Finance Committee, 13 Sep 2005

Meeting date: Tuesday, September 13, 2005

Official Report 278KB pdf

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Budget Process 2006-07

I welcome people to the 19th meeting of the Finance Committee in 2005 and apologise for starting slightly late. I welcome the press and public as normal and remind people that pagers and mobile phones should be switched off. We have apologies from Alasdair Morgan, and Wendy Alexander has indicated that she will be joining us but will be a bit late.

Before we begin agenda item 1, I inform members that the Scottish Executive has not announced its review of baseline budgets—we were told that there was to be a review. Professor Arthur Midwinter's paper has therefore been rewritten so that it makes recommendations to the Executive, rather than being a submission to the baseline review.

We are distributed around the table slightly differently today because some experts will join us for item 2. The idea is to mingle them among us, so I hope that when we reach that item, we will each sit next to somebody unfamiliar. I am sure that that is fine—for us, if not for them.

Item 1 is consideration of a presentation and paper about the Scottish budget from Arthur Midwinter. The paper is on decisions that have been taken, the scope for change and possible approaches to the next spending review. Arthur has offered to give us a short PowerPoint presentation, after which we can discuss the issues that are raised. The paper suggests recommendations to the Executive. At the end of the discussion, I would like us to consider whether we agree to send the paper to the Executive.

I expect the item to take about half an hour, so I will try to conclude it by 10.25, when we might have a five-minute break to allow the experts to join us for the next item.

I invite Arthur to give his presentation, after which members will comment.

We discussed the paper at the away day, but several members were not at that event, so it was suggested that we should bring it back for the meeting, to give those members a flavour of the thrust of the arguments. The paper was intended initially to kick off the spending review exercise and to allow us to look back at what has happened, with a view to beginning to think strategically about how the committee would approach the next spending review. Of course, when the paper was nearly finished, the United Kingdom spending review was cancelled. The paper is probably back to its original draft form. We had to amend it halfway through, but we now have roughly the paper that was intended in the first place.

I liked the way that the convener said that I had "offered" to give a presentation; it was the result of severe pressure from a leading member of the committee who is not here today.

I will summarise the paper quickly, because I am aware that people will have read it. The paper examines how the expenditure pattern has changed post-devolution by considering the framework of what I have called committed expenditure. That covers ring-fenced expenditure, demand-led expenditure and contract-based expenditure, which constrain the ability to shift the budget in the short term. That is particularly important, because all the messages from the Treasury are that the next settlement will be tight compared with those of previous years.

The paper also contains evidence that we have brought together on outputs, on the growth in service staffing levels and on output measures to give a flavour of what has happened. I will talk about issues for the spending review of 2000 and whenever. We will have to discuss fairly shortly with the finance ministers the implications for Scotland. I will also examine how the budget will be managed if the budgetary context is tighter.

I move on to what is called committed expenditure. The table on the slide shows that the committed amount has grown since we first undertook the exercise back in 2000; roughly 5 per cent more of the budget is now committed and that is a minimum. The figures contain big contracts that we are aware have been let but, from our discussions with Executive officials, we know of others of which we could not take account.

Unfortunately for us, our friend and colleague Richard Dennis was promoted in the middle of the exercise. I take the opportunity to thank him for his help over the years with such exercises. His promotion left the Executive a person short when we tried to obtain up-to-date information. I hope that whoever replaces him has his combination of analytical skills and Treasury scepticism about spending programmes.

The committed expenditure represents just under £6 billion of the budget that it is very difficult for the Executive or us to do anything about. That figure has risen since 2000.

The public-private partnership figures are different from those that Jim Mather received in a parliamentary written answer. I will explain that later to him, if he wishes.

We decided to consider the growth pattern over the whole period. Members can see that education does not appear in the list on the slide, because of the complications that result from education spending being spread over three budgets. Roughly, health and transport have done well, while other sectors have received below-average increases. That is reflected in the list of outputs that is in the paper, which shows growth in all the major public professions—in the number of teachers, doctors, nurses, policemen and others.

