Finance Committee, 12 Sep 2006

Meeting date: Tuesday, September 12, 2006

Official Report 157KB pdf

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Budget Process 2007-08

I welcome members of the press and the public to the meeting. I remind people to turn off pagers and mobile phones. The first item on the agenda, which we took in private, was on the report of our accountability and governance inquiry, which we have agreed. The second agenda item is the budget process 2007-08. We have two papers from our adviser, Professor Arthur Midwinter. The first is an analysis of this year's draft budget and the second is guidance to subject committees, which we normally issue. As we have had to reduce the amount of time for this item, I suggest that Arthur Midwinter does not make a presentation but instead that members ask any initial questions. The analysis of the draft budget can be discussed again on 26 September. As the Minister for Finance and Public Service Reform will not come to talk about the budget until our external meeting in November, we still have a bit of time.

Before we begin, I ask Arthur Midwinter to say something about an error that he has found in the draft budget document.

The error is in table 7.03, which shows the capital and revenue grants to local authorities that are outwith the aggregate external finance process. The moneys that are contained in that table are also contained in the appropriate portfolio lines. As you will see in my report, when I looked at those, I found what appears to be a significant drop of around £200 million in the funding that comes through those programmes. I asked my contacts in the Scottish Executive to explain that—it appears that there are errors in the figures for last year. The local government capital figure of £222 million in the current year's budget was just over £100 million in last year's budget. The difficulty is that information was wrongly excluded last year. Although there seems to be a fairly big drop, we should be able to account for it properly. Once I have been able to square all the figures, I will get back to members with a revised note. The error appears to have been made in last year's documentation—about £100 million of expenditure was excluded in an accounting error.

There are also problems in the local government revenue section in the table, where different categories have been used for the different years—we have categories for transport and for enterprise and lifelong learning and then one category for transport, enterprise and lifelong learning. That figure also varies from last year's. I have had correspondence from the Executive that will help me to explain the matter. In the meantime, we can simply note that the figures need to be revised, which will happen as soon as possible. We should also inform the Local Government and Transport Committee.

We should definitely inform the Local Government and Transport Committee that we have picked up that discrepancy.

Do members have any questions about either of the reports that we have received from Arthur Midwinter?

The Minister for Finance and Public Service Reform made a recent announcement on the local government settlement. Is that reflected in the draft budget or has it been excluded?

There has been no announcement; there has been a leak to the press. When the story appeared, I was aware that the figures were not in the draft budget documents. Any additional money for local government would have to be provided before the November settlement if it were to influence local authority budgets for 2007-08 in March. The information would have to come to the committee around the time it publishes its report on the budget.

The provision of additional money, about which there has been speculation, would be in line with the recommendation that the Finance Committee made last year.

The committee noted that there was a shortfall of £85 million, which should be revisited on the basis of the Barnett consequentials and any other budgets, with a view to easing the squeeze on local authorities and reducing council tax levels.

I seek the convener's guidance. The figure that the Executive gives for the uplift in budgets is £725 million and it is extraordinary that not a single page in all the documents shows where that money came from and where it will go. The issue is not complex; we demand such information from nearly every other public organisation. If the Executive were systematically audited in the way that is required of other organisations, it would have to show us the baseline and where the money is going.

We are seven years into devolution, but the annual budget for the organisation that probably accounts for slightly less than a twentieth—a significant proportion, at any rate—of the total United Kingdom budget does not outline where the money is being allocated. The utility of much of the rest of the documentation is negated if the Executive cannot say, "We told you that we spent £725 million this year; here is a table that shows how we spent it." No such table exists and it is extraordinary that the Executive should not impose on itself the accounting discipline that it requires of other organisations.

For information, the argument that we made last year for the rationalisation of the process was intended to allow the Executive to focus on the issue that Wendy Alexander identifies. There might have been a misunderstanding about what was agreed, but I saw the guidance to departments that officials in the Scottish Executive Finance and Central Services Department produced, which asked departments to explain changes from the previous year. I cannot account for why such information has not materialised, but the information that we have been given is certainly not in the format that I had hoped for. We wanted there to be a clear exposition of where and why additional money would be spent, but it seems that the numbers have simply been rolled forward and conventional accounts have been provided of what will be done with the money in the context of the overall budget. There has been no focus on the areas in which choices have been made for the current year.

Does the Finance and Central Services Department not know where the £725 million by which it has increased the budget is going, or is it just not telling us? Guidance on the matter would be helpful, but perhaps the budget adviser does not know the answer to my question.

