Finance Committee

Meeting date: Wednesday, March 13, 2013

Official Report 687KB pdf

---

Subordinate Legislation

---

Budget (Scotland) Act 2012 Amendment Order 2013 [Draft]

Good morning and welcome to the ninth meeting of the Finance Committee in 2013. I ask everyone present to turn off mobile phones, tablets and other electronic devices.

Agenda item 1 is to take evidence from the Cabinet Secretary for Finance, Employment and Sustainable Growth on the Budget (Scotland) Act 2012 Amendment Order 2013. The draft order is subject to affirmative procedure, which means that the Parliament must approve the order before it can be made and come into force. We have before us a motion in the name of the cabinet secretary that invites the committee to recommend to the Parliament that the draft instrument be approved.

Before we come to the debate on the motion under item 2, we will hold an evidence session to clarify any technical matters and to allow the explanation of any detail. The cabinet secretary is accompanied by Janet Egdell and Terry Holmes from the Scottish Government finance directorate. Good morning, all. I invite the cabinet secretary to make an opening statement.

Thank you, convener.

The spring budget revision provides the last opportunity to amend the Scottish budget for 2012-13, and it deals with four different types of amendments to the budget. The first involves changes of substance, whereby we propose to increase the money devoted to particular areas of spend. The second involves a number of technical adjustments that have no impact on spending power. The third involves a small number of Whitehall transfers, and the fourth involves some cash-neutral transfers of resources between portfolio budgets.

The net impact of all those changes is an increase in the approved budget of approximately £451 million, from £33,739 million to £34,190 million. Table 1.2 on page 6 of the supporting document, “The 2012-13 Spring Budget Revision”, shows the approved budget following the autumn budget revision and the changes that are sought in the spring budget revision.

There is deployment of £51.3 million of funding from available Barnett consequentials flowing from the United Kingdom autumn budget statement in December 2012, Her Majesty’s Treasury transfers and the utilisation of budget exchange flexibilities. In my announcement to the Parliament on 19 December 2012, I confirmed that a further £25.2 million of capital budget would be allocated for 2012-13 in the spring budget revision. The revised budget therefore reflects funding for transport initiatives; economic development and regeneration projects; culture and heritage projects; rural, environment and tourism projects; support for the maintenance and improvement of the Scottish Court Service estate; and local government.

In addition, £16 million of funding is allocated to health and wellbeing. It will be managed by the portfolio within existing resources to support Commonwealth games and Olympic legacy initiatives in 2012-13 and over the next two years. I have also provided a budget of £5.6 million to support investment in essential equipment at the Scottish crime campus, and other net budget cover that amounts to £4.5 million.

The second set of changes comprises a number of technical adjustments to the budget, which are non-cash and budget neutral. However, it is necessary to reflect those adjustments to ensure that the budget is consistent with the final outturn that is reported in our annual accounts.

The main technical adjustments in the spring budget revision include £187.5 million of additional AME—annually managed expenditure—budget for non-cash provisions, impairments and depreciation to align the budget for accounting purposes; £41.3 million of non-cash cover to align the international financial reporting standards-based budgets for public-private partnership and private finance initiative schemes for year-end accounting purposes; £192 million for the impairment of student loan balances on income-contingent repayment loans; a non-cash budget of £58.3 million to cover forecast increased depreciation on the road network; and a non-cash net technical reduction of £80 million in respect of the Scottish teachers’ and national health service pension schemes arising from a number of actuarial assessed factors.

With regard to Whitehall transfers, three are recorded in the spring budget revision, resulting in a net impact of -£0.7 million on the approved budget.

The final part of the budget revision concerns the transfer of funds between portfolios to align the budgets with profiled spend. There are a number of internal transfers within the budget as part of the revision process, which have no impact on spending power.

The main transfers between portfolios include transfers of £18 million from education to local government for the Orkney and Western Isles schools programme; £10 million from culture and external affairs to education for people and infrastructure; £8 million of existing budget provision from other portfolios to infrastructure, investment and cities and parliamentary business and government strategy to ensure efficiency in the delivery of public information and social advertising campaigns and the international marketing and promotion of Scotland; £5.9 million from rural affairs and the environment to local government to deliver rural broadband; and £5 million from finance, employment and sustainable growth to local government for the decoupling exercise in respect of the timing of the Scottish Parliament and local elections.

