Finance Committee

Meeting date: Wednesday, March 12, 2014

Official Report 506KB pdf

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Subordinate Legislation

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Budget (Scotland) Act 2013 Amendment Order 2014 [Draft]

The second item on today’s agenda is to consider the Scottish statutory instrument that provides for the 2013-14 spring budget revision. Before we come to the motion seeking our approval of the order, which is agenda item 3, we will have an evidence-taking session on it.

I welcome to the committee John Swinney, Cabinet Secretary for Finance, Employment and Sustainable Growth. The cabinet secretary is accompanied by two Scottish Government officials: Mr Gordon Wales, deputy director, finance programme management division; and Mr Terry Holmes, principal accountancy adviser, corporate reporting division.

I invite the cabinet secretary to make a brief opening statement.

Thank you, convener.

The spring budget revision provides the final opportunity to formally amend the Scottish budget for 2013-14. It deals with four different types of amendment to the budget. The first is funding changes that impact on the spending power of portfolios and programmes. Secondly, it makes a number of technical adjustments that have no impact on spending power. Thirdly, it makes a small number of Whitehall transfers. Finally, it makes some budget-neutral transfers of resources between portfolio budgets. The net impact of all those changes is a £5.5 million increase in the approved budget, from £33,698.9 million to £34,704.4 million.

Table 1.2 on page 7 of the supporting document shows the approved budget following the autumn budget revision and the changes sought in the spring budget revision. In relation to funding changes, the spring budget revision reflects a net reduction in funding of £28.1 million. The supporting document to the spring budget revision and the brief guide that has been prepared by my officials provide the detailed background on the net funding reduction.

The following is a summary of the main adjustments. First, there is a funding reduction of £27.4 million for the receipt of police authorities’ historical reserves, which accumulated prior to the creation of the Scottish Police Authority. The sum involved reflects the arrangement agreed by the joint Convention of Scottish Local Authorities and Scottish Government settlement and distribution group. As I confirmed to Parliament in May 2013, the sum accruing to the Scottish Government has been used to address the £54.8 million reduction in our fiscal resource departmental expenditure limit budget arising from the March 2013 United Kingdom budget. The second factor is a £3.3 million reduction to the budget for the Scottish Parliamentary Corporate Body. That reflects the outcome of a rebate for rates paid for the four years from 2010-11 to 2013-14. The third is the deployment of £3.1 million of available capital DEL to the health and wellbeing portfolio to support capital investment.

The second set of changes comprises a number of technical adjustments to the budget. These non-cash and budget-neutral technical adjustments have a net positive impact of £24.7 million. It is necessary to reflect those adjustments to ensure that the budget is consistent with Her Majesty’s Treasury budgeting and accounting guidance and with the final outturn reported in our annual accounts. With regard to Whitehall transfers and allocations from HM Treasury, there is a net positive impact on the budget of £8.9 million.

The final part of the budget revision concerns the transfer of funds within and between portfolios to better align budgets with profiled spend. There are a number of internal transfers as part of the revision process and they have no impact on overall spending power. The main transfers between portfolios have been set out in the guide. As in previous years, there are also a number of internal portfolio transfers that have no effect on portfolio totals but which ensure that internal budgets are monitored effectively.

The committee will wish to note that, as part of our robust budget management process and in line with good practice, we have taken the opportunity at the spring budget revision to deploy emerging underspends to ensure that we maximise public expenditure in 2013-14, in particular to support capital investment where possible. The spring budget revision records the deployment of £48.3 million of redirected budget, representing less than 0.2 per cent of the fiscal DEL budget. Details are given at annex C of the brief guide that has been prepared by officials.

The spring budget revision also reflects the proposed transfer of budget from resource to capital in respect of the Scottish budget. Members will note that the Scottish budget records capital that scores in the Scottish Government’s consolidated accounts or the accounts of directly funded bodies.

