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Item 2 is continuation of our scrutiny of the budget strategy for 2011-12. I welcome to the meeting the Cabinet Secretary for Finance and Sustainable Growth John Swinney and his officials. I invite the cabinet secretary to introduce those officials and to make brief opening remarks if he wishes to do so.
Thank you, convener. I provided the committee with a note in advance of my appearance before it, therefore, in the interests of time, I will not make an opening statement.
These are interesting times. We have received the report from the chief economist, Andrew Goudie, which contains his estimates on what is likely to happen to public finances over the next three years. Does the cabinet secretary share his views on what is likely to happen to Scotland’s budget and the implications for expenditure in the economy?
In his analysis, Dr Goudie essentially took the material that was available from the budget that was produced by the former United Kingdom Government in March this year and presented a picture of the public expenditure outlook, having taken into account the significant variables, which include the announced position on the total managed expenditure that the previous Government expected. Of course, his analysis is predicated on certain assumptions about the level of annually managed expenditure that will require to be sustained, particularly in relation to what one might call the costs of recession—the debt interest payments that will be required and the support for social security programmes principally. Dr Goudie presented a scenario that is based on sound assumptions about the impact on departmental expenditure limits, which are, of course, the part of public expenditure over which the Scottish Government has control and responsibility.
As you say, we are in uncertain times. No doubt we will have a clearer indication when we get to the budget in the autumn. However, with regard to the Economy, Energy and Tourism Committee’s remit, do you envisage Scottish Government expenditure in this area falling in line with the expected overall reduction in expenditure or will it fall less or more than the average?
I hope that you will forgive me, convener, but that question is impossible to answer at this stage. We still have to go through a budget process that will be based on information that we receive from the United Kingdom Government.
Before I bring in other members, perhaps I should ask my question in a slightly different way. I appreciate that there is uncertainty—indeed, for that very reason I have some questions about whether this exercise that we are undertaking on behalf of the Finance Committee has any value at this time. That said, what guidance have you given to the three main agencies with which this committee deals—Scottish Enterprise, Highlands and Islands Enterprise and VisitScotland—on the budgets that they should expect for 2011-12 and future years?
On the question whether this exercise has any value, the Finance Committee is actually examining and exploring the consequences of the outlook for public expenditure in Scotland as a result of the condition of the public finances and the impact of economic recession, which is the subject matter of Dr Goudie’s paper into the bargain. I very much welcome the process as a way of mobilising debate and discussion about some of the challenges that we face.
When you say 2011 do you mean the 2010-11 or the 2011-12 financial year?
I mean 2011-12. Those organisations have got their budget certainty for 2010-11, and I do not intend to revisit that unless the UK Government decides to revisit the spending totals that we have been advised of for 2010-11. On that point I am unable to give the committee clarity this morning, but it will be uppermost in my mind in my discussions with the new chancellor. As soon as practicable during this year, I will give clarity to all public sector organisations on their expected allocations for 2011-12, which essentially will be part of the next budget process for the Scottish Parliament.
Can I get this clear? Have you or have you not given Scottish Enterprise, Highlands and Islands Enterprise and VisitScotland indicative budget figures for 2011-12?
They have no indicative budget numbers for 2011-12.
They have given this committee information that they say is based on guidance that they have been given by their sponsoring departments.
That would be from those organisations looking at the assessment that Dr Goudie has given them. I certainly have not given the organisations a definitive set of numbers on what their resources will be.
They have given us figures based on the guidance that they have been given by their sponsoring departments as to the likely level of resources that they will get next year.
The guidance can have come only from the public expenditure assessment and outlook, which is at a general level. It is certainly not indicative for the different organisations involved.
Scottish Enterprise and Highlands and Islands Enterprise both indicated roughly level spending between 2010-11 and 2011-12. VisitScotland has indicated a very small fall of about 1 per cent. Dr Goudie has suggested a fall of about 3 per cent. The figures that the committee has been given do not fit with what you have just said.
I have given none of the organisations that you have referred to an indicative budget number for 2011-12.
We might come back to that.
We are now talking about the development of the low-carbon economy as a Government core aim. Following the restructuring of the enterprise agencies in the last three years, they have been seen—including the one in my area—as in the vanguard in developing the renewables industry and creating new employment. Could it be argued that those agencies are now at a level at which no further cuts in their structure should be made? Should an argument be made that they are actually supporting front-line services?