As in previous years, there are also a number of minor internal portfolio transfers, which have no effect on portfolio totals but ensure that internal budgets are monitored effectively.

The committee will wish to note that, as part of our internal monitoring process, and in line with good practice, we have taken the opportunity in the spring budget revision to deploy emerging underspends in the finance, employment and sustainable growth and infrastructure, investment and cities portfolios to ensure that we maximise the budget that is available in 2012-13—in particular, where possible, to ensure capital investment.

The SBR records the deployment of £30.9 million of redirected budget, which represents 0.1 per cent of the departmental expenditure limits budget. The budget revision also reflects the proposed transfer of budget from resource to capital in respect of the Scottish budget, noting that the Scottish budget records capital that scores in the Scottish Government’s consolidated accounts or the accounts of our directly funded bodies.

In the context of our HM Treasury budget, the planned resource to capital transfer is £227.6 million; that switching is managed within the total DEL that is available to the Scottish Government. The increase of £21 million on the figure that was provided in December 2012 as part of the response to the Finance Committee’s report on the draft budget reflects the outcome of the internal monitoring exercise in January 2013.

I propose to write to the Finance Committee once we have provisional outturn figures in June with a table that sets out the actual transfers by portfolio and programme in a similar format to the table that we provided in the response to the committee’s report on the draft budget.

As we approach the financial year end, we will continue, in line with our normal practice, to monitor forecast outturn against budget, and wherever possible we will seek to utilise emerging underspends to ensure that we maximise use of the resources that are available to us in 2012-13 and to manage proactively the flexibility under the budget exchange mechanism that has been agreed between the Treasury and the devolved Administrations.

I confirm, in line with previous years, that I intend to make a statement to Parliament prior to the summer recess on provisional outturn in respect of our Scottish Parliament budget and the HM Treasury budget. The brief guide to the spring budget revision that my officials have prepared sets out the background to and details of the main changes that are proposed, and I hope that the committee has found it helpful. I am happy to answer any questions that arise.

Thank you for that comprehensive statement. I am sure that there are a few questions from members round the table, although you have answered some of the ones that I planned to ask.

You spoke initially about the £51.3 million arising from Barnett consequentials, HM Treasury transfers and the utilisation of budget exchange flexibilities. Can you give us a wee bit more information on how that amount is split between those three elements?

The Barnett consequentials arising out of the autumn statement totalled £4.6 million. The budget exchange flexibilities totalled £46.7 million, within which is a one-off transfer in respect of Olympic legacy funding, which arose from the issues that the Scottish Government and other devolved Administrations raised with the UK Government regarding the calculation of Barnett consequentials arising out of Olympics expenditure.

Essentially, there was a disagreement with the previous United Kingdom Government, which was sustained with the current Government, about the treatment of regeneration expenditure in the east end of London. Ordinarily, such expenditure would have attracted Barnett consequentials, but the previous UK Government took the view that the Olympics were a pan-UK project and there were no Barnett consequentials arising. We, along with our Welsh and Northern Ireland colleagues, disputed that view. The current UK Government agreed to address the issue, and we reached an agreement that resulted in a one-off transfer of £16 million of legacy funding, which is now being deployed.

Thank you very much for that clarification.

Towards the end of your opening remarks, you talked about the resource to capital transfer of £227.6 million, which, as you indicated, is higher than the previous figure of £207 million. Will you expand on how that switch has been achieved and what capital projects will benefit from it?

All the transfers are within-portfolio transfers, so no transfers are taking place between, for example, health and enterprise—they are all health to health or enterprise to enterprise transfers.

The pattern of the expenditure largely follows the plan that we set out previously, although there are differences between some of the areas of performance. On health and wellbeing, our expectation was that there would be a resource to capital transfer of £95 million. We now expect that figure to be about £87 million, because the nature of the health shift is such that it is about supporting more maintenance projects. If we explore the categorisation of what constitutes capital expenditure and what constitutes resource expenditure, we see that some of the maintenance activity ends up being classified as resource expenditure. At the margins of that type of analysis, some changes in composition are evident in our most recent assessment, but the overall picture is that we are moving to a total of £227.6 million.

Some of that funding is for taking forward individual capital projects in the enterprise network and, as I said, health maintenance projects. In rural affairs, we are undertaking some projects to strengthen the forest estate. In addition, we are providing capital grants for the roll-out of superfast broadband and are carrying out work to strengthen the agricultural estate. A range of areas are involved.