In the context of our HM Treasury budget, the planned resource-to-capital transfer is £220 million. The switching is managed within the total DEL available to the Scottish Government. That is a slight reduction compared with the estimated £243 million transfer set out in the 2013-14 draft budget, and it takes account of the latest profile of the Government’s overall capital programme.

Once we have provisional outturn figures in June, I intend to write to the Finance Committee with a table that sets out, in a similar format to the table provided in my letter of July last year, actual resource-to-capital transfers by portfolio and programme in respect of the financial year 2012-13.

As we approach the financial year end we will continue, in line with our normal practice, to monitor forecast outturn against budget, and we will seek wherever possible to utilise emerging underspends to ensure that we maximise use of the resources available to us in 2013-14 and that we proactively manage the flexibility provided under the budget exchange mechanism agreed between HM Treasury and the devolved Administrations.

In line with previous years, I confirm that it is my intention to make a statement to Parliament, prior to the summer recess, on provisional outturn in respect of both our Scottish Parliament budget and our HM Treasury budget.

The brief guide to the spring budget revision that has been prepared by my officials sets out the background to and details of the main changes proposed. I look forward to answering members’ questions.

Thank you, cabinet secretary. As usual, I will start with a couple of questions before opening the session out to colleagues around the table.

You touched on capital, and the spring budget revision states:

“Table 1.7 on page 11 ... provides a complete picture of capital spending.”

However, table 1.7 does not allow us to establish a picture of resource-to-capital transfer by portfolio—in other words, we cannot establish which resource budgets have fallen to accommodate the capital increases or the changes that have taken place since the plans were set out in the draft budget for 2014-15. Can you provide us with some information on that?

I can best give definitive information to the committee on the resource-to-capital transfers when we are in a position to assess totals by portfolio, and that will be when we are dealing with the outturn situation after the end of the financial year. We gave an estimate; the latest figures were provided in response to an oral question, S4O-01396, in October 2012, and that information was publicly available.

If we were to restate those figures during the financial year, we would run the risk of putting additional numbers into the discussion at the portfolio level when we are still working on the operational decisions on capital expenditure and on the likely outturn of particular programmes. I felt that it was helpful to the committee to give my current assessment, which is that I estimate that the resource-to-capital transfer will be of the order of £220 million at a global level within the budget, but, as I indicated in my statement, I will make a more comprehensive explanation of that transfer by portfolio when it comes to the outturn statement after the end of the financial year.

That is helpful. However, I do not think that the SBR should say that it

“provides a complete picture of capital spending.”

There should be a wee bit of rephrasing in future.

Regarding health and wellbeing, I understand that there is a net revenue-to-capital transfer for national health service and special health boards of about £95 million, as detailed on page 20 of the SBR. That compares with £105 million in the draft budget. Why has that change been made?

The estimate that we have from the health and wellbeing portfolio is that most of the resource-to-capital transfer activity that was to be undertaken by that portfolio relates to addressing the backlog of maintenance in the NHS estate.

The committee will be familiar with the fact, which I have rehearsed with it before, that although we all think of maintenance expenditure as capital expenditure, it sometimes has to be defined as operating or resource expenditure. Perhaps the best illustration of that relates to maintenance of the road infrastructure, where the definition of what counts as capital or resource depends on how far a road has to be dug into.

The judgments can be affected by the nature of the maintenance activity. The current estimate is that £95 million will require to transfer to capital in the health and wellbeing portfolio, although the £105 million of maintenance expenditure that was envisaged when the budget was settled last year will be undertaken.

You mentioned a change in the local government portfolio that relates to police authorities’ historical reserves and you referred to a process that involved COSLA. So that the record is clear, will you confirm that that process was agreed with COSLA?

Yes.

I presume—you can confirm this—that that is a technical matter that is bound up with the change to the police structure that Parliament agreed. As that is the case, I presume that it will have no effect on local government spending power.