The organisations have taken a number of decisions over a number of years—that has not just been the case in the last couple of years. There have been different restructurings and realignments of the focus and approach of Scottish Enterprise and Highlands and Islands Enterprise almost continuously over the past 10 years. It is in the nature of the function and responsibilities of those organisations that their perspective and the type of support that the business community and the economy require change, and they have to be appropriate for the circumstances that we face. That is the test that I want the leadership of the organisations to take forward. There is every opportunity for the organisations to look afresh at their structure and their outlook to ensure that they are delivering the support that is expected within the economy. I will support them in taking those decisions.
I am interested in a particular means of support, which I will throw into the debate. The incentive for people to make a profit and be competitive is probably enhanced more by giving loans than by giving grants as we have done in the past. Will we have the facility to consider that seriously? The agencies have claimed to be successful based on the main measure of the delivery and retention of jobs, but we have not had a clear picture of the success or failure of that approach over the years, largely because people have mainly been given grants. Will there be a facility to think seriously about incentivising people to stand on their own feet a good deal more?
That is essentially the thinking that underpins the Scottish Investment Bank. As the committee is aware, we now have £50 million of resources in that bank, with the objective of supplanting them in due course. The thinking is that the bank will provide the type of support that Mr Gibson mentions.
HIE states in its operating plan for 2010 to 2013:
I come back to what I said about the Scottish Investment Bank: that is exactly the thinking that is involved.
Like you, cabinet secretary, to some degree I must go by what I have read in the papers and heard on the radio this morning about some of the framework in which the decisions that you are discussing will have to be made. What indication do you have regarding the current financial year? You said that you were hopeful of avoiding significant changes in the budgets of agencies that are within your remit in the current financial year. I have heard talk this morning of £6 billion being taken out of public expenditure throughout the United Kingdom straight away. Is that your understanding and, if so, what are the implications for the agencies that you fund?
I have heard the same news reports, and it is my understanding that that is the case. Obviously, a number of consequences will arise from that. The first is how such a reduction in public expenditure will be distributed across UK departments. To go back to what I said a moment ago, there are some areas in which we have 100 per cent comparability in finance; health is one. For example, if there is a reduction in the UK health budget, that will directly cross over to our departmental expenditure limit, and Scottish ministers will decide how to address that; we are not required to follow exactly the UK Government’s decision. Across all UK portfolios, if £6 billion is to be taken out of public expenditure in the current financial year, we will have to see what is affected and work out the consequential total for Scotland.
You mentioned the potential for deferral. Can you explain your thinking on that?
The thinking was essentially set out to us by Mr Osborne prior to the election. His proposal—and I stress that this was made prior to the election—was that the £6 billion in expenditure cuts would come in 2010-11. There would be a consequential impact on Scotland that would have to be tabulated and calculated in the fashion that I set out in my earlier answer. However, the Scottish Government could apply that reduction in public expenditure in 2010-11 or opt to defer it until 2011-12. In short, that means that we would have to find those savings and any other savings that might be required for the 2011-12 settlement in 2011-12. From Dr Goudie’s analysis, we can see that 2011-12 is already going to be a very challenging year without the additional consequential impact of the budget change that has been reported in the media this morning.
Of course, you will not have prejudged the result of the election, and you cannot prejudge the detail of what will come out later today. However, was it open to your civil servants to consider how such a deferral might impact in practical terms were you to take that road? Have you asked your civil servants to examine that in recent weeks?
I have undertaken and am undertaking a range of contingency work to identify what issues might have to be addressed by the Scottish Government. We have had an open election contest in which all of those issues have been laid bare. Work has been undertaken on a range of the approaches that could be taken, but the Government will consider the options once we know the situation that we face in relation to public expenditure reductions from the United Kingdom Government.
You have had contingency discussions and, clearly, you will have political discussions—
I have undertaken the contingency work; we have not had the contingency discussions.
Understood.
Obviously, I want the agencies to be well supported in the work that they undertake. Mr Gibson’s point that there will always be more demand for services and resources was correct—that was true even in the days of enormous growth in public expenditure, so the phenomenon is not new.
