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The next item on the agenda is evidence on the budget process 2007-08. I welcome George Lyon, the Deputy Minister for Finance, Public Service Reform and Parliamentary Business, to give evidence on the local government finance aspect of the budget. David Henderson, the head of local government finance, and Graham Owenson, team leader for local government expenditure and grant distribution, are here to support Mr Lyon.
I am pleased to give evidence on the Executive's detailed spending plans for local government for 2007-08, as published in the draft budget 2007-08. I remind the committee that these are draft proposals at this stage. We will reflect further on our plans in light of that and the consultations that are taking place with portfolio committees. I will restrict my comments to my overarching responsibilities for local government funding. Responsibility for individual services rests with individual portfolio ministers.
The most significant thing that the majority of people will want to know about in relation to your statement today and the decisions that you will face over the next few weeks is probably the local government settlement for 2007-08. In your introductory remarks, you acknowledged the Executive's willingness to look into the issue again, provided you are convinced that local government is taking the efficiency agenda seriously.
Far be it from me to speak about press speculation and what may or may not be announced by Mr McCabe when he makes his local government finance statement. The important point to recognise is the substantial increase in local government support, which is up 55 per cent since devolution. There is a 2.9 per cent cash-terms increase this year, which is a small real-terms increase. We have said on a number of occasions that we are willing to consider going further. Discussions have been held with COSLA on its views. I am not in a position today to say exactly what any extra moneys will amount to; that will be for the Minister for Finance and Public Service Reform to announce to the Parliament once decisions have been reached.
Can you tell us either today or when the Minister for Finance and Public Service Reform reports to Parliament whether it is the Executive's intention to indicate the level of council tax increase that you expect local authorities to work towards, given the financial settlement that the Executive will put forward?
As you will be aware, following last year's discussions about council tax we ended up with the lowest percentage increase in council tax since devolution. We will encourage councils to bear down on council tax once again this year. Part of that discussion will be recognition of the fact that extra money might be provided. We expect such bearing down on council tax to continue in 2007-08.
What would you regard as an acceptable average figure?
I do not want to comment on that. As you well know, that is a matter for councils. The clear message from central Government is that we welcomed the bearing down on the council tax figure last year and we hope that that will continue in the forthcoming year, given that extra finance might be made available.
I ask the question because last year the Executive made it clear that it expected local authorities to set council tax increases at the lower end, below the rate of inflation. Some councils achieved that and some exceeded it by quite a margin. Do you have a view on whether all local authorities delivered on that equally? Are you prepared to be critical if you think that some local authorities are not taking the efficiency agenda seriously and are burdening council tax payers instead of dealing with their financial strategy properly?
I am sure that when the Minister for Finance and Public Service Reform makes his statement he will comment on the issues that you raise. However, until decisions are taken, our clear view is that we want the bearing down on council tax increases that we saw last year to continue.
I want to ask the minister about non-domestic rates and the figures in table 7.05 in the draft budget. As we all know, business rates—non-domestic rates—are collected by local authorities, paid into a central pool and then redistributed. We also know that the poundage in Scotland was raised in the first year of devolution by the then Minister for Finance Jack McConnell—who has since gone on to higher things—so that there has been a higher business poundage in Scotland than in England. I understand that, next year, that increase is to be reversed, so we will revert to the English poundage. With reference to the planned non-domestic rates figure, which is £1.779 billion in 2007-08, what business rate poundage does that assume shall apply in Scotland?
The objective was clearly stated in the First Minister's announcement that we will equalise the rates in Scotland and England over a two-year period. The first step towards achieving that objective was taken last year. We intend to announce in due course the poundage rate that will achieve the target that we have set. I argue that that will give not only a level playing field but a competitive advantage to Scottish business, as valuations tend to be lower in Scotland than in England.
Let us park that assertion, with which I disagree.
The assumption underlying the achievement of that equalisation with England and Wales is based on inflation. When the rate was set, the underlying assumption was that inflation would be around 2.5 per cent.
Can the minister, Mr Henderson or Mr Owenson tell us what figure for the poundage in Scotland will apply in 2007-08? What is the figure, please?