Historically, the Government and local government funded police authorities in proportions of 51 per cent and 49 per cent, and local police boards had the ability to retain reserves. As it became clear that Parliament would agree to establish a single police service, we opened discussions with local government about the accumulation of reserves, to which local government and the Scottish Government had each contributed roughly 50 per cent.

We reached a settlement with local government on the return of the accumulated reserves once a variety of factors and costs to local government and the Scottish Government had been dealt with. Local authorities are to receive a sum that is roughly equivalent to what the Government is to receive. It is for local government to deal with that as it sees fit.

That is a bit of a windfall for local government.

I suppose that the sum could be described as that.

You will be aware that I am a member of the Welfare Reform Committee, so I have an interest in welfare reform. I presume that the £37.9 million that is to be transferred from the infrastructure, investment and cities portfolio to the local government portfolio is the money that you have previously talked about. With that contribution, what is a rough figure for the Scottish Government’s overall investment in welfare reform mitigation up to now?

The transfer is to be made from the infrastructure, investment and cities portfolio, where the money sat in the budget line for the welfare reform mitigation programme. It will fund local government to implement measures such as the Scottish welfare fund. At a global level, the total annual expenditure—including expenditure on discretionary housing payments, the council tax reduction scheme and other measures—is in excess of £100 million. The Government has made a commitment to sustain that expenditure over time.

09:45  

Good morning, cabinet secretary. I refer you to page 16 of the spring budget revision document. In the bottom of the two tables on that page, there is a line for energy. The total figure is £52.9 million.

Can we pause a second to find that page?

I am referring to schedule 3.4 on page 16 of the spring budget revision document.

Okay. I am with you.

In the bottom table, there is £52.9 million in the energy line. The original budget figure was £115.9 million, and the autumn budget revision figure was £68.8 million. Can you explain why the figure is now £52.9 million?

Essentially, that will be because of the difficulties and challenges that we have experienced in releasing expenditure to the renewable energy investment fund. I have made clear to Parliament on a number of occasions the issues that we are wrestling with in respect of projects that are coming forward for investment. Those issues are largely caused by the uncertainty about electricity market reform, which has been a persistent factor that we have wrestled with for the best part of the past 24 months and which has resulted in an insufficient pipeline of projects reaching the stage that we can fund. We are exploring different opportunities in the market to provide support, but we have not had that sufficient pipeline, and that is largely attributed to electricity market reform issues.

If we go to the level 4 data when you initially published your budget, we see that there appear to be eight headings under energy. Can you tell us how the issue affects each of those headings? You might want to provide the information in writing.

I will certainly provide that information. I do not have the level 4 data in front of me, but I would be happy to provide that.

I would be grateful for that.

You said that there is not a sufficient pipeline of projects at the moment. It is clear that a substantial amount of money has been removed from energy. Will that be reinstated to energy in future budgets, or is it effectively gone?

I have an obligation under the Energy Act 2004 to ensure that any moneys that are made available under the renewable energy investment fund are used for the purposes of that fund. We put the sums of money into the budget at what we consider to be the most appropriate opportunities, when expenditure may be required. By its nature, that involves an estimate that is based on when we think projects will crystallise to a point of meriting and attracting funding.

Unfortunately, not all our predictions will be correct, and we use opportunities to redeploy those resources so that they can be used to support other priorities. However, there is a commitment that the resources that have been allocated to the renewable energy investment fund, which totals £103 million, must be spent on the purposes of that fund over time. I think that I indicated to Parliament in my previous statement on budget-related issues and in-year expenditure changes that I would reprofile and extend the period within which I expected the renewable energy investment fund to be deployed.

What about moneys that were originally under the energy heading and which were not part of the REIF? Will they be reinstated in future?

