Finance Committee, 14 Sep 2004

Meeting date: Tuesday, September 14, 2004

Official Report 235KB pdf

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Committee Away Day

Agenda item 4 is consideration of a paper that minutes decisions that the committee made at its away day. We will also consider some papers that have been produced by our adviser, Professor Arthur Midwinter, on efficient government to supplement our discussions on the away day. I ask members to deal with the recommendations that are made in the paper, which are largely to do with the committee's pattern of working and its future business. The recommendations are set out in the briefing paper on working practices and the future work programme. Members have discussed the matter extensively, and I ask for agreement on that.

Members indicated agreement.

There is one issue for clarification. The third bullet point under item 7 of the future work programme is:

"To incorporate issues surrounding capital spending".

That should say "planned capital spending" across the portfolios. The issue that was raised was really the planning and co-ordination of capital spending across the portfolios—not the fact that money is spent, but how effectively that spending is planned and co-ordinated.

Could I ask a question about that?

Yes.

I am not sure how directly it will affect me because I do not know whether I will be a member of the Finance Committee for that much longer—

Shame.

Counselling will be available, Jeremy.

I wanted to raise a point about the future work programme in relation to planned capital spending. One of the growing concerns about financial issues is just how much the private finance initiative is costing Scotland. Can the figures for all the PFIs be presented to the committee, as well as a clear statement of how much it will cost to pay for those gigantic mortgages during the years ahead? Could we ask the Executive to give us the figures on that?

We can ask for an update. The Executive produced those figures about 12 months ago.

The figures would have to include not just those PFIs that the Executive is initiating, but those in education and health for schools and hospitals. All those figures should be brought together so that we can see the whole picture and how much we will have to pay back.

That is reasonable.

On relocation, we have the report from Mr Scott that came out yesterday. Is there anything else that we should say about that?

In light of the response for the debate tomorrow, and given the fact that the committee is considering its future work programme, the committee might want to consider whether it wants to factor in some additional sessions on relocation. The deputy minister, in his response, offered to clarify and confirm the issues with the committee as guidance is developed.

I suspect that we might well do that. In my view, we have received an interim response and there are certainly issues that we will want to pursue. Are members agreed that we should factor in some sessions on relocation?

Members indicated agreement.

The report was an interim report, in the same way that the Fraser report will be when it is published tomorrow.

We wanted to take up with the Executive several issues concerning the content of financial memoranda. We have discussed that, so I assume that members will be content if I write a letter to express our concerns about the quality of the evidence that is used to underpin financial assumptions and the information regarding wider initiatives in the Executive in particular. We should note formally our agreement that we want to scrutinise financial statutory instruments when a large cost would follow on the enactment of a bill. The Executive would not then be able to get around the financial memorandum process by putting off the cost analysis until a later statutory instrument was laid. We will advise the clerks and raise the issues about members' bills that we mentioned in correspondence with the Executive. Are we agreed?

Members indicated agreement.

Thank you.

Next we will consider the papers from Professor Arthur Midwinter, which update us on developments since the stage 1 budget report. The papers are very interesting. There is also a supplementary report on efficiency targets. Professor Midwinter can add to what is in the papers before I invite questions from members.

When I was preparing for the meeting yesterday, I realised that we now have a number of papers relating to the matter, so at the last minute I produced a set of notes for myself to talk across the papers. When members leave the meeting, they should have a clear indication of where there is factual agreement and of the areas that are contested.

At the away day, we decided that we would seek agreement with the Executive on how the process would be managed, how progress monitoring would take place and how the Executive would report to the Parliament on its performance on the matter. In addition, because of the conflicting statements that have been made in the past fortnight from within the Executive, it is probably important to add the process to the list of things that we should discuss with officials in the first instance, so that the committee gets full and proper information when ministers come to see us.

I shall summarise across all the papers that we have. There is a paper on Gershon, one on the efficiency targets and a supplementary note. The scale of growth from the spending review is 3.5 per cent per annum. Let us be quite clear about the fact that, from that spending review, Scotland did not get any efficiency targets from the Treasury. The Treasury cannot set efficiency targets for Scotland. As the committee's adviser, I would like to say that there is no financial imperative for those efficiency targets. There is no financial reason why the Executive has to pursue the targets at this time, given the fact that the 3.5 per cent real-terms increase is still historically the highest in the post-1976 era.