That will be announced once the rate down south has been confirmed.
No, minister. There must be a figure on the basis of which the total of £1.779 billion has been calculated. I am not asking the minister to state what the announcement to Parliament will be: I am asking him to state a matter of fact. I am asking the question for the fourth time. I accept that the minister cannot be expected to have all the information at his fingertips, but I assume that Mr Henderson and Mr Owenson know the figure although, thus far, they have chosen not to share it with us. Now is your opportunity to do so, please, gentlemen.
I do not have the figure with me today. The figure is available and we can give it to you in writing. As the minister said, it was calculated on the basis of an inflation rate of 2.5 per cent. In the past, the English poundage has been uprated year by year on the basis of the retail prices index. The assumption was that the RPI, as it stood a year ago, would be what the English rate would go up by, therefore that was the figure that was assumed for the calculation in table 7.05. What I do not have, I am afraid, is the figure for the pence per pound to which that equates, which is what I think you are looking for.
The English rate for 2006-07 is 42.6p. I do not have the ability to calculate quickly in my head 2.5 per cent of 42.6p.
I am sure that the information is readily available. If you could get it to us in correspondence before next week, that would be helpful.
Yes. I am sorry that this has taken so long, convener. I thought that the information could have been provided at the beginning.
Our commitment is clearly to equalise the poundage rate in Scotland with that in England and Wales. Once the figure is announced down south, we will equalise the rate in Scotland to provide not only a level playing field but a competitive advantage to Scottish business. That is our intention. That is what was announced by the First Minister, and that is what will be delivered.
Okay. Let us stay with the subject of business rates. Mr McLetchie and I attended an event that was hosted by Edinburgh Chamber of Commerce about two weeks ago, at which it announced that a deal had been struck, or was going to be struck, to provide rates relief for businesses in Edinburgh to compensate for the disruption that the construction of the one and a half trams is going to cause to businesses, especially on Princes Street and Leith Walk. That struck me as a rather odd way to make such an announcement. I appreciate the fact that the minister was not at that meeting, although the Minister for Transport was. However, can he help us out by stating whether an agreement has been reached to grant rates relief to businesses in Edinburgh in respect of the disruption that may be caused to them by the construction of the trams?
I am not aware of any deal being struck. It may be that the City of Edinburgh Council has been in discussions with the chamber of commerce, in which case you had better direct your question to the council. I certainly have no knowledge of such a deal being reached with the Executive.
Thank you, minister. That is the answer that I expected. If the City of Edinburgh Council has reached such a deal, is it for the council to pay the cost of it?
I expect that that would be the case. I am not aware of the council being in any direct negotiations with us over the matter, but if it has been I will clarify the matter for you, Mr Ewing.
Thank you.
Both you and the Minister for Finance and Public Service Reform have accepted that the settlement for 2007-08 is tight. What do you mean by that? What are the most important factors that will influence whether you revisit the settlement and deliver more finance to local authorities, given your recognition of how tight the settlement is?
We have used the word tight to describe the level of the settlement relative to the settlements in other years. As I explained, direct Government funding to councils in Scotland has increased to a record level, in real terms, since devolution. However, we recognise that, although 2.9 per cent—which is the indicative figure at the moment—is still a real-terms increase, it is at the lower end in comparison with the substantial increases that were delivered over the preceding seven years. In that context, the settlement for this year is tighter than those in previous years. That is why we made a commitment to engage with local authorities to discuss whether we might revisit the figure. Of course, that is predicated on efficiency savings.
You did not address the second part of my question. What are the factors that bear most on the Executive in relation to the extra funding that you are considering? What specific factors require you to revisit the settlement?
I gave you the context for our revisiting the settlement. COSLA provided a substantial list of funding pressures, including the increase in fuel prices and a wide range of other pressures, and we have been in discussions about them. However, we have not prioritised them and said that one is more important than the others. There is a general view that we need to address the range of pressures that local authorities face, and we are willing to engage in constructive discussions to see whether we can reach an agreement about going beyond what was set out in the 2004 spending review.