It depends on what those budget headings were intended to support. If there is a demand-led budget, for example, and the level of demand has not been equal to the level for which we planned so that we cannot spend the money for that purpose, I will redeploy that money into some other area of expenditure within Government. Whether we made further provision in those areas of activity would be a matter for us to consider in any future budget rounds or spending reviews. In relation to the budget, we would make those decisions annually; in relation to a spending review, we would make them periodically.

Okay. We will move on to page 20 of the spring budget revision. In schedule 3.1, on health, fairly low down on that page there is a heading “Miscellaneous Other Services” and the figure that is attached to that is £130 million. The figure in the autumn budget revision appears to be £157 million. While “Miscellaneous” no doubt means miscellaneous, I just wondered whether you were able to shed any light on that reduction of £27 million, either now or in writing.

I will probably have to write to the committee about that. It is not immediately obvious to me what the relationship is between the numbers. I will be very happy to write to the committee on that point.

Okay, I will move on.

Schedule 3.9 on the Scottish Prison Service is on page 39 of the spring budget revision. Near the bottom of that page, there is the line “Scottish Prison Service Current Expenditure” and the figure that is attached to that is £266 million. Again, at the time of the autumn budget revision, that figure was £296 million. The Scottish Prison Service’s current expenditure appears to have gone from £296 million to £266 million. Can you shed any light on that?

It was envisaged that the Scottish Prison Service would make transfers from resource to capital. I have, however, been able to deal with that capital requirement by transfers from other portfolios and I have redeployed the resource expenditure that we have been able to free up within the prison service budget to meet a change in the profile of the cost of police and fire pensions. During the financial year, we have seen more retiring police officers, as a result of the low interest rate climate in which we are operating, opting for a greater proportion of their pension entitlement in lump sums as opposed to recurring payments. We have to meet that short-term resource pressure that has emerged because of the choices that have been made by officers retiring from the police and fire services. The adjustments that I have made to the balance between resource and capital expenditure have enabled me to meet that particular pressure.

We are paying more now in pension lump sums but the profile over time then reduces.

Correct.

I note that, on page 73, the second of the tables in schedule 3.1, which relates to administration, says that the figure for Scottish Government staff costs is £164.8 million. In the autumn budget revision, the figure was £149.9 million. Are you able to explain the increase in that figure?

The increase is the result of our factoring in various elements of expenditure from different programmes of activity that, although taking place in other parts of Government, are subsumed within that particular figure and the administration budget at this time of year.

I did not quite follow that. Can you explain it a bit further?

Certain items of expenditure are undertaken by different parts of Government under what are called programme budgets, which are essentially portfolio activities. We will subsume some of that expenditure within this particular line. Indeed, if my memory serves me right, the committee and I have gone through this issue before at the time of the spring budget revision, because the number is always different from that in the autumn budget revision. We are simply taking items of expenditure that would normally be allocated under a programme budget heading and deploying them under the administration heading.

Will that require a reduction in the money for other parts of Government?

It is in essence the same amount of money; it is just being spent through a different channel instead of through the programme budgets in question.

Given that we are talking about an increase of the best part of 10 per cent in the staff costs budget, can you give us, if not now then in writing, a breakdown of the programme budgets that money has come from?

I am happy to do that.

I have just one more question, convener.

I note that, in the second table in schedule 3.14 on page 69, the figure for “Referendum on Scottish Independence” is £0.6 million. In a Scottish Government press release that was issued yesterday on the costs of the white paper and various other items of expenditure, the figure that was mentioned was higher than £0.6 million. I assume, therefore, that all the money for those items of expenditure is not coming from that budget. Is some of the figure that was mentioned yesterday being met from that budget or is it all being met by a different budget line? I have not been able to tell.

Of the figure announced yesterday, £405,000 comes from the £8.4 million transfer from other SG portfolios for social advertising and public information in 2013-14. Some of the costs are subsumed within that figure, which becomes £11.9 million as a consequence of the wider transfer of the £8.4 million for a whole variety of public information campaigns, including those on road safety, detect cancer early, credit union support, healthier choices and infection control.