I will ask one more question before I open out the discussion to colleagues. In your opening remarks, you mentioned that AME of £187.5 million had been agreed with HM Treasury to cover non-cash provisions and impairments. Could you tell us a bit more about what that means in practical terms?

Essentially, a calculation is undertaken several times during the year on different aspects of the Government’s budget and what accounting provision must be made for some of our expenditure. The AME budget is not one that we control; it is an area of activity that we negotiate with the UK Government. For example, of the total that you mentioned, £39.5 million of provision will be allocated to NHS boards. That arises from their assessment of some of the potential financial implications of injury benefits.

Other assessments in other portfolios include the accounting treatment of motorway infrastructure, whereby £73.4 million will be allocated to the infrastructure portfolio in relation to the accounting provisions for land compensation payments in respect of road schemes. There will be impairments in the Scottish Prison Service to do with the valuation of its estate and properties, and an assessment has been undertaken of the depreciation that will require to be applied to donated assets across health boards. A range of accounting transactions is taking place as a consequence of this exercise.

09:45

There are a lot of tables in the document, and a lot of the figures showing money being transferred between budgets are quite clear. However, there is often no explanation of what the transfers actually mean. One example is an

“£80.0m budget reduction for the Scottish Teachers’ and NHS Pension Schemes to reflect changes in actuarial forecasts”.

Could you give us an explanation as to what that will actually mean, behind the figures?

Periodically, an actuarial assessment is made of the teachers pension scheme. On this occasion, there was an actuarial recalculation of the closing liability on the scheme on 31 March 2012. That actuarial calculation was by no means insignificant. It went from £23.6 billion to £22.4 billion. As a consequence, a calculation is made about the interest that needs to be calculated on that substantially smaller sum compared with the original estimate. The interest recalculation was £59.9 million. As a consequence of that valuation, there was a reduction in current service costs of £39.3 million.

Those numbers were netted off by a reduction in the capitalisation receipts within the pension scheme, which requires non-cash budget cover. That netted off at £87.1 million. What drove that issue was an actuarial revaluation of the scheme, which resulted in a not insignificant change in the overall position of the pension scheme.

Is that scale of transfer common? As regards the document that you have produced, and projecting forward with regard to pension liabilities, is that the type of fluctuation that you envisage from one year to the next?

I find that particular actuarial recalculation to be at the very significant end of the spectrum.

So that is not common.

It is far from common. I could not give the committee a range of factors, but a difference of £1.2 billion is at the very significant end of the spectrum, in my estimation.

The document also contains figures such as a

“Transfer of £10m from Culture and External Affairs to Education for People & Infrastructure”.

Again, the documentation does not exactly specify what “People & Infrastructure” is. Can you clarify what that transfer entails?

Essentially, that particular transfer was to deal with underspends in the culture and external affairs portfolio, which then assisted us in supporting the development of the schools programmes. It is essentially a direct transfer to assist us in funding some elements of those programmes.

Another example—and it is a fairly substantial figure, considering what it is being spent on—is the

“Transfer of £8.0m to Infrastructure, Investment and Cities ... from other portfolios”.

The document does not say what other portfolios have lost out in order to find that £8 million, but it is for

“social advertising campaigns”.

Could you tell us what those campaigns were?

We centrally manage the social advertising activity of the Government across a range of different campaigns. Individual portfolios have to identify and agree with me and the Deputy First Minister the composition of their advertising programmes so as to have some central control over how much advertising spend the Government undertakes as a whole. Those portfolios have to provide the money for them. Once we reach agreement about the composition of the advertising programme, we take the money from the individual portfolios and put it into the infrastructure portfolio budget, and it is disbursed at that level.

The committee may recall that, in 2010-11, I established a cap on advertising expenditure at 50 per cent of the previous total, which was £6.695 million. That cap has been sustained. We are undertaking advertising expenditure of £6.108 million within that cap and there is additional provision, outside that advertising cap, of £1.532 million for international marketing.

I will give the committee a flavour of the campaigns that were supported within that cap. There was £800,000 for road safety; £800,000 for detect cancer early; £600,000 for the contribution to food waste; £600,000 for the greener campaign, which is about climate change; £500,000 for awareness of organ donation; £400,000 for alcohol behaviour change; £300,000 for home energy Scotland; £300,000 for active travel; £300,000 for smoking cessation; £300,000 for the take life on national marketing campaign; £300,000 for early years marketing; £200,000 for seasonal flu; £200,000 for no knives, better lives; £200,000 for fuel poverty; and £200,000 for ready for winter. That is pretty much the staple diet of public information advertising that the Government undertakes.