We tried to find out what happened to the growth moneys. Members will recall that roughly £1 billion a year of additional money has been provided each year for the past five years. That period has experienced the highest sustained growth in public spending. The media have often suggested that much of that money has just been spent on additional pay rather than on developing services, so we went to some lengths to obtain a reasonable assessment. We discovered that the overall increase in public sector pay was roughly in line with the real increase in pay throughout the economy as a whole. Probably less has gone on additional pay than has gone on additional staff. Pay levels showed less growth than I expected.

We disaggregated the growth into developments to existing programmes, which I have called core programmes, and new programmes, of which the paper has a long list. Most new programmes involve funding outside agencies rather than employing staff directly. New programmes have shown considerable growth.

The conclusion is that there has been major service growth and growth in commitments over the period. The paper shows the interesting fact that only a few programmes have been trimmed over the six years. We could find only three or four level 3 programmes for which budgets were lower than they were at the start of the exercise and only one level 3 programme that had been terminated. That confirms the view that, because of the large increment of growth each year, the budget exercise has focused on allocating the increment of growth. We are aware that, this year, the messages from Whitehall and our Minister for Finance and Public Service Reform are that they expect the period of 3.5 per cent real growth to end when the current spending review period ends.

I suggest that if the Executive and the Parliament are serious about taking forward their strategy, simply to rely on any increment of growth will not be enough. If that amount is to fall, the strategy must be progressed. That will not be possible from the increment of growth or through painless efficiency savings, as they are described. The sums of money that we are being offered as part of the efficient government agenda will not release enough resources.

Two choices are available: to continue the approach of taking the easy decisions on the allocation of the increment of growth; or to conduct a more fundamental base budget review exercise that not only considers the efficiency gains but reasserts priorities and looks at programmes that can be trimmed and cut to allow the real priorities to be progressed. Those are the really hard decisions that, until now, the Parliament has not had to address, because of the budget's high growth.

The committee has anticipated the last point for the past 12 to 18 months—the hard decisions and the way in which the committee will have to respond to matters will be important defining issues for us.

I invite members to ask Arthur Midwinter questions or to comment on the information that he has given us.

You said that the Executive had refused to do a base budget. Is it just timing, or is it refusing to consider it? I know the answer, but I wanted to ask.

A review is under consideration at the moment, but the Executive has not yet made any public announcement about it. We learned that a review is being considered after I had drafted my paper arguing for an extensive base budget review.

If we were to agree the paper in its current format, that could be interpreted as the Finance Committee saying that there needs to be a review of the base budget.

That was what was intended in the initial stages, in June, before the suggestion that the Executive might consider such a review anyway came out of discussions with officials. However, there has been no public announcement about it yet.

You indicated that the current proposals for efficiency savings will not be sufficient. Could the Executive consider a more robust series of efficiency savings, as is happening south of the border? Would that option be open to the Executive?

The message that I am trying to get across is that you should stop thinking that it can all be done by efficiency gains. You have to get serious about reallocating priorities, and in some cases that will mean trimming services rather than simply making what are called efficiency gains. I was intrigued by the First Minister's statement last week that the business rate cut would be paid for by £200 million-worth of further efficiency gains. I do not think that it will be possible to release anything like enough money. All the experience of public sector retrenchment shows that to get to 2 per cent or 3 per cent savings on a budget it is necessary to start trimming programmes rather than just looking for what are regarded as more painless savings. I am still sceptical over whether we will get to the figure that is in the plans for the efficient government statement, without thinking that the business rate cut can be paid for through even more efficiency.

I hesitate to say it, but when politicians are talking about things that they call efficiency gains, they are often talking about real savings; it is easier to dress them up as efficiency gains. There is a need for a more robust approach if the Executive is serious about trying to achieve some of the targets that it has set for public services in the longer term.