One of the issues that came up in our discussions with witnesses, particularly VisitScotland, was your decision not to introduce transitional measures for businesses in tourism and elsewhere that are facing substantial increases in their business rates. When I raised the matter with you in the chamber, you indicated that you would meet Aberdeen and Grampian Chamber of Commerce and that you would heed the representations of affected businesses. The other day, Philip Riddle told us that he had been invited by Jim Mather to put forward responses from the sector. Can you update the committee on those issues?
I am pretty sure that there is a date in my diary for a meeting with Aberdeen and Grampian Chamber of Commerce—if it has not yet been arranged, it is simply a matter of logistical arrangements; of course, the meeting will happen. We will continue to have dialogue with business organisations and others on these questions.
You have made the link clearly between the decision not to have transitional relief and the meeting of your commitment to peg the poundage level at the same level as elsewhere in the United Kingdom. When you had the discussions with the business organisations, did they understand that the price of pegging the poundage level would be that no transitional relief would be available?
The commitments given to the business organisations about business rates poundage were part of the Government’s manifesto commitments in 2007. I obviously felt duty bound to honour them in the decisions that we took subsequently. I am afraid that I cannot answer the question whether the connection was fully understood and appreciated by business organisations—that is a question for the business organisations—but they certainly recognise the fact that the Government gave a commitment to peg the poundage rate and that we have fulfilled it.
Thank you.
I have two areas to look at, cabinet secretary, and the first is tourism. On page 3 of your submission to the committee, you talk about “Supporting internationalisation” and how the Scottish Government is committed to continuing the work following homecoming. You state:
I will take the two events separately and deal first with the prospective British Airways strike. It is not possible to look at that prospective strike and think that there is anything good about it. It is bad for the economy, employees and the travelling public, and clearly there will be an economic impact as a consequence.
Thank you for your detailed answer. In the context of our efforts to make Scotland an attractive destination for more visitors and to secure a legacy from the year of homecoming, I am still a wee bit concerned about the implications for VisitScotland’s budget of not just the two events that we talked about but what might come down the line from the new UK Government.
As I said to Mr Macdonald, I want the agencies to have appropriate resources to allow them to fulfil their functions. That will be my approach. In the year of homecoming, I think that we demonstrated that it is possible to deliver a significant tourism impact on a relatively small budget. We want the thoughtful, creative and effective approach that was taken to the year of homecoming to be replicated in future activities.
The reduction in ring fencing, which came with the concordat that was signed by the Scottish Government and the Convention of Scottish Local Authorities, has been a bit of a hot potato in the Scottish Parliament in recent years.
It is difficult for me to give a definitive answer to that. The Government is yet to know the precise financial position, and it is yet to take any decisions in that respect. The work will become clear over the course of the summer.
Will the cabinet secretary clarify that the Scottish Government’s position is that there is currently no protected department or budget line in the period ahead?
The Government has made it clear that our commitment is to support economic recovery and front-line services. We are determined to follow that approach as effectively as we can with the spending totals that we have available. That will guide the decisions of ministers.
So there is no protected budget.
It depends on how we look at it all. It is clear what front-line services are—health, education and social care services—and we want to support and protect those services.
I appreciate the uncertainty that we are dealing with, but you did cite one figure in your earlier remarks, on the possible consequence of a £6 billion reduction in the UK budget in the year 2010-11, with possible implications for Scotland of a reduction of £500 million to £600 million. That surprised me, in the sense that it implies that all of the reduction would come in devolved areas. Do you have any inside information to suggest that that would be the case, given that devolved areas account for only about 60 per cent of the spend in Scotland?
I do not have any inside information; I am simply positing a potential scenario. If decisions were to be taken whereby UK expenditure reductions fell in that fashion, such a reduction in Scotland could be the consequential impact.
But that would not be the most likely impact. You have just agreed that your assumption is that all the cuts would fall in devolved departments. That would seem an unlikely assumption. Or must we simply wait and see?
I am afraid that I have no inside track that I can share with the committee. I am simply giving an illustration of what the number might look like.
