Finance Committee

Meeting date: Wednesday, March 14, 2012

Official Report 422KB pdf

---

Subordinate Legislation

---

Budget (Scotland) Act 2011 Amendment Order 2012 [Draft]

Item 3 is to take evidence from the cabinet secretary on the draft Budget (Scotland) Act 2011 Amendment Order 2012. The draft order is subject to the affirmative procedure, which means that Parliament must approve it before it can be made and come into force. The cabinet secretary has lodged a motion inviting the committee to recommend to Parliament that the draft order be approved.

Before we come to the debate on the motion, we will have an evidence session to clarify any technical matters and allow explanation of detail. The cabinet secretary is again accompanied by Alyson Stafford, and by Stuart Dickson, financial policy adviser with the Scottish Government.

I understand that the cabinet secretary wants to make an opening statement.

Yes, convener.

The spring budget revision provides a final opportunity to amend the budget for 2011-12. It deals with three different types of amendments to the budget. The first type are changes of substance, through which we propose to increase the amount of money that is devoted to particular areas of spend. The second type are a number of technical adjustments that have no impact on spending power. The third type are some cash-neutral transfers of resources between portfolio budgets. The net impact of the changes will be an increase in the approved budget of approximately £259 million, from £33,958 million to £34,217 million.

Table 1.2 on page 5 of the Government’s supporting document shows the approved budget following the autumn budget revision and the changes that are being sought in the spring budget revision. The substantial changes are due to the deployment of available Barnett consequentials and are related to Her Majesty’s Treasury transfers as a result of announcements made by the chancellor in the March 2011 budget and the November 2011 autumn budget statement. We have added £136.6 million in Barnett consequentials and related Treasury transfers to our budget for 2011-12. Those Barnett consequentials inject new support this financial year into housing, transport and employment programmes, helping to get people into work, to create new jobs and to meet our ambitions for Scotland.

The main allocation of Barnett consequentials includes £50 million to Scottish Water. The chancellor made £50 million available to improve the Caledonian sleeper service in 2011-12. As colleagues will be aware, it is not possible to procure new rolling stock overnight. The upgrade to the sleeper service is a significant project and, rather than lose access to the £50 million funding that has been offered by HM Treasury, the Scottish Government has worked with the UK Government to use those funds in the short term, and to deploy them in a phased way in future years to develop the Caledonian sleeper service.

We have allocated funding of £17 million to help to provide training for young people to improve their chances of future long-term employment, which is important to all parties in the Scottish Parliament and to those in the further education sector. In addition, £15 million has been made available for the college transformation fund.

We have allocated £21 million to help to alleviate pressures on police and fire pensions that have been caused by the introduction of new commutation rates on 1 April 2011. We have also allocated an additional £10 million to boost housing supply in the affordable housing programme.

The second set of changes comprises a number of technical adjustments to the budget. Technical adjustments are mainly non-cash and budget neutral, but it is necessary to reflect those adjustments to ensure that the budget is consistent with the final outturn reported in our annual accounts. The main technical adjustments in the revision are: £73 million of additional annually managed expenditure budget for non-cash provisions, impairments and depreciation to align the budget for accounting purposes; £20 million to align the international financial reporting standards-based budgets for public-private partnership and private finance initiative schemes for year-end accounting purposes; and £16 million for the impairment of student loan subsidies, which reflects the impact of low interest rates on income-contingent repayment loans.

The final part of the budget revision concerns the transfer of funds between portfolios to better align budgets with profiled spend. There are a number of internal transfers within the budget as part of the revision process. They have no impact on spending power. The main transfers between portfolios include: the transfer of £11.7 million from justice to health in respect of the prison health strategy; a one-off transfer of £6.3 million to the National Records of Scotland for funding the 2011 census; and the transfer of £7.5 million of existing budget provision from other portfolios to parliamentary business and Government strategy to ensure the efficiency that we expect in respect of public information and social advertising campaigns and the international marketing and promotion of Scotland. As in previous years, a number of minor internal portfolio transfers will be made. They will have no effect on portfolio totals, but will ensure that internal budgets are monitored effectively.

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 use emerging underspends to ensure that we maximise the use of the resources that are available to us in 2011-12 and proactively manage the flexibility provided under the budget exchange mechanism agreed between HM Treasury and the devolved Administrations.

Thank you for that statement. As always, I will start off the questions.

On the Caledonian sleeper services, and with regard to additional money by portfolio, I understand that that money was ring fenced but is being loaned to Scottish Water, as has been touched on. Can you give us an indication of when that money will go back into ensuring that the Caledonian sleeper service is delivered?