From the figures, it looks as though the money has gone into infrastructure and away from health and justice-related campaigns. Is that not the case?

Bruce Crawford previously had responsibility for the management of that process. I had to sign off the overall financial cap but he negotiated much of the detail of the advertising campaigns. When Mr Crawford left the Government and the Deputy First Minister assumed his portfolio in relation to Government strategy, we simply shifted the budget line. At £8 million, it is a relatively small budget line at this level of expenditure, so it was transferred into the Deputy First Minister’s portfolio of responsibilities.

So it is not a transfer of money from health advertising to infrastructure.

That is absolutely correct. It is essentially a way of grouping—in our estimation as transparently as we can, although I am not sure that we have succeeded in that effort given the exchange that we have just had—all those areas together in one budget line so that the spending can be observed. It appears in the infrastructure portfolio because that is an area of the Deputy First Minister’s portfolio and she has assumed the responsibilities for Government strategy that Mr Crawford previously held.

Cabinet secretary, I refer you to page 15 of the spring budget revision. The lower table on that page has a line for “Energy”, which appears to total £42 million.

Sorry—bear with me a second while I find the page.

The energy line appears to be £42 million. If I read the budget correctly, the original figure was £64 million and in the autumn budget revision it went up to £75.3 million. It has now gone down to £42 million. Can you explain what has happened to the energy budget over the course of the year, particularly since the autumn budget revision took place?

There are a number of relevant factors.

First, we expected to spend about £16 million of the renewable energy investment fund on supporting renewables projects. As I have indicated, and as I indicated to the Parliament during the final stages of the budget bill for 2013-14, we are finding that the uptake of those funds is slower than anticipated. We had provided for that spending and, at the time of setting the autumn budget, the information that I had gave me confidence that it would be deployed in this financial year. As the year has gone forward, however, I have become less confident about that and I am taking action to address the fact that I may end up with unspent resources. As Mr Brown will know, I have to ensure that unspent resources are properly carried forward if they can be. I have made a judgment that the resource will not be required in this financial year.

There is a caveat. Because the fund has been created by the fossil fuel levy resources, the change has to be made good over the duration of the forward period. We will have to demonstrate that the £103 million that was allocated through the fossil fuel levy has been spent over the course of a number of years on renewable energy projects, and I reaffirm our commitment to doing that.

The other major item is that in the community and renewable energy scheme and in some of the microgeneration renewables schemes there has been a lower uptake of the budgeted provision that we had available. In that respect, the Government is redeploying those resources to ensure that we do not lose them in due course.

If I heard that right, approximately £16 million is down to renewables projects—

To be absolutely precise, the figure is £13.6 million. It was originally £16 million but I now forecast that a further £2.4 million will be expended from the fund. The change therefore covers £13.6 million from the renewables energy investment fund, £8.6 million from a number of smaller energy projects spread across three areas—community and renewable energy, microgeneration renewables, and the prototyping of offshore wind energy renewables activity—and, finally, about £2.3 million that related to some other projects in the low-carbon economy.

If the figure was £75.3 million at the autumn budget review and it is £42 million now, that explanation gives me some of the difference. Are you able to tell us what the remainder is made up of?

The remainder?

Your explanation takes us to about £25 million. I think there is a gap of about—

The figure that arises from my response is £24.5 million. Regarding the reconciliation to £75 million, I do not have the autumn budget revision level in front of me just now, but I am happy to provide clarity and fill in the remainder, which must be about £8 million.

On page 16 of the spring budget revision there is a section for the third sector. The original budget for the third sector was £24.5 million and it ends up at £18.4 million, which is a reduction of the best part of a quarter. It appears that £1 million of that is going to a justice change fund. Presumably, it could be argued that that is the third sector in some guise—

That was always the plan. When we set the reducing reoffending change fund, part of the financial underpinning was the transfer of £1 million from the third sector budget to the justice portfolio for that purpose.

That makes sense. However, there is a reduction of the best part of £5 million in what is notionally called the third sector budget. Are you able to explain that? Has that money gone to the third sector in some other way, or has the sector effectively lost it?