I would imagine that the Finance and Central Services Department knows to which departments the money has gone. There is an official in the Executive who deals directly with each department and they would know the detail of that. I do not know who owns the process and decides what will go in the chapters on each portfolio. The guidance asked departments clearly to state what use they were making of the additional money from last year.

Part of our grievance with the budget documentation was to do with the huge overlap between documents. There was an attempt to streamline the documents this year and make the process easy by focusing only on changes. However, some of the portfolio chapters continue to repeat page after page of information that is already in the budget document and do not do what we wanted them to do. I would expect any department that was to secure real-terms growth of, for example, £40 million, to be able to explain what it would do differently because it had that money.

I suggest that we pursue that information with the Executive officials and see whether we can get something that gives us a relatively easy-to-understand synopsis of where the growth money is going on a portfolio basis.

There is no problem in tracking the money; the problem is in tracking the use that is being made of it. At the moment, the narrative is about the budget as a whole, whereas our concern is about the changes to the budget that require to be approved.

As Wendy Alexander suggests, it is important that we know not just the use that is being made of the increased resources, but what impacts and outcomes we can expect to arise from that. It would be useful to have that information on the cash changes and programme implications before the minister comes before us in November.

At various stages in the different reports, we can see that the Government is making choices about the reallocation of resources. Some budgets are declining, in real terms, and we need to know the implications of those reductions in funds. It might be that those funds are reduced and we notice absolutely no difference in the delivery of public services—in which case, we would have questions about how the money was being spent in the first place. We need to have a better understanding of how that happens.

My second point relates to the format of the draft budget documents. A presentation of the budgets in real terms—at 2006-07 prices—is given at level 2, but that is not shown at level 3. At a glance, it is difficult to work out what the implications are of assumptions on inflation in relation to the level 3 budgets. For example, there are some lines that look to be pretty flat in cash terms although they will be quite significant in real terms. That information would give us a better flavour of the pattern of the budget.

My third point relates to the local authority settlement, which Elaine Murray talked about. The committee asked ministers to look again at 2006-07 and 2007-08, so we will be wrestling with a cumulative impact when we consider the issues later in the year.

My final point is a question for Arthur Midwinter. Very close to the summer recess, the minister made a statement about his ability to spend around £800 million in the course of the 2007-08 financial year. Some people, rather unkindly, related the fact that a lot of money had suddenly been found in the vaults of the Treasury to the fact that an election is coming up. Has that £800 million pot had any implications for the publication of the budget, or is it a roll-forward of what we got last year with no implications for changed spending decisions?

Because I will come before the committee again in a fortnight, I did not look at the matter in detail; I simply put together a quick brief to give members an initial steer. I understand that the £800 million is kept in the central account at the Treasury and that most of it is earmarked. It is money that departments have banked under the various arrangements so that they are able to retain both the central unallocated provision and the end-year-flexibility provision.

From memory, I can recall only £200 million ever being kept that was not earmarked, which was the result of additional yield from business rates at the time of the 2004 spending review. That money was deliberately kept back for use now, as the feeling was that there would be a tight budget this year. Each item will be logged somewhere in the draft budget document or in the revisions, when they are produced. I think that the money amounts to £800 million over two years rather than £800 million over this year. It would be unusual for the minister to account for the whole £800 million, which is what you might have liked to see. Rather, you will get individual items recorded in the changes to the draft budget document from the previous year.

Are the plans for the £800 million for the financial year 2007-08 in the draft budget now?

I will have to look that up and answer the question when I come back to the committee in a fortnight. I think that some of the plans might be, or they might be introduced in the revisions, depending on when the decisions are made and how far advanced the Executive's planning is. The money is usually accounted for item by item—the Executive will lay out how the new £800 million is to be spent.

The minister will be here to talk about EYF next week, so members will have an opportunity to quiz him on that issue.

I was a bit worried when I read paragraph 20 of Professor Midwinter's briefing note, in which he mentions particular portfolios that the Scottish Executive identifies as contributing to the economic growth objective. My worry is that the health portfolio is not mentioned. I imagine that the Health Department would argue that it makes several contributions. The draft budget contains a section on growing the economy, which is split into direct and indirect contributions. Is the criticism that there is no attempt to quantify the sums of money that are making those contributions?

The programmes that I identify in the first two or three lines of paragraph 20 are those that the Executive has identified in its introduction. The "Framework for Economic Development in Scotland" and the Executive's treatment of public spending and its contribution to economic growth tend to concentrate on investment in infrastructure and skills and support for business. Those are the three main areas, but health is included in the catch-all. I have never been convinced about that, because the vast bulk of health spending is on people in the last three years of their lives, before we pass on to greater things. I am not fully convinced that a connection can easily be made between spending 40 per cent of the budget on health and a boost in economic growth.