Statements were made initially about the fact that there would be no job loss, and then reports appeared in the press saying that there might be job loss. I tried to clarify that with my contacts in the Executive before coming to the meeting, and the latest advice that I have is that, although the Executive has no target for job loss—unlike the UK spending review, under which each department has a target for the number of jobs to go—it may nevertheless be necessary, in order to reach the savings target, for there to be job loss. The position is not as clear cut as saying, "There will be no job loss," or "There will be job loss." The Executive is saying that it may be necessary to have job loss in order to meet the savings target.

There has been confusion about the target. Statements were made initially that the target was £500 million in total. Then, according to reports in the press, the target was 2 per cent per annum over three years. In my supplementary blue paper, I have done the calculation for members to show what 2 per cent per annum over three years would mean in real terms, and the total is £1,450 million, not £500 million. Suggestions that the Executive target is tougher than Gershon seem to me not to be grounded in the data that are in the public domain. The figure for cash savings from Gershon is around 4.4 per cent of the budget in Whitehall, and the target for Scotland is 1.96 per cent of the departmental expenditure limit.

We should be clear that, although the initiative is being presented as Scottish, the areas that have been identified for potential savings are precisely the same areas that were identified by Gershon—procurement, back-office reform, transactional services and looking at policy funding and regulatory regimes. We are aware, for example, that there will be a merger of the two funding councils for higher and further education. From a total spend of £1,300 million, the councils between them spend £8 million on administration, so I am as sceptical as ever about the system's capacity to deliver savings if it focuses only on administrative costs. In particular, because £3 out of every £4 goes on staff costs, I am sceptical about the capacity for reaching the savings target without impinging on staff costs.

The committee must ensure that it agrees with the Executive a rigorous and transparent approach to reporting performance, so that the committee can monitor not only progress against the targets but the impact on jobs and services. To date, I still have doubts about the feasibility of the targets and the discussion has been largely at a level of vague generalisation. Only when the papers that come before us get down to specifics can we make a serious judgment about the potential for meeting those targets.

Thank you very much.

The papers that you have given us are useful, at least in setting the terms of what the committee needs to do. It is important, though, to focus on the timescale. The Minister for Finance and Public Services will be before us in early October, and there are a number of issues arising from your paper on which we will be able to question him. I assume that we will get further information about the efficiency targets and processes that are involved as part of the spending review announcement, so there will be more detail then.

Of course, we have just agreed to have an inquiry into efficient government, so in a sense we are mapping out a whole year—or certainly six or seven months—of analysis of the issues. We will be able to get down to details and test the claims that are being made and the parameters that you have highlighted. We could be convinced by the Executive but, to summarise what you said, the issue is that we are not convinced yet, on the basis of the information that we have.

I make a plea for clarity. The papers are helpful, but I am struggling with some of the data in the one entitled "Budget Process 2005-06 - Supplementary Note on Efficiency Targets". The final sentence in paragraph 2 states that there would be

"a total savings target of £21.5 billion"

down south—then the percentages flow in. I am struggling in audit-trailing those percentages home to roost to understand their basis. The 7.3 per cent is—

Over three years.

The cash saving element would deliver 4.4 per cent over the three years.

I amplify my plea for clarity in relation to paragraph 3. I am, sadly, more numerate than literate and I would appreciate the percentages being laid out in a tabular form so that I could get my head round them and start to differentiate between the 1.96 per cent and the 2 per cent and between the annual figure and the figure over three years. I totally accept that Arthur Midwinter has an absolute grasp of that, but I do not.

We will work towards greater clarity. Obviously, as the Executive releases data, that can be taken forward.

I found the papers helpful, if somewhat concerning. If Professor Midwinter is saying that there is no financial imperative to the efficiencies and that they are not necessary, why on earth are they are being made? Is it just because people think that efficiencies must be a good idea? Has a rigorous analysis has been done on the level of efficiency savings that are possible or desirable? Paragraph 4 in the supplementary note on efficiency targets states:

"I raised my concerns with Finance Co-ordination and learnt that their current assumption is that all of the £500m will be in cash-releasing savings."