The proposals that we agreed with the Treasury involve the Treasury contributing £50 million to the enhancement of the Caledonian sleeper service and the Scottish Government contributing about £80 million. Between the two Governments, there will be an investment of about £130 million. That will be focused on improving the rolling stock and on taking forward a range of other propositions to enhance station infrastructure, station facilities and some of the lines that are used by the Caledonian sleeper. My estimation is that the improvements will probably roll out over a four-year period.

Some of those propositions will be factored into our investment programme for the rail industry in Scotland. We will be able to do that in a fashion that is complementary to the existing programmes that we are undertaking with the additional resources that we have obtained.

When will the four-year programme commence?

I expect some activity to be undertaken in 2012-13, but I imagine that the bulk of it will commence in 2013-14.

On the technical adjustments, the health, wellbeing and cities strategy has received a £58.3 million adjustment upwards. However, the supporting document for the budget revision is not clear about how that figure is reached. The NHS and special health boards budget receives a net adjustment, for the purposes of IFRS, of £13.8 million, and there is additional funding for NHS provisions of £39.5 million. However, there is no explanation of whether that is due to the technical changes in the portfolio or something else that might be specified. Will you provide a wee bit of clarification on that?

The £58.3 million figure comprises, first, £39.5 million of additional annually managed expenditure funding for depreciation factors and impairments. There is also a £5 million factor on the depreciation that is required on donated assets, which again is under annually managed expenditure. The final element that you referred to is a £13.8 million adjustment for IFRS purposes for special health boards and the NHS as a whole. Those three items are shown on page 18 of the document.

I was specifically interested in how the £13.8 million breaks down.

We have to regularly review the provisions that we make in order to ensure that our financial reporting is consistent with the international financial reporting standards. That will be done in relation to the way in which we tabulate PFI and PPP costs, which will come within the operations of NHS boards and special health boards.

Professor Bell is not with us today and cannot ask questions in any case, but I want to ask about an issue that he raised in a paper that he has given us. The paper refers to the funding of about £12 million for youth unemployment measures, in addition to the £126 million scheme that was recently announced by the Deputy Prime Minister, which will be focused on those not in employment, education or training. How will the additional money in Scotland be targeted, and how will it align with the money that is being spent in Scotland by the United Kingdom Government?

11:00

That money will be deployed as part of the Government’s opportunities for all commitment, which guarantees every 16 to 19-year-old who is not in employment, education or training access to a suitable learning or training opportunity. Support will go in to maintain college places at the necessary level. The way in which that relates to the United Kingdom Government’s proposals for young people who are trying to enter the labour market is important. We must work closely with the UK Government to ensure that a complementary approach is taken.

The UK Government has set out its UK-wide work programme, of which the youth contract is an essential part. I have agreed with UK Government ministers that we will respect the focus and approach of their programme, and complement it with our employment offering in Scotland. We will not seek to duplicate the UK programme—that would be completely inappropriate—nor to compete with it, but we will put in place complementary interventions.

All that hinges on the degree of co-operation that exists on the ground. In that respect, we encourage—as do the UK Government ministers—very close working in localities between Skills Development Scotland, Jobcentre Plus and local government to avoid overlap at a local level.

One illustration of that co-operation is that the Minister for Youth Employment and I will take part in a United Kingdom Government-organised seminar on youth employment in Dundee tomorrow morning with the Secretary of State for Work and Pensions and the Secretary of State for Scotland. I agreed with the Secretary of State for Scotland that we would participate at that level to reinforce politically the point that the convener makes about the need to ensure that the schemes and initiatives work hand in hand.

Thank you. I now open the session to questions from committee members. Elaine Murray will go first, followed by Gavin Brown.

I return to the £50 million that has been transferred from the Caledonian sleeper service to Scottish Water. I appreciate that one cannot just go to a shop and buy rolling stock. Can Scottish Water use that money within the next two or three weeks?

The transfer gives Scottish Water an advance on its capital programme, which allows it more resources in the short term than we had planned in order to support that programme. We will draw that resource out of Scottish Water by adjusting the investment commitments that we plan to make in it in the next three to four years, and use that money to support investment in the Caledonian sleeper service.

So it is not the case that Scottish Water will have to commence and pay for projects by the end of the financial year to use up the money.

No—it has a rolling five-year investment programme that we support financially and which is managed within the overall financial arrangements for Scottish Water.