10:00

We ran a programme in previous financial years in relation to the enterprise growth fund, which was principally for social enterprises. That was a very successful fund, and the Government committed to taking it forward. As we have gone through the consultation exercise on how best to focus and target the fund in future years, the discussion and dialogue and the procurement process have gone on for longer than we had originally estimated, so those resources will be unable to be spent during this financial year.

The enterprise growth fund will be launched very shortly, but the expenditure will not arise in this financial year. Essentially, the change is part of my assessment of where programmes have not been able to match the level of performance that we expected, so we have redeployed those resources to other purposes.

Page 52 of the spring budget revision document shows that the Young Scot fund was originally due to get £5.4 million, but that was apparently reduced by £2.4 million in the autumn budget revision, and the spring budget revision will reduce the fund further by £2 million. That will leave the Young Scot fund with £1 million instead of £5.4 million. Can you explain what has happened there?

The issue there, essentially, relates to timing. Some of the propositions that we expected to have been funded under that line have not materialised at this stage. However, the funding commitment that we have given to that will be made good in future financial years.

The final issue that I want to ask about, which the convener has asked a little about already, is the revenue to capital switch that you referred to in your opening statement. I know that you said that you will send us a table showing us where the switches have happened. Did you say in your opening statement that that would be available in June?

We will provide it when we are in a firmer position in relation to outturn. As the committee will appreciate, even once we reach financial outturn, there is still a process of assessment and validation of the approach that we have taken, which can deliver some change. I think that some time after outturn would be the desirable point to provide that table.

There seem to be two big changes. First, the enterprise agencies seem to be switching substantially less to capital than was originally envisaged. Can you explain the background to that and why the enterprise agencies did not switch as much from revenue to capital in this financial year?

Essentially, a number of things interact together here. There are changes to budget allocations arising out of the decisions that I have taken when we have acquired new capital resources. Those will have been deployed, so there will be an element of our taking decisions to deploy those resources that can have an effect on the capital programmes of enterprise bodies and others.

Secondly, there is an interaction with capital receipts. An assessment is made of where capital receipts are likely to come from. Those may overshoot or undershoot, and that will have an effect on how those resources can be utilised in due course.

There is also the interaction with particular programmes and projects, some of which will be responsive to demand within the marketplace. On particular projects that at the time of planning we think are likely to come forward and be realised, we need to work with individual companies to shadow their investment plans. If companies change their investment plans, we cannot then deploy our part of the bargain. Therefore, there are quite a number of factors that will play together in that situation.

What we predict at the outset of a financial year is designed to be as accurate and realistic an approach as possible. However, it will vary by a number of factors, whether it is capital receipts, additional capital consequentials that become available or the change of plans by individual companies or other organisations with which we may be in partnership.

I understand the third point—companies’ plans change—but I want to follow up briefly on the first two points. Did the enterprise agencies collect more or less in capital receipts than they anticipated at the start of the year? You said that they can overshoot or undershoot. They can do only one, obviously—

They collected more in capital receipts than was anticipated. I took a fairly pessimistic view of capital receipts when we formulated the budget, given the property market. Although that was not a particularly unreasonable assumption to make, the capital receipts have been more significant than we had planned.

So Scottish Enterprise collected more in capital receipts than you thought that it would at the start of the year.

It did, yes.

By a large margin? Do you have figures for that?

I do not have the numbers to hand but I can provide them.

I would be grateful.

On the first point, you referred to changes to budget allocations. If I interpreted that correctly, were you saying that if additional capital is given through Barnett consequentials or in any other way, Scottish Enterprise might get a slice of that and therefore it will not transfer some of the revenue to capital that it was intending to?

That could be the situation.

I, too, was going to ask about resource to capital—you have covered quite a lot of that area.

I return to some of the top-line figures. Basically, the switch is now £20 million more than you suggested in your response to our report. You have also explained this morning that the reduction of £8 million in health and wellbeing is more apparent than real. You argued that it was doing the same work but was classified as resource. In response to Gavin Brown, you indicated that the minus £5 million to finance and sustainable growth does not really represent a reduction in overall capital expenditure. I am not criticising that decision but I wonder how you come to decisions about how much resource to capital transfer to have. It appears that you have decided to put quite a lot more into resource to capital transfers than you had originally planned. Is that true? What do you base such decisions on?

We have encouraged different elements of Government, essentially responding to the strategic economic direction of the Government to support greater capital investment. Mr Chisholm and the committee will be entirely familiar with the Government’s concerns about the reduction in capital expenditure since 2010. Our policy direction has been to encourage and maximise capital investment wherever we can. Different parts of the organisation are responding to that challenge as effectively as they can. Obviously, the Cabinet is leading that process in identifying ways in which that can be done.