I would like to go back to the efficiency issues. In The Scotsman today, Caroline Gardner gives an interview to Peter MacMahon in which she pulls apart the whole efficient government scenario. According to her,

"the tools to measure time-released savings are ‘rarely in place' … there is ‘uncertainly about targets' … some claimed efficiencies are only ‘proxy' savings and cannot be properly measured … assumptions on inputs and outputs, the key test of efficiency, are ‘often untested'."

Given that, are we liable to have a £731 million hole in the budget, or will outcomes be inhibited?

It would be fair to say that there is evidence that savings will be made. Savings have already been made, as the money has been taken from health and local government and allocated to other functions. However, what Caroline Gardner is saying is more sophisticated than that. If I understand it from how you have repeated it, she is saying that there is no baseline for measuring outputs, and the output measurement is central to whether something is an efficiency gain. Without that, we can measure that savings have been made, because there is a budget baseline for them, but without serious output data we will not be able to demonstrate that there has been an efficiency improvement. I think that that is the thrust of the criticisms, which are similar to what she said when she came to the committee.

I do not think that there is anything different or surprising arising out of that interview, because it is what she said before.

Without showing or feigning surprise, I feel that—

It is a cause for concern.

Genuine concern. In essence, the baseline has to be not so much outputs as outcomes. I have done a lot of reading over the summer and have seen that where people are genuinely serious about making a step change in efficiency they set a consistent aim. That consistent aim is invariably outcome based and in the interests of the common good. One of the things that disturbs me about the current proposals is that I do not see that consistent aim expressed in such a way that people can get their heads round it. A multitude of departments and ministers need to get their heads round it to converge on delivering that outcome.

I will have a paper before you next week on that topic, and that will bring us up to date, but I agree with what you are saying.

We will have the Deputy Minister for Finance and Public Service Reform before us next week precisely to answer questions on that matter.

Essentially, the critical problem will be that if we do not identify an assessment base for working out what the outcomes are, then even if we want to make difficult political and economic judgments about projects, there will not be enough analysis to enable us to make the right choices—never mind the fact that, by and large, the natural instinct of all politicians is to try to minimise the pain and maximise the publicity. It strikes me that we will have difficulty in getting there. Even if there were a consensus in the Parliament about going in the direction that you hinted at over the next two or three years to deliver the overall figures, could we be in for a turbulent period in debates among politicians on how to address the issue?

It is much easier to get consensus on allocating growth than it is to get consensus on what should be saved.

A number of us have come from local government backgrounds.

You will be used to it.

I think that there have been two periods of wonderful turbulence in local government. The early 1980s, before I was involved in local government, was a particularly turbulent period, when such decisions had to be made for the first time in a long time, and the post-reorganisation period was also turbulent, partly because of reorganisation but due to other factors too. Can we learn any lessons from that experience, other than the fact that some folk here have survived it? I think that that is a challenge facing any politician sitting in Parliament.

The committee's role is to try to ensure that there is a robust, evidence-based, structured approach. I fully accept that you will not get perfect information—politicians always have to make judgments without having all the information that they would like—but we have to ensure that the approach is as rigorous as is possible. We must certainly have an end to ad hocery, like last week's announcement out of the blue about business rates. We have a three-year strategy for the budget, and then out of the blue comes the statement that business rates will be cut. That is totally contrary to the approach that the committee and the Executive have been trying to work up together for the past two or three years. We do not respond in ad hoc ways; we deal in a systematic way with such things.

I understand the concern about process on that specific issue. The question that I want to ask about the announcement on business rates is about what measurements we can put in place to demonstrate that the business community can deliver the growth outcome that many folk in the business community have argued for rhetorically. It may not be a discussion for today, but it strikes me that that kind of debate will be important. If somebody said to me, "You've got £200 million to find. What would you put it into to try to get growth?" some honest debates could be held about the most appropriate location for that money.