Unlike the UK Treasury, finance co-ordination is not assuming that 40 per cent of efficiencies will be about doing things better—being more efficient in terms of output, but not necessarily saving money. I am slightly puzzled by that. Do you think that 100 per cent of the savings will be cash releasing?

Like you, I am not certain that that information is accurate. It is the most recent that I have received, although I have received information that there would be non-cash-releasing savings as well, through more productive use of time. The principle needs to be cleared up with the Minister for Finance and Public Services when he comes before the committee in October. As I understand it, the latest position is that the £500 million will be in cash savings. I am not 100 per cent sure why that is the position, but I understand that one of the reasons given is that some of the potential savings that were identified in Whitehall—those that are about rationalising back-office functions, supervisory regimes or whatever—do not apply in Scotland because the Parliament inherited an Executive that was already a single department. For example, one of the recommendations in England is that every department should have a procurement office, but the Scottish Executive already has a procurement office, so it is saying that some things have been done already.

It sounds almost as if the possibility that the process could be improved has been ruled out.

My view is that any manager in the public sector who is worth his salt will be looking for these things on an on-going basis. It is in the interests of the programme manager to release the resources to the front line. Some of the examples that we have been given—for example, ensuring that policemen's time is more productive, which I mentioned at the away day—probably would have happened anyway. They have just been rolled up into an initiative. It would be idle to speculate on the motivations behind that at this time. We should pursue it with the Minister for Finance and Public Services. However, I still have doubts as to whether the Executive is looking for non-cash-releasing savings. I have heard two different versions.

It is up to the committee to ask the minister that question when he comes. We are just flagging that up as an issue for us to take forward.

If they have been reported accurately, the statements from the ministers in the press conflict.

Your update of developments paper states:

"The Scottish Budget … will not be affected by the Whitehall efficiency reviews."

What happens if the Whitehall efficiency reviews do not bring about the savings that are wanted? My understanding is that the Chancellor of the Exchequer's announcement was predicated on the targets being met and funds being released. If the targets are not met, the cash will not be put into front-line services, so potentially we will not get the consequentials. Is that right?

That is not the case in Scotland. I do not know whether that approach has been adopted in England. The statements to which you refer are vague on that point. The position in Scotland is that, under the devolution settlement, the block grant is transferred. If, for example, our attempt to save £500 million was not successful, the totals would not be affected at all. All it would mean is that fewer resources would be released for redistribution within the budget. There is no way in which, having determined what the allocation will be through the agreed Barnett arrangements, the figures can be altered. We have our three-year figures in the spending review. The assumption is that any savings will simply be diverted into front-line services. The committee has a crucial role to play in monitoring that.

I do not know the position in England, but I would not be surprised if it is not as you think it is. You seem to think that, if the targets are not met in England, the spending programme might have to be adjusted. I am not sure that that is the case. It is definitely not the case here, because I have cleared it with officials.

How do we find out? It is important.

I am not the adviser for the UK spending review.

No, but I am seeking advice.

I can check with finance co-ordination, which will know the position in England. However, the position in Scotland is that we get the Barnett transfer, we have the totals and the budget and, if the savings targets are not met, the money simply will not be released to front-line services.

But we are dealing with the Barnett consequentials from an announced programme, predicated on efficiency savings as part of the review that the chancellor announced. If the review south of the border is unsuccessful, inevitably the money will not be put into public spending south of the border, so we will not get the consequentials.

Once the figures are set for three years, that is it.

The issue that you raise, Jeremy, would come up at the next spending review and would depend on the profile of savings. Currently, the figures have been set on the basis of three years. There might be internal adjustments south of the border within that three-year period, but the overall settlement for us has been set on the basis of a single projection.

So it is ring fenced.

Yes.

I agree that the information in the UK spending review is not clear on this matter, but my expectation is that the Westminster Government will operate to a similar set of rules to ours. I cannot believe that it has set three-year figures but will adjust them if savings targets are not achieved. That would not be in keeping with the strategy of trying to strengthen long-term planning in the budget. We do not know, but we will pursue the matter. I will send a note to the committee after I speak to officials.

I am sure that Arthur Midwinter would not like me to put words into his mouth, such as that he is "openly sceptical" about the chances of achieving the Executive's targets without significant job losses. He would not be able to say that, but it is what I would say.

Paragraph 16 of the update on budgetary developments states that the problem is exacerbated by the fact that

"staff costs account for 50% of the Scottish Budget".