The Government will make a judgment about the overall allocation of its resources. We will judge how we can support some of the operational aspects of public services and public spending and how much we can transfer to capital to supplement the resources. We have arrived at a position in which we expect the overall total to be about £227 million for this financial year, compared to the original plan of £206 million.

Do you do any kind of economic analysis of the consequences of losing resource or do you just say, “How much can resource budgets endure?” Obviously, there are a lot of difficulties there because of the general financial situation. Can you make an economic assessment that at a certain point shifting too much from resource into capital will have negative economic consequences?

There is a judgment to be made there. That was my point about the sustainability of resource budgets.

Part of our economic analysis is driven by material that I have shared with the committee before, which is the analysis that is undertaken by the Office for Budget Responsibility indicating that £1 of capital spend delivers £1 of economic impact and that £1 of resource spend delivers 60p of economic impact. Therefore, that expenditure is underpinned by economic analysis. We could take that to its logical conclusion and say that we will spend all the money on capital next time, but clearly that would not make sense because operational programmes need to be supported, and portfolios make a judgment about how best that can be undertaken through a mix of resource and capital expenditure.

Does the OBR analysis have any timeframe attached to it? I am not being critical—obviously, I support more capital expenditure. However, is there a time lag for the economic effects of capital expenditure?

No, although we know that different models of capital expenditure will have more impact. Direct capital expenditure that we can offer begins to have an effect on the economy immediately and directly.

How much of the £51.3 million came as capital and how much of it came as resource? It looks as though a lot of it is capital but not all of it.

I do not have the split between the two in front of me, but it would probably be safe to say that about 50 per cent of it is applied as capital. The lion’s share of the remaining £16 million is funding for the Commonwealth games Olympic legacy, which is resource expenditure. It is safe to say that about 50 per cent of the £51.3 million was deployed as capital expenditure.

How much of that came as part of the budget exchange flexibility?

About £46.7 million came as budget exchange flexibility.

Does that mean that most of that money will be spent in future years?

The £51.3 million will be spent in the current financial year.

Sorry—how much?

The £51.3 million will be spent in the 2012-13 financial year.

How does that work for the Commonwealth games funding?

Sorry. It is allocated to the budget holders and will be deployed as part of their on-going commitments over several years on that particular provision.

That is all part of the carry-forward. You are allowed to carry forward 0.6 per cent of resource DEL and up to 1.5 per cent of capital DEL.

That is correct.

Are you near those ceilings?

It is an annual calculation. You will know that, in the period before the 2010 change of Government, it was possible to accumulate a surplus in the Treasury and then draw that down. That was abolished in 2010 and replaced with a system that gave us the ability to carry forward 0.6 per cent of resource DEL and 0.5 per cent of capital DEL but on an annual basis, so there is no cumulative sum of money. The allocation for carry-forward from 2012-13 to 2013-14 is about £150 million in resource and about £40 million in capital—about £190 million in total. The budget for 2013-14 is underpinned by more than £100 million of carry-over; therefore, we will have to carry over a certain amount and we are on course to do so. I am obviously trying to minimise the amount of capital carry-over.

10:15

That is not very much capital. I am quite surprised by that. Given the several different tranches that you have allocated to housing this year, does that mean that you are spending all of that money this year?

Yes.

But you are also spending—

In the February budget statement, I announced to Parliament that there was £200 million of resource allocated to housing in the past 12 months, if I remember my phraseology correctly. Not all of that will be deployed in the current financial year; some of it will be deployed in 2013-14 as a result of Barnett consequentials that will have arisen to be deployed in that financial year.

Okay. Thanks.

Under “Technical adjustments”, £192 million is mentioned for impairment of student loan balances. Can you give us an explanation of what that means?

Essentially, that summarises a revaluation of the student loan book. The value of the student loan book is calculated using the HERO model. The valuation arising out of that is compared with the existing valuation of the loan book and a decision is taken on whether any variation is sufficiently material to require the carry-forward value to be adjusted. The comparison for 2012-13 gives a difference of 6 per cent between the carry-forward and the actual position, which is significant enough to require that adjustment. The variation has, essentially, been driven by material changes in the rate of inflation over recent years. In agreement with the Treasury and Treasury protocol, £192 million of budget cover has been provided for that purpose.