I need to be perfectly frank about this. I do not think that £200 million will make a hoot of difference—zilch. We are talking about 0.3 per cent of our gross domestic product being shifted from the public sector to the private sector. All the evidence that we have seen in the past 20 years—during which time there have been three major Government reports, in 1986, 1995 and 2003—suggests that there is no link between the level of business rates and investment and employment. In fact, the First Minister recorded a lot of that in his statement, and then went on to announce the decision anyway.

The figures for the post-devolution period show that the Scottish business share of the business rate taxes across the UK, relative to England, has been falling since 2000. Part of the problem is the obsession with the rate poundage, which is only half the equation. People are not looking at the whole thing. It is the bills and what people pay in rates that matter. I am not convinced that the cut in business rate poundage will have any impact. A great deal of research into the matter—including reports by the Thatcher and Major Governments, as well as the Executive's report of a few years ago—has been done.

We are getting away slightly from where we should be.

My question relates to some of the previous discussion. The first sentence in the penultimate paragraph of your paper states:

"This will also require a fundamental reappraisal of spending priorities by the Parliament's Subject Committees".

That seems to be the key point in the paper.

Unfortunately, I was not able to attend the committee's away day, at which the issue may have been discussed. To what extent should the reappraisal be concerned with the importance of priorities and the need for them to be more rigorously applied, and to what extent should it be an exercise in setting priorities? I understand why, for reasons of political expediency, a cut in business rate poundage may have seemed like a priority to the First Minister in last week's debate on the Scottish Executive's programme. However, you make the point well that it does not measure up against the overarching priorities of the Parliament, such as increasing employment and sustainable development. How do you see the reappraisal of spending priorities working?

You may be pushing Arthur Midwinter into a political arena in which it is not fair to put him. It is fair to say that the subject committees will have decisions to take about how they respond to the situation. There are choices to be made. It is not for the Finance Committee to set parameters. All that we can do is say that there is a budgetary constraint or backdrop to which committees must respond.

Mark Ballard summed up the point that I was trying to make. I am seeking a more rigorous approach to setting priorities. Next week I will submit a paper to the committee that points out that 119 priorities are set in the draft budget. As we have said in the past, that is far too many for the exercise to be meaningful. Almost any area of expenditure could be justified under those priorities. If the cake is no longer growing as fast as it has been and we are still trying to meet the same objectives, there must be a rethink and a systematic reordering of priorities. It is not for me to say what the priorities should be—that task falls to you as politicians. My point concerns the way in which the budget should be managed. I am quite clear about the fact that we will fail in our task if the number of priorities is not reduced and if budget decisions are not more closely focused to reflect those priorities.

You are seeking a reappraisal of the way in which we deal with spending priorities, rather than something else.

Both the Finance Committee and the other committees of the Parliament need to take part in such a reappraisal. For the four years in which I have been involved in the process, we have worried about how to spend the growth moneys. Now we will make advances in some programmes only if resources are reallocated. That requires committees to ask themselves what their top priorities are. In some departmental spending chapters, every programme that is identified is described as a priority. I am getting into next week's paper on this year's budget. Basically, I argue—as the committee has argued—that there need to be fewer priorities to ensure that resources are targeted on the areas that the Parliament wants to support.

I know that before I became a member of the committee it raised several times the issue of the sustainable development cross-cutting priority. How does that relate to the notion of our reappraising budget priorities?

Sustainable development is listed as one of what the Executive calls cross-cutting themes of the budget. Occasionally those themes are called priorities. We want to see a framework developed that provides as much support as possible for agreed priorities. We have not yet reached the point at which departments' spending proposals are clearly linked to the overarching priorities. We have all wanted to push the Executive in the long-term strategic direction of linking its proposals to overall priorities. However, at the moment there are too many priorities. We have not gone as far as I would like.