Let me move on to some more general questions. There is a high level of uncertainty at the moment. “The Government Economic Strategy” states that the purpose of the Government is to raise the sustainable growth rate in Scotland. It goes on to say:
Over the past couple of years it has become pretty clear that Scottish economic performance has largely mirrored the pattern of economic performance in the rest of the United Kingdom. I am not saying that that is absolutely marvellous, because we have gone through a period of sustained decline. Nevertheless, that is my key observation. My hope and expectation is that, as we move into economic recovery, the pattern we follow will be relatively similar to that in the rest of the United Kingdom.
The Government’s submission says that we have
There is no reduction envisaged for this year in the statutory instrument that is before Parliament. Next year, the reduction is 0.5 per cent.
Given the emphasis that has been placed on emissions reductions, why has your approach departed so substantially from the 3 per cent year-on-year reduction that was promised in your manifesto? Why in years 3 and 4 are we promising nothing more than a 0.5 per cent reduction? What has led to such a dramatic downscaling of ambition?
I fundamentally reject that proposition. With our statutory commitment to reduce emissions by 42 per cent by 2020, we have accepted an approach that equates to reducing emissions by 3 per cent per annum. With Parliament’s consent, we have enlisted the advice of the United Kingdom Committee on Climate Change, which has assessed the ability to reduce emissions over the next few years. The committee’s view is that we should not be envisaging emissions reductions over a three-year period, but the Government has opted to take a more ambitious approach, which has been set out in the statutory instrument that is currently before Parliament.
I have two other very brief questions. The Government’s submission talks about
That is what the SFT is there to do. Its on-going work is to deliver the kinds of efficient methods of financing that we have seen in, for example, the national housing trust, the work on the hub programme and the different non-profit-distributing projects that are going on around the country. All of that work forms the SFT’s core functions.
Does that equate to an alternative model to PPP or public procurement? That is what the promise was.
I would say that that equates to that promise, yes.
Significant resources for support for business have been transferred from Scottish Enterprise to local government in the past couple of years, but economic development does not feature prominently in the concordat. Are any measures in place to monitor whether the spending in the broad economic development arena that has moved over from Scottish Enterprise continues to be used for economic development? Can a local authority reduce the spend on economic development to zero if it so wishes?
Reducing the spend to zero is not possible, because contractual commitments are in place to ensure that a business advice service is provided under the auspices of the business gateway. The resources are provided for the contractual commitment, so they cannot be used to support other services.
Does that apply to any functions beyond simply the business gateway? Does that apply to all the resources that were transferred from the development agencies or exclusively to the contract for the business gateway?
Other transfers related to local regeneration. A tranche of money was transferred to support a range of existing projects that had a substantial tail, so that resource is linked to the continuation of those projects. The same constraint as applies to the regeneration money applies to the business gateway money.
I presume that the regeneration projects are time limited for one, two or three years. After that, will the budget go into the local authority baseline?
The budget will go into the local authority baseline for local economic development purposes.
That will be an element of ring fencing that is not covered in the concordat.
We reached agreement with local government that we were transferring a function, which had to be supported as a consequence of the transfer of resources.
Has any commitment been made about the quantum of resources that must continue to be devoted to such functions? I presume that some projects reached the end of their natural life cycles in the past financial year and that that will happen in this and the next financial years.
You will find that local government spends more money on local economic development than we provide through the mechanism that we are discussing. In that context, local government will invest in local economic development activity.
You said that we would find that more money was being spent, which returns us to my original question. In the interests of transparency, is any monitoring done of or are any data published about continuing local authority spend on the functions?
I am pretty sure that such spending is identifiable in local authority financial returns, but I am happy to write to the committee about that.
The decision about such spending is discretionary and will remain discretionary in the difficult period that is ahead. Perhaps you should write to us, because you imply that money is tied on an on-going basis. Business organisations are concerned that, in straitened circumstances, the total spend will be reduced as projects reach the end of their natural lives.
I will provide the committee with reassurance in writing.
Cabinet secretary, I apologise for missing the first few minutes of your evidence and for my late arrival. One of the issues that you raised was the Scottish Investment Bank. What will happen to the co-investment fund?
The co-investment fund will continue to operate in the fashion in which it has operated historically. In essence, it will be drawn together with the Scottish Investment Bank. As I said to the convener, new resources have gone into the Scottish Investment Bank, but the Scottish co-investment fund will continue its operations as before.
So, to be clear, there will be no change at all to the co-investment fund.
No, there will be no change to it.