In other words,

"the savings will all have to be made in the £13 billion of other costs in the Budget".

The real efficiency target in percentage terms is therefore far bigger than the Executive says if it means to achieve the target without job losses.

That is accurate. In my broad experience, it is very difficult to deliver significant savings in public sector budgets if the staff cost element is excluded.

You go on to make the point that, as local government and the health service together account for more than £15 billion of spending and as both those services have gone through structural and organisational reform, a lot of the savings should have been achieved in any case. Yet again, that makes achievement of the targets that much more difficult.

Savings assumptions were built into both reorganisations in the past decade. We are now talking about the scope for sharing the funding of services between councils, trusts or boards rather than saving by merging them, which is what happened in the two rounds of reorganisation.

A point that occurs to me is that, to some extent, part of the scepticism comes from the relatively limited budget that is assigned against administration. It is possible to envisage savings from some kinds of administrative rationalisation that affect other budget lines and what might be budgeted for as operational procedures—I am thinking of time saving and pooling certain kinds of job that are not narrowly within the administrative category. We must pursue those issues with the minister. We must ask whether that is what he means, or whether he means something different.

My job was to interpret what the Executive said publicly. What was said publicly was that the savings will be made in cutting waste in duplication and bureaucracy, but I have doubts.

We must pursue what the Executive means.

I take it from what we have heard so far that there is, as Ted Brocklebank indicated, a degree of scepticism or fear about the authenticity of the figures. Arthur Midwinter does not give me the impression of being a happy chappie about the information that he has received, and we rely heavily on his guidance. We have now moved from the primary Parliament into the secondary Parliament—we have gone up a scale. I know that it is against his thinking, but surely until such time as we have fiscal autonomy in Scotland, we cannot get our teeth into the figures that really matter—we are working on the periphery. Does Professor Midwinter have any thoughts on that?

You may say that, but I could not possibly comment. I do not want to answer that specific question, because it is outwith my remit and my position is well known anyway. On what you say about getting the feeling that I am not a happy chappie and about the lack of clarity in the information, what I am totally signed up to is the underlying promise of devolution to deliver a more transparent system. Every now and then, there is a hint that we feel that we are not getting the full picture in some of the information that is provided. There was a similar episode a couple of years ago when the money was being double and treble counted. The Executive accepted the committee's recommendation and stopped doing that for a while.

I am certainly sceptical about whether the savings can be delivered and, in particular, about whether they can be delivered without impinging on staff costs. Although it is easy to describe people who work in central bureaucracy as bureaucrats and so on, what they do in supervising the operation of services is crucial to all the aspirations that we have for the delivery of those services. Seventy five per cent of the costs of the administration budget are staff costs, so if there are to be job losses, we need to know why and what the impact will be on services. If there are to be no job losses, the chances of delivering the target recede. You are correct to say that I am not a happy chappie.

We need to be cautious about extrapolating too much from limited information. We do not have the full set of information about what the Executive intends to do. Before we reach final judgments on any of these matters, we need to probe the Executive along precisely the lines that Arthur Midwinter is suggesting, to get a detailed indication of what the Executive is proposing. It will then be up to the committee to make a judgment about whether that is feasible, realistic or otherwise.

The supplementary note exposes the Executive in various ways. It contains a mass of contradictions. The paper destroys the claim that the Scottish Executive's efficiency targets are tougher than those of Whitehall. There is also the vacillation and confusion between the Minister for Finance and Public Services and the First Minister about whether or not there should be job losses. That seems wholly unacceptable, given that we are talking about people's livelihoods. On a good day, the Executive's financial statements amount to a guddle; on a bad day, they amount to a boorach. That is what we are facing.

I would like to ask Arthur Midwinter about the process by which we can and should seek to ensure that public money is not wasted and is not used to little or no effect. Over the past year and a bit, I have argued that money has been wasted. I will give one example of that. I do not think that it is correct for public money to be used to pay people 10 grand to relocate their jobs and then to pay them another 10 grand a year later—in the case of Scottish Natural Heritage, that is not a good use of public money. I give that example, as it is easy to make statements without backing them up.