My main concern is that health will receive two thirds of the growth, whereas the link between that spending and economic growth is not particularly clear cut. I accept that every department is asked to say how it contributes to economic growth, but making the connections is difficult. The Auditor General for Scotland has told us that health status has improved every year since the national health service was set up. However, it is problematic to disentangle the impact of any particular spend on those matters. My concern is that the percentage growth in the budgets that the Executive has flagged up as important is fairly small in contrast to the growth in the health budget. Although table 1 in my report shows that education is up there at 7.8 per cent, I remind members that that is the specific grants element, which is a small budget that does not include the further and higher education or school education budgets, in which the growth is much less.

We could also argue that there are difficulties in giving an absolute figure for how much of the money that has been invested in education has made a direct contribution to economic growth. The issue is difficult for all the budget lines. For example, with environment and rural development, there is a suggestion that the £600 million that is being invested in the water industry all contributes to growing the economy, which it clearly does not.

Yes. Trying to attribute that is fraught with difficulties. It is not a particularly helpful way of deciding a budget priority to produce a list of programmes that form more than 80 per cent of the budget and say that they all contribute to economic growth. That does not take us very far, after we have included education and health, which make up 70 per cent of the budget between them.

In paragraph 1 of your briefing note, you spell out the committee's responsibility in relation to strategic priorities, which you discuss further in paragraphs 15 and 16. Given that responsibility, would it be sensible for us to put down a marker by saying that progress on economic growth, closing the opportunity gap and sustainable development should be measured openly in some way and subjected to external audit?

We have gone down that route before. That takes us back to the discussion that we had last week about whether there is a need for an independent audit of performance.

A glance at the performance report that accompanies the draft budget suggests that, although the draft budget contains a list of targets under each of the portfolio headings, it does not contain any strategic targets for economic growth, closing the opportunity gap or sustainable development. After all, if you are going to use a targets model, you should have targets for the major objectives.

Perhaps the answer is to have openly recognised measurements that show where we were in 2003, where we are now and where we hope to be next year. We might not even have to have targets; we could simply have aspirations that at least move us along the line and allow us to be seen to measure such matters.

We might have that very debate in a couple of weeks' time when we receive the results of the research that we have commissioned.

All that the performance report says about the closing the opportunity gap indicators is that they have been replaced. As a result, we do not have any measurements for 2000-02.

Where is that?

Somewhere in the chapter on communities, one of the composite targets for growth in health, employment and so on has been marked as replaced; indeed, it was replaced in the 2004 spending review. However, that means that closing the opportunity gap was not monitored over the period covered by the 2002 spending review.

My question is pretty technical. John Swinney has touched on the fact that the document contains a lot of analysis of real-terms growth in the budget. However, it has always been argued that the appropriate index for health is very different from the retail price index or any of its published variants. Instead of using the same inflation index, could we apply any proxy measures in the Executive's methodology or anything else, either programme by programme or department by department, to find out the underlying real growth in an area?

Five years ago, Jim Stephen and I produced a report that addressed that very question. When we looked at health, we discovered that, in certain years, using the gross domestic product deflator gave a more favourable result than using the health index and concluded that using the GDP deflator—which has become the current practice—had certain advantages. For one, the Treasury would accept it. Given that this is a resource allocation process, the question is whether, for example, one would buy the same amount of health if the rate of inflation for health was growing faster than the rest of the economy. You would not necessarily want to build a projection based on past health inflation into such a process.

I remember that Andrew Wilson was involved in discussions on the matter, and the committee at the time agreed that it was safest to use GDP deflators. Every other approach gives rise to complications. However, it was recognised that in certain years the inflation rate for drugs, say, might go overboard. The question is whether one would buy the same amount of drugs or whether one would seek to control the budget. We felt that it would not be right to advise the Finance Committee to get into such open-ended commitments.

With regard to taking evidence on the budget process this year, would it be seemly for us to draw on further professorial input and invite Professor David Bell and Professor Sir Donald MacKay to give evidence?

I think that we have already agreed our approach to this issue. In any case, that is a matter for the committee, not for Professor Midwinter.

I simply thought that it would be seemly for us to engage with—or at least to listen to—the material sceptics in the public domain.

We can consider that. It is not necessarily for Arthur Midwinter to advise us on it at this point.

Do members agree to the guidance to subject committees, which we have to send out?

Members indicated agreement.

I thank Arthur Midwinter for his two papers.