Like Frank McAveety and Des McNulty, I am one of the people who survived the turbulence of the 1990s. When I look back on that period, it strikes me that the difficult discussion that we must have about what Government no longer does will have to extend beyond the subject committees. It is not just about the subject committees saying that in health we do one thing but not another. We may decide that there are whole areas of work that we will no longer do and that we will put much more money into doing something else. That is a more profound discussion than even the committees can have. There needs to be a public angle to the discussion, because people expect Government to do everything. Whenever anything goes wrong, they ask, "Why doesn't the Government do something about it?" Whatever Government is supposed to do about it usually involves spending taxpayers' money, so if the discussion is to be successful, it must be quite fundamental. I do not know how that can best be progressed within the available timescale.

One of the advantages of the postponement of the UK spending review—presumably, the same will happen here eventually—is that it gives members more time to think about how they want to handle the issue. It is properly the duty of subject committees to examine the priorities among the programmes within the portfolios for which they are responsible, but the much tougher, more complex task is the overall one of deciding how programmes meet the overarching strategic priorities of Scotland. The year's grace that we have been given will allow us to think about how to do that. Next week we will consider a paper about issues that will come before the committee in the budget process on which we are about to embark.

I do not want to encroach inadvertently on next week's debate. However, when I was going through your paper and the budget document to which you referred, I was struck by the fact that the quality of information on spending seems to vary between departments and spending programmes. You talk about our carrying out a baseline spending review. Would you expect a significantly higher quality of financial information to enable the Finance Committee and subject committees to have a more detailed look at what individual spending programmes entail?

We have had a long debate about the issue that you raise. You have come into the Parliament during what we call a light year in the budget process, because the big decisions were taken last year, at the time of the spending review. There used to be more information—another 50 pages—in the budget document than there is now. However, members said consistently that information from the April document was being repeated in the draft budget. We have tried to sanitise the system, so that the strategic decisions are taken at the time of the spending review. This year's budget document is meant to be only fine tuning. That is why it contains less information than you expected, coming in from the outside. There are no additional moneys, as the three-year allocations were made last year. We have asked departments simply to report to us the changes that have been made since then, so that proper parliamentary authorisation can be given. That is why the budget document does not contain the full amount of information that we would normally get at the time of a spending review.

Earlier you used a throwaway line that grabbed my attention. You referred to the relative tax burdens in Scotland and elsewhere. Could you expand on that point?

I was referring to the amount of money that is raised from business tax in Scotland compared with the amount that is raised in England. I can send you a table with that information. It is not something that is due to come before the committee—I was working on it in another context. Because of the revaluation exercise, property values rose less here than they did in England. What matters is how the Executive decides the outcome, and that requires it to consider the poundage and the valuation. The sums of money raised at the end of that process have been falling relative to those raised in England. At the start of the process, the difference in the relative tax burdens was 11 per cent; it is now 10.2 per cent and it has been dropping every year. Interestingly enough, the number of rated properties in Scotland rose during the same period.

Is that the number of physical properties?

Yes. That is what we would expect to be roughly in line with past levels of economic growth. Presumably, the number will be rising faster in England. From my background, I think that it is a bit difficult to have a serious discussion just about the rate poundage.

Sure, but you used the word "complex" earlier and there is an element of complexity given that the economy down south grew at 3.1 per cent and ours grew at 1.9 per cent. That 3.1 per cent might reflect itself in considerably different profits for individual businesses beyond that gap and thereby result in—

The assumption is that setting the same rate poundage will lead to something called a level playing field and that is just nonsense.

I agree.

We will stop the discussion on item 1 and break for four or five minutes to allow our witnesses to join us.

Meeting suspended.

On resuming—

I reconvene the meeting. Before we finish with item 1, I ask that members endorse the transmission of Arthur Midwinter's paper to the Executive as the committee's view. Are members comfortable with that?

Members indicated agreement.