What concerns me about the general process is that targets are to be set for each department. Presumably that means that the top civil servants or the chief executives of quangos will be asked to provide reports and to identify where savings could be made. That seems to sum up the whole problem about devolution: it is top-down decision making. The one thing that we can be sure of is that directors will still get their bonuses, while the staff get the P45s.

I ask Professor Midwinter whether he thinks that it would be sensible to incorporate in any drive to use public money properly a whistleblower approach, whereby employees—ordinary folk working in the public sector—are asked to say where money is being wasted. This is an important question about process. Nowhere in the Executive's paper do I see mention of any involvement by ordinary working people in identifying where money has been wasted. My own day-to-day experience suggests that those people often know best, and better than management, where money is being wasted. If we could encourage whistleblowing as a useful civic responsibility and duty, would not that form a useful part of any process of identifying efficiency savings effectively?

That is provided that staff are careful not to be in breach of their contract, which is often a problem when it comes to the restrictions that are placed on them. I certainly agree that there is a strong case for widespread staff involvement in considering such matters, rather than its simply being left to the top managers to deliver and impose from above. I think that there is a wider case for involvement by members of the Parliament in considering the detail before it is delivered.

That is exactly the role of this committee.

Yes, in effect: to consider the options and gauge their acceptability.

You raised a serious technical point, which might concern Executive staff: that people might be in breach of contract if they speak out. Is it not incumbent on the Executive to give clear guidance, so that people who speak out will not be in breach of their contract, will not be victimised or punished and will have immunity, and to say that any contracts that say otherwise should be altered?

I am not sure that that is a question for Arthur Midwinter to respond to. It is more of a political point, which members could address.

As a point of principle, the Executive ought to encourage widespread involvement from its staff in such matters. Every member of staff will be affected by the changes.

But staff will not be able to be involved if they might be in breach of contract. Rightly, they will be afraid to speak out. That has been the curse of whistleblowing throughout the ages. Every week, we read in the press about people who have been punished for speaking out. Unless we—and, more to the point, the Government—give a lead, whistleblowers will still be discouraged from performing the useful function that we surely all agree should be part of any process of this nature.

As a point of fact, the ministerial statement that announced the efficient government review made it clear that the review was of all staff within all departments. From discussions with staff in my local authority at all levels, including the chief executive, I know that all staff are able to submit proposals for the better management of the front-line services that they run. There are clear processes for contacting Audit Scotland if people have fears about horrendous waste of public funds from an auditing point of view. As far as the efficient government review is concerned, staff involvement both was mentioned in the statement and is being put into practice.

We have probably exhausted all the questions that we had for Arthur Midwinter. Jim Mather has one final question.

Paragraph 13 of Arthur Midwinter's paper "Budget Process 2005-06: Update on Developments since the Stage 1 Report" focuses on procurement. I want to ventilate my concern about that issue. Having been on the receiving end of mailings from information and communications technology companies, print associations and people involved in public-private partnership deals, I wonder whether those procurement savings might damage Scottish suppliers. If the procurement contracts go to bigger suppliers elsewhere, there might be a double whammy. Not only might the private sector in Scotland contract by some of that £200 million but, if the savings are made effective in the south rather than up here, the size of our public sector in Scotland might continue to diverge from that of the UK. That could badly damage our competitiveness. Given that the recent International Institute for Management Development survey showed that Scottish competitiveness is 36th out of 60—by comparison, the UK is 22nd—I worry that there might be a further divergence on all those counts.

As I am not an expert on procurement, and given the way in which the issue has developed, I think that the committee might want to seek the expert help and research that was discussed at its previous away day. The £200 million saving is a big chunk of the £500 million target. Given that the Scottish Executive already has a procurement office, the situation here is not like that in England. We ought to get some decent background papers on how the process operates at present and on the scale of the arrangements that are involved. I see where Jim Mather is coming from, but I am not sure that, under the rules that govern the allocations of contracts, the Government can take into account the kinds of things that he has mentioned. However, we ought to get some clarity about the process by bringing in some expert help.

We have agreed to launch an inquiry on efficient government and the clerks will produce a paper to set out the inquiry's parameters. Perhaps Jim Mather's points can be incorporated when we consider the remit of that inquiry. I thank Arthur Midwinter for all his work.

As we agreed previously, we will move into private session for the final agenda item, which is consideration of the appointment of a budget adviser.

Meeting continued in private until 12:15.