Is the Caledonian sleeper service the one that goes north of Edinburgh? Does it include the sleepers to Aberdeen, Dundee and so on?

Yes. The Caledonian sleeper service is the generic marketing term for all the sleeper services that come to Scotland. It refers to the services to Edinburgh and Glasgow as well as to Aberdeen, Fort William and Inverness.

Part of the “Rail 2014” consultation focuses on the future of the sleeper service north of Edinburgh and Glasgow. I am aware that a lot of the consultation responses are enthusiastic about keeping the service, but if the decision was taken not to continue with it in the post-2014 franchise, what would happen to the money from the UK Government? Would that be paid over a certain period?

The “Rail 2014” consultation paper contains many propositions, suggestions and ideas. The Government has been unequivocally committed to the maintenance of the Caledonian sleeper service. That has been a key part of our commitments and will be so in future, so the circumstances that you describe do not arise.

Do you envisage the sleeper service remaining as it is at the moment?

We have been entirely committed to the Caledonian sleeper service. Although there are many options in the consultation, the Government has always maintained its belief that the sleeper service is an essential part of the transport infrastructure of Scotland—and that will continue in the period going forward.

In relation to the £50 million that went to Scottish Water, were other options examined? Was there a plausible alternative, which would accelerate funding to housing or other capital projects that were shovel ready?

The mechanism that I chose for deploying the resources enabled me to have the flexibility to draw the resources back out, given the overall financial commitments that the Government has given to Scottish Water over a five-year period. The mechanism enables me to ensure, without question, that the resources can be deployed for the Caledonian sleeper service when they are required.

Were other options examined?

No.

Okay. I seek clarification on a few other points. In relation to police and fire pensions, £21 million has been allocated to offset the need for additional funding. Is that a one-off? Was there an initial miscalculation? How did the position come about?

In the preparation of the budget, we calculate the demand for police and fire pensions that we consider to be likely. For the financial year 2011-12, we were making that judgment in the run-up to the publication of the draft budget in November 2010; we settled on the budget in February 2011. On 1 April, the commutation rates changed to reflect the lower interest rates that are prevailing. As a consequence, during the financial year we found that there was a much larger demand for lump-sum payments from retiring police and fire officers than had been planned for, which required to be met during the financial year. Resources had to be found to match the demand.

Of course, the consequence of having paid those lump sums is that the longer-term, annuity-type requirements will be lower. In essence, there is a financial peak, which crystallised in this financial year. It might well crystallise in 2012-13, but in the budget documents for 2012-13 we have a set of assumptions about how the issue will take its course. Demand clearly exceeded our original expectations, but in essence, the factors that drove the change arose after the settlement of the budget.

Thank you, that was helpful.

In relation to the census, there is a one-off transfer of £6.3 million to National Records of Scotland. Was the census more expensive than was anticipated, or did something extraordinary happen?

We simply decided to utilise a mechanism whereby we applied the strongest financial controls to the census that we could apply. The census is a one-in-10-years enterprise, so I was not particularly keen to allocate resources in advance, because these things can often stretch to fill the space—I say that delicately. I gave a commitment to fund the census, but I wanted to exercise as much financial control as possible over the sum total. The census came in at a cost that was consistent with our expectations.

Stretching to fill the space is classic Matherism—Matherism at its best.

I have learned much from Mr Mather over the years.

As have I and many other people.

The table on page 30 of the spring budget revision document shows a transfer of £7.5 million into the “Parliamentary Business and Government Strategy” portfolio. If I understand it correctly, the money goes into “Strategic Communications”. In your paper to the committee, you explain that the transfer is

“to ensure optimum efficiency”.

In one of your speeches on the 2011-12 budget—I cannot remember whether it was at stage 1 or stage 3—you said that that budget had been cut from about £10 million to about £5 million, for reasons of efficiency. I think you said that the Government must cut its own cloth and so on. If it was right to cut the budget at that stage, why are you adding £7.5 million now, which I think takes the budget above the level of previous years?

I am happy to go through the details on that. On 5 August 2010 I wrote to Mr Welsh, who was convener of the Finance Committee at the time, making clear to him that I had reduced the total of the Government’s budget for social advertising and public information from £13.4 million to £6.695 million. The £6.695 million figure was the one that I continued to assert for the 2011-12 financial year.

I also decided to strip out of the Government’s budget the central core marketing budget and distribute that by portfolio. That put the onus on portfolio ministers to determine whether they really, really needed to undertake particular marketing expenditure, given that the money would come not from some amorphous marketing pot but from portfolio budgets. That changed the balance of decision making, so that portfolio ministers had to be absolutely certain that they wanted to run a campaign. In total, such spending would have to come in at the generic total of £6.695 million.