Right, so that comes from Westminster and does not affect our budget.

That is correct. Yes.

Is that to do with the fact that students will not be earning and will not be able to repay their loans?

It is driven by a difference in the rate of inflation that will be calculated within the loan book and, therefore, the value that will be realised as a consequence of that factor. It simply creates a need for more provision within the budget to meet the notional cost of that to the public purse, which is what the AME calculation is about.

Thank you.

The financial scrutiny unit paper that we have been given refers to page 37 of the spring budget revision and says that the proceeds of criminal acts receipts, which total £15.1 million, do not balance with the proceeds of criminal acts payments, which total £10.8 million. It seems pretty clear to me—I wonder whether you can confirm this—that that is because those receipts are utilised on a range of interventions. They become “Retained Income” in the table for drugs and community safety and the proceeds of crime scheme—is that correct?

Yes. The justice portfolio surrenders the £15.1 million from the proceeds of criminal acts to the Scottish consolidated fund and gets back £10.8 million of that for a variety of different programmes to support young people and divert them from crime and antisocial behaviour. Other expenditure, totalling £4.3 million, is transferred to a range of other programmes. For example, £1.7 million went to community justice services for payback grant schemes for offenders renovating sports facilities; £200,000 went to community justice services for mentoring projects; £800,000 went to the police division for the recruitment of additional financial investigators, which is handy for boosting proceeds of crime resources; £0.2 million went to the Crown Office; £0.2 million went to Creative Scotland; and £0.6 million went to international development.

That is all directed at trying to intervene and stop people engaging in criminality.

That is correct.

Am I correct in recalling that there is a Treasury cap on the moneys from proceeds of criminal acts that can be used? Have I picked that up wrongly?

We will write to give the committee chapter and verse on that. My recollection is that we can retain only a proportion of the proceeds but, for absolute clarity, I had better confirm that in writing.

You think that what I said was correct, but you will come back to us.

This is a strange area because, ideally, we would want to have less criminal activity and therefore no proceeds from criminal acts. However, we have the scheme. Is there a forecast for the revenue that it will bring in? Do you just wait to see what comes in? How does that work?

We can form a firmer expectation of what is likely to come in from the case load that the Crown Office is dealing with and from the Crown Office’s expectation of success in individual prosecutions. The Crown Office has been more successful in identifying areas in which proceeds of crime are clearly exposed and how resources can be realised to benefit the public purse.

The answer to my next question might be contingent on whether there is a cap, which you will confirm. Were the receipts of £15.1 million more or less than was expected?

I think that that is one of the highest figures that we have had for proceeds of crime resources.

That was helpful.

Page 24 of the budget revision document refers to an £18 million

“Transfer to Local Government in relation to Schools programme”.

Two programmes—in Orkney and the Western Isles—are identified. I am trying to understand how that transfer works.

Am I right in thinking that there is a budget of about £40 million for the Scottish Government’s school building programme, to which local government is invited to bid every year for funding for new school building? I understand that that works on the principle that local government has some money for school building and that, in approving that, the Government could support that with Government money. Does making a transfer from education to local government change the dynamic of school building programmes?

The budget line that you refer to involves a unique issue, which I can best describe as a hangover from the approaches to the PFI programmes that the Government inherited. The nature of the island communities that were involved meant that making some PFI schemes happen was difficult, although they were committed to. The Government had to meet some of the costs of supporting the development of those programmes, to ensure that the schools could be built. I would not read into the transfer a general approach to school building; it is unique to the situation in Orkney and the Western Isles.

School building will be supported by two mainstream opportunities. One will involve direct capital—we provide a capital grant to local authorities and they make their own decisions about how to deploy that. The other will involve the non-profit-distributing programme, which is taking its course.

The Government gave a commitment to the authorities in Orkney and the Western Isles, to ensure that the schools programmes could continue. I would not read anything more into the budget line than that.

Under item 2, we move to the debate on the motion.

Motion moved,

That the Finance Committee recommends that the Budget (Scotland) Act 2012 Amendment Order 2013 [draft] be approved.—[John Swinney.]

Motion agreed to.

The committee will communicate its decision formally to the Parliament in a short report that links to the Official Report of the meeting. Are members content with that approach?

Members indicated agreement.

I suspend the meeting briefly while the witnesses change over.

10:25 Meeting suspended.

10:26 On resuming—