According to the Scottish Parliament information centre, total managed expenditure has increased by 19.1 per cent during the Parliament's lifetime, but expenditure on local government has increased by only 5 per cent. The increase in local government expenditure has been considerably smaller than the overall increase in the Executive's budget. Has the Executive made a conscious decision not to increase local government expenditure in line with increases in the overall budget?
Our position is quite clear: since devolution there has been a dramatic increase in funding for local government—an increase of 55 per cent. We have prioritised health spend, so expenditure on health has grown slightly faster than expenditure on local government, but nevertheless there have been substantial increases in the settlement for local government. Those increases must be seen in the context of the even greater increases that have gone to the health service, which I am sure you support.
You recognise that local government is under pressure and that it has not had similar increases to the Health Department or other departments.
We had a long debate about that last Thursday and there was relative consensus throughout the Parliament that the matter is the sole responsibility of local government. I am pleased that, in the evidence that local government provided to the Finance Committee, it said that at least £250 million of its £1 billion reserves was unallocated and that that would provide an opportunity to meet the costs of equal pay and single status agreements. In the draft accounts that are starting to come from local government, we are beginning to see it allocate those reserves to meet the costs. That is appropriate and it is the correct way to proceed.
You said that the council tax collection rate had gone up to 93.3 per cent, which is welcome, but that still leaves a discrepancy of 6.7 per cent. Do you agree that the collection rate could be improved dramatically by our piggy-backing on the income tax system that is employed by HM Revenue and Customs?
That is one of the strong arguments that have been made in favour of the system to which you refer.
Are you aware of the advice from HM Revenue and Customs that moving towards such a system would cause it to incur significant costs? In addition, it is likely that primary legislation at Westminster would be required before such a system could be implemented.
I am aware that that evidence was given to the Burt committee. I am sure that we could engage in a debate on the subject for the rest of the afternoon, but I do not think that that would be appropriate.
Similar evidence was given to this committee during consideration of the Council Tax Abolition and Service Tax Introduction (Scotland) Bill, which was introduced by Tommy Sheridan. The information is available and is known within the Scottish political context.
Thank you, convener, for taking a supplementary question from me.
Do you want to come back in?
No, you have taken the words out of my mouth.
The minister will be aware of the problems of financing the free personal care policy, especially the controversy about the appropriateness or otherwise of charging for assistance with meal preparation and what constitutes meal preparation. There is evidence that if meal preparation is deemed to have been wrongly charged for by our councils—largely as a result of the confusing and contradictory advice that councils have received from the Scottish Executive—they may find themselves having to pay back £20 million to £25 million to people who have been wrongly charged. Without getting into the argument about meal preparation, can you confirm that there are sufficient contingency funds in the budget for 2007-08 to make a one-off allocation to councils to cover the cost of refunds, so that resolving this long-running problem does not impact on current-year services?
It is not for me to speculate on the outcome of the debate, so I will not comment on that. It is up to the Convention of Scottish Local Authorities in its discussions with us to decide what its priorities are. It is responsible for administering the elderly care budgets that are in its hand. We provided the funding that was requested by COSLA in full at the beginning of the spending review period. Clearly, if COSLA believes that the issue to which the member refers is a spending pressure, it will be part of the discussions that we have been having with COSLA over the past few weeks and months on how we may provide extra finance going forward into 2007-08.
Am I right in saying that, effectively, there is a contingency fund or reserve and that, if the Scottish Executive decided as a matter of policy to make an allocation for assisting councils to resolve the issue, it could be done?
The money for elderly care and free personal care is not ring fenced–it is for councils to make decisions on priorities. We provide an allocation through grant-aided expenditure based on estimates of what we believe to be the appropriate amount that each council should be allowed to distribute. If councils believe that they need extra expenditure in this area, I am sure that the issue will be raised in the negotiations that we are conducting with them about extra finance for the coming financial year.
Is there enough slack in the budget to make that possible?
We believe that we can provide extra resources to councils from within our current resources. If the funding of meal preparation is a priority for councils, we will respond to that constructively.