10:00

Just for clarification, then, is the money that was announced yesterday to be found in the strategic communication line, which refers to £11.9 million?

It is part of that £11.9 million, which is driven by the transfers from other SG portfolios for social advertising and public information in 2013-14 mentioned in the top part of page 69.

So all the money mentioned in yesterday’s press release is contained in that one line and is not split across different budget lines.

From the information available to me, it appears that there might be some in the strategic communications line and some in the referendum on Scottish independence line. To be on the safe side, I had better say that the money is contained in either of those two lines. It will certainly not be included in any other lines.

I am grateful for that.

I should also put on record that a full and clear explanation of the costs involved was given in a parliamentary answer yesterday.

Cabinet secretary, I wonder whether you can clarify some of the technical adjustments in the spring budget revision, which, according to annex B to the document, total £24.7 million and do not involve any cash. First, can you tell us about the

“Justice allocation non-cash DEL”

figure of £12.8 million, which is also mentioned in schedule 3.6 on page 36 of the spring budget revision document?

Can you give me that figure again, Mr Mason?

Yes. It is the £12.8 million mentioned in the “Technical changes” section of annex B.

That is for the management of the year-end risk with regard to impairments in the physical assets of the justice portfolio. That portfolio has a significant estate footprint, large parts of which have been renewed or developed. In particular, new buildings have been developed at Her Majesty’s prison Grampian and the Scottish crime campus.

Does it mean that a building that has been gradually depreciating is now worth less than it had been?

It is all about trying to get our accounting treatment of the valuation of properties into alignment.

Another line in that section is

“Technical adjustments to align budgets with accounting requirements”,

which totals £113.9 million. Paragraph 15 in the briefing that your officials have provided gives some detail, saying:

“The substantive adjustments of this nature include the alignment of IFRS based budgets for PPP/PFI schemes (-£54.4 million)”.

Can you tell us what that £54.4 million is for?

Under international financial reporting standards, we are obliged to budget and account to the Scottish Parliament for public-private partnership and private finance initiative arrangements in accordance with the “Government Financial Reporting Manual” and in line with Audit Scotland’s expectations with regard to transparency between budgets and accounts. We have to follow a combination of that factor and the consolidated budgeting guidance published by Her Majesty’s Treasury, and ensure that our accounts are consistent with IFRS requirements, which, of course, have been applied to the budget provision in a budget-neutral fashion.

In essence, this is about consistency in the preparation and presentation of the material. In other words, these accounting adjustments relate to our presentation of particular costs in line with the budgeting guidance that we are required to follow by either Audit Scotland or Her Majesty’s Treasury, depending on which presentation of the accounts we are making.

Does it stem from previous thinking that PFI schemes could be kept off balance sheet altogether? Are we, to some extent, suffering from that by having to ensure that they are on the balance sheet, because they always were and always will be real liabilities?

The short answer is yes. In all honesty, the fact is that, although these projects might have appeared as distant or remote from Government, Government was ultimately paying the costs. The relationship was an awful lot more direct than I think it was made out to be.

Thank you.

That concludes the committee’s questions.

We now move to our consideration of the motion on the order. I invite the cabinet secretary to move motion S4M-09255, that the Budget (Scotland) Act 2013 Amendment Order 2014 be approved.

If members have no comments, I will put the question. The question is that—[Interruption.] You did move the motion, didn’t you, cabinet secretary?

I did not quite get round to doing that, convener. If it helps, I move,

That the Finance Committee recommends that the Budget (Scotland) Act 2013 Amendment Order 2014 [draft] be approved.

Motion agreed to.

I thought that you had moved it while I was chuntering, but never mind. I apologise. The committee will publish a short report for the Parliament setting out our decision on the order.

Thank you very much, cabinet secretary. I suspend the meeting for a couple of minutes to allow a changeover of witnesses.

10:06 Meeting suspended.

10:08 On resuming—