If the fund is doing exactly the same as it always did, what do you mean by saying that it will be drawn into the Scottish Investment Bank?
It would be best to think about that from the perspective of somebody who is looking for investment support. Some people will pitch up at the Government’s door to look for investment support. It might be appropriate for them to get that support from the co-investment fund or to get it from the Scottish Investment Bank. We are trying to make it as easy as possible for individuals to find the support that is appropriate to them. When I say that they will be drawn together, I simply mean making it practical and convenient for members of the public who seek the investment to find a ready way of accessing it.
Did the Government get feedback that businesses were struggling to understand the difference between the various funds?
No. The Government introduced a new fund, which was the Scottish Investment Bank. We did not want to create any obstacles or confusion about the appropriate destination for investment inquiries.
Is the additional £50 million that you announced a couple of weeks ago and to which you referred today already available for businesses to access? If not, when will it be available?
It is available now.
Has anybody accessed it?
I do not have that detail to hand.
No one has been awarded a grant as yet, but a number of discussions are under way. Due process and due diligence must be gone through first.
How is the Government letting businesses know that the fund is now open for business?
As far as I have noticed, there has been a fair amount of media coverage, so people will probably realise that the Scottish Investment Bank exists. Information about it is available through the normal channels of inquiry to the Government about particular investment funds. We will consider what additional promotional activities need to be undertaken. The business gateway or account managers within Scottish Enterprise, Scottish Development International or Highlands and Islands Enterprise will advise companies and signpost them towards the appropriate source of finance.
The last paragraph of the Scottish Government’s written submission refers to efficiency savings that the Government has already achieved since 2007. What did you make of Audit Scotland’s analysis of the efficiency programme?
It was pretty consistent with what Audit Scotland has said about the efficiency programme in Scotland in general over a number of years, which is that it is not possible to demonstrate and authenticate every scintilla of saving that is made as part of the programme but that the programme in Scotland is more heavily evidenced than others within the United Kingdom.
I accept entirely the argument that it is difficult to prove every scintilla, but were you surprised that Audit Scotland said that it was unable to verify any of the efficiency savings?
Yes, I was surprised at that.
I do not doubt for a moment that efficiency savings have happened.
That is why I find Audit Scotland’s comment a bit strange. It is clear beyond peradventure that efficiency savings can be demonstrated. I cannot accept Audit Scotland’s view. As I have said to Mr Brown, I would not for a moment suggest that we can produce an audit trail and receipts for every pound in the efficiency savings programmes that it has been claimed has been saved, but going to the other end of the spectrum and saying that we cannot evidence any efficiency savings does not result in a substantial point.
So where do we go next? It is probably not worth the effort to prove that every single pound has been saved. The amount that would be spent on proving that would probably outweigh the merits of such an approach. However, what action will the Government take to enable Audit Scotland to say that it can verify the bulk of the efficiency savings? For it to say that it cannot verify any of them strikes me as unsatisfactory.
I am largely in the same position as Mr Brown is in; indeed, ironically, I am in the same position as my predecessor was in, despite the fact that, when I was in opposition, I used to chide him for not having a more definitive answer. It is impossible to prove and demonstrate that every single pound has been saved, and it is not worth tabulating all of that work. The question is how far we are along the journey. Obviously, I am happy to engage in discussions with Audit Scotland or parliamentary committees about how we can strengthen the verification process to give people greater confidence. That said, I think that the evidencing of such activity is far stronger in our programme than it is in other parts of the UK.
I am particularly interested in paragraphs 7 and 9 of the Government’s submission, which refer to the low-carbon economy. Does the cabinet secretary agree that it is important that we find out what the policy of our partner Government in London on that is as soon as we possibly can? There must be ambiguities about the role of nuclear power. As far as I recollect, convener, it did not figure greatly in the Liberal party’s priorities. What are the implications for particular projects in Scotland, given that two of the great arrays of marine-based wind farms must proceed rapidly to the planning stages? What will the London Government’s attitude to them be? Of course, work on them will be carried out to a great extent with sovereign wealth from continental countries. Whether Britain goes down the nuclear road and we find that our nuclear stations are run by the French or whether we go down a renewables road and find that things are run by the Swedes or the Germans, diplomatic initiatives will be of the essence. How can those initiatives be geared into the supply of investment from this country or from partners in Europe, given the coming London Government’s ambiguous approach to European co-operation?
