is well understood. I think that we provide about 25 per cent of the civil engineering market in Scotland.
We can have a broader reach by getting online more and encouraging businesses to do so. We piloted the strengthen your business campaign last year, which is a full online service. The pilot was a huge success and was a direct response to the downturn in recovery. The approach has allowed us to reach hundreds and thousands of companies that we had not reached before. Maybe we need more of that. In the context of transformational government, if we want to find other ways of delivering more with less, maybe we can all learn from approaches in which as much as possible is moved online.
If the witnesses have no last-minute comments, let me say that in the face of national budgetary problems your activity and management of resources will be crucial to recovery. I wish you well in your work to fight back against the current problems.
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