I appreciate that £7.5 million is higher than £6.695 million. The figures are an amalgam of two different elements. The £6.695 million relates to social advertising and public information. That includes, for example: £1.2 million on zero waste; £0.7 million on road safety; £0.6 million on the detect cancer early initiative; £0.5 million on awareness of organ donation; £0.4 million on smoking cessation; £0.4 million on recruitment of children’s panel members; £0.3 million on alcohol behaviour change; £0.3 million on the no knives, better lives campaign; £0.2 million on the debt arrangement scheme; £0.2 million on early years activity; and £0.2 million on ready for winter. Those are all the kind of campaigns that come into the £6.695 million budget.

Within the £7.5 million is £1.4 million for marketing Scotland internationally, which relates to the work of organisations such as Scottish Development International. That is not social advertising or public information; it forms part of a completely different work stream.

The reason for all that expenditure coming under the same ambit is that I require all such spending to be done through a central purchasing function in the Scottish Government so that we have a single, highly efficient and successful media buying outlet that gets us the best value, which, in this context, is often the lowest price.

11:15

With that in mind, what will the strategic communications budget be for 2012-13? Will it be as it was set out in the documents accompanying the Budget (Scotland) Bill, which we voted on a month or so ago? Do you anticipate money being put back into that budget in the autumn or at some future point?

I certainly do not intend to spend any more money on public information and social advertising in 2012-13 than was spent on it in 2011-12.

Pages 82 and 83 of the spring budget revision deal with the pension schemes for teachers and NHS staff. One page identifies a “Reduction in Scheme Liability” of £20.5 million, while the other identifies an

“Increase in Scheme Liability and Current Service Costs”

of £29.1 million. Can you explain what that is about?

That is a technical adjustment of £8.6 million, which reflects changes to the income assumptions that underpinned the budget and a reduced level of receipts from NHS employers in respect of advanced funding for early retirement. It is essentially just a reshaping of the pension budget.

The money for teachers’ and NHS staff pensions comes from annually managed expenditure—that is how they are funded—whereas police and fire service pensions are funded from the departmental expenditure limit budgets.

I see that £2 million is allocated to local authorities for dealing with potholes. I assume that that money will be allocated through COSLA. Do you foresee it being allocated in accordance with the redistribution formula or will individual authorities bid for it?

I am aware that, recently, some authorities have put additional moneys from their own capital plans towards road maintenance. Will an element of match funding be looked for or will it simply be a bidding process?

I am trying to remember what the mechanism is. We will agree the mechanism with COSLA. The last time we did this, which was in the last financial year, we agreed the mechanism, which was either the length of road or the volume of car usage in authority areas. I cannot recall which of those intricate calculations was used, but I will confirm that in writing to the committee.

Does that mean that, in effect, you will have an agreement to ring fence the money for potholes, rather than it going into the general local government pot?

Mr McDonald made the point that many local authorities are already involved in filling potholes. I will certainly not be ring fencing that £2 million; I will be allocating it on the basis of the mechanism that I have alluded to, but it will be up to local authorities to decide their priorities.

I have a very brief question. Cabinet secretary, you have already alluded to health, wellbeing and cities spending. I appreciate that the “Miscellaneous Minor transfers” row at the bottom of page 18 of the spring budget revision document will cover a range of things, but can you clarify what transfers might come under that heading?

I certainly can. Without counting them all up, I think that there are about 25 different transfers coming in and going out. For example, there is a £900,000 transfer to the education portfolio for additional clinical and pre-clinical teaching places at Glasgow and Dundee dental schools and a transfer from education to Social Care and Social Work Improvement Scotland for regulatory fee income. The highest transfer is £900,000; three of them are £100,000; five of them are £200,000 and so on. They are all relatively minor and relate to payments for dental places, nursing places and whatever and costs coming back into the health portfolio for drugs-related activity and so on.

So the exchanges are quite normal.

Yes.

As the committee has exhausted its questions, we move to the debate on the motion. I invite the cabinet secretary to move motion S4M-02165.

Motion moved,

That the Finance Committee recommends that the Budget (Scotland) Act 2011 Amendment Order 2012 [draft] be approved.—[John Swinney.]

Motion agreed to.

The committee will communicate its decision formally to the Parliament by way of a short report that provides a link to the Official Report of this debate. Are members content with that approach?

Members indicated agreement.