Allow me to be as diplomatic as I possibly can be this morning. I do not know what the United Kingdom Government’s policy perspective will be, but I know that some approaches that the previous Administration took to concepts such as the strategic investment fund—I notice that Mr Macdonald questioned Scottish Enterprise about that—have been significant in enabling new technological developments to take off. We have a lot of vested interest—certainly from the Scottish Government’s perspective—in ensuring that we get out of those vehicles continued investment in renewables infrastructure and the great opportunities that we have, and it is important to have clarity about that.
We did not emerge from our interrogation of the Office of Gas and Electricity Markets totally satisfied with the transparency of that organisation’s desire, at that time, to achieve more perfect markets—to use the in phrase—in energy supply. Is this an appropriate point at which to press for modifications to Ofgem’s approach, given the fact that the Cameroons’ partners will be the Liberals, who, in Scotland, have certain interests in ensuring that energy supplies from their areas are not penalised?
Ofgem certainly needs to revisit a number of its fundamental assumptions. The Scottish Government pursues such issues assiduously and will continue to do so.
The earlier villains—the bankers who seemed to make an efficient getaway to tax havens—did not figure very much in the election debate. Again, is this not the time to press for the creation of a type of what John Kay would call a narrow bank, which has as its goal the creation of sustainable low-energy-consumption housing as a major part of combating fuel poverty and getting the most efficient use of our energy supplies in the housing market?
We need to ensure that there is a very strong capital market for investment in the low-carbon economy. The Government encourages that in a range of different points of dialogue that we are conducting. Whether that has to be achieved by a narrow bank is clearly a point of discussion about the architecture of the banking sector, but we must ensure that we have an adequate source of capital for investment. That is one of the major factors upon which the success of the low-carbon economy developments that we want to implement will depend.
I am sure that Chris Harvie will be reassured to know that Chris Huhne, the Liberal Democrat, is the Secretary of State for Energy and Climate Change.
My first question is a follow-up on Lewis Macdonald’s question about the rates revaluation. With the cabinet secretary’s interest in growing the economy, I am sure that he will agree that the independent nursery sector is really important to the economy, particularly in enabling women to get back into work. I have had representations from that sector in my constituency, as have members across Scotland. The nurseries have been particularly hard-hit by rates increases.
In a rates revaluation, there can be significant changes. The Scottish Assessors Association undertakes the independent valuation and sets out the independent methodology that it uses to do so.
I was using that nursery as an example, but representations have been made by nurseries across Scotland. The nursery sector seems to have been adversely hit. For example, a nursery in Dunfermline has experienced a 276 per cent rise in its business rates, and one in the convener’s constituency has experienced a 50 per cent increase—I could go on. Nurseries tell me that, when they ask why their rates are going up, they are told that it is because they are a growth area. Their appeals are not being heard, but the increases are being served and they are telling me that they might be put out of business. You have to take the issue seriously, cabinet secretary, because many people, particularly women, will be adversely affected if the nurseries close. I point out to you the anomaly in the situation.
I take the issue seriously, which is why I encourage the companies to appeal. That is the process that should be undertaken. Obviously, any business rates that have been collected inappropriately will be repaid, more than likely with interest, if that is appropriate.
For many of the nurseries, that might be too little, too late. There seems to be quite a serious issue developing.
Marilyn Livingstone will be aware that we have expanded the support that we are giving to the college and university sector beyond what was envisaged in the spending review, as part of the negotiations around the budget process for 2010-11. In response to the points that were put forward by the Liberal Democrats, we increased the amount of support that goes into college places, which resulted in more college places being provided. I entirely accept the importance of the argument.
That was going to be my next question. Colleges are bursting at the seams, and there will be huge numbers of school leavers. We would quite like to be kept up to date with the plans that you mention.
The issue is predominantly one for the Cabinet Secretary for Education and Lifelong Learning, but he and I are in active discussion about the point, as we recognise the seriousness and significance of the issue. Either Michael Russell or I will be happy to keep the committee informed.
If you are able to get a word in edgeways when you are talking to Michael Russell, you are doing better than most of us.
I am sure that Mr Russell will pay careful attention to my remarks.
I am sure that he will.