Yes, but councils' setting of priorities implies that they have the legal freedom to decide one way or another. If there was a legal ruling that councils had wrongly charged people, it would not be a matter of priorities or discretion but of their having to pay the money back—the councils could find themselves £20 million or £25 million short, so would the Scottish Executive consider some kind of contingency favourably?
Dependent on when the issue came to a head and the matter arose—it is subject to legal decision, as David McLetchie rightly says—the Executive's position would be, as it always is, that we would be willing to enter into discussion about funding. No doubt, if such a legal decision takes place before May, I or Mr McCabe would be involved in that; after May, it might be someone else.
Let us hope so.
Thank you for that. I will not take it personally.
Oh, no—I was talking about a change of complexion, minister.
The position is clear: we will reflect on the Burt report and, in due course, respond to it. I expect that the committee might want to take evidence on it at some stage in the coming months.
Is it correct to say that the Scottish Executive has no position and therefore has not rejected any specific proposal?
Mr McCabe made it clear during question time that we are still considering the Burt committee's report and recommendations and that we will respond to them in due course.
Is it your understanding that the local property tax that the Burt committee recommends is broadly similar to, or the same as, the tax that the Westminster Government has introduced for Northern Ireland?
I understand that it is similar and that Peter Burt drew some comparisons with the system that the United Kingdom Government has implemented in Northern Ireland.
Is the local property tax that the Burt committee recommends also similar to the local property tax that was given favourable consideration in the report of the Liberal Democrat tax commission, with which I am sure you will be familiar?
If you read that report closely, you will see that it stated that the idea is worthy of some investigation.
So, we can assume that the Executive parties have not ruled out a local property tax.
We have said that we will respond to the Burt committee's report and recommendations. I am sure that all parties will reflect on that report and, in due course, contribute their views on it.
Can I ask one further quick question on a related matter?
I will bring in other members first, because you have asked a good few questions.
Can I ask a question of you, convener?
No, you cannot, because I want to allow other members to question the minister on the budget, which is today's main business.
It is on a point of procedure.
Other members will get the chance to question the minister first—we will take questions of procedure at the end.
The draft budget highlights that, in addition to prudential borrowing, finance and public services reform—I assume that that is what FPSR stands for—direct spending on infrastructure investment and centrally supported borrowing will amount to £421 million in 2007-08. How does that compare in real terms with previous years? How is the prudential framework operating in practice? Could improvements be made to it?
The provision for local government capital includes the real-terms figure of £338 million that is outlined in table 7.02 and the capital figure—which is not set in stone—of £426.89 million in table 7.03. That figure is likely to increase as decisions are made and further capital is allocated, especially under the communities budget, where the transfer of managed fund expenditure on housing is still to be allocated along with a couple of other funding streams. The total capital funding that we have made available to local government is a combination of those two figures, but those do not include prudential borrowing. Since its introduction, prudential borrowing has been running at approximately £300 million per year over and above the capital figures that are given in the tables.
Actually, the £300 million figure for prudential borrowing refers back to 2005-06. The latest local authority estimates for prudential borrowing are £472 million in 2006-07 and £454 million for 2007-08. Inevitably, there will be some slippage, but those are the latest reported planned figures.
Those are moneys that are raised through charges and loans to secure the repayments of that funding, which is outwith the capital grants schemes.
Are improvements to the prudential framework needed?
I think the framework is working very well: it has provided local authorities with another important source of funding. Through innovative use of charging and revenues that are raised locally, authorities have also been able to carry out significant investment in infrastructure projects. After many years of constrained spending, I am sure that such investment is welcomed throughout Scotland. I am certainly not aware of any particular problems with the prudential borrowing scheme.
Councils have welcomed the scheme and the flexibility that it gives them.
Is any research taking place or due to take place in the near future to examine how the framework has operated and what might happen in the future?
We have no such research planned for the immediate future. Audit Scotland provides feedback on how councils carry out their business and we have issued a code of practice and guidance on how the prudential regime should operate. We monitor the scheme, but we have no immediate plans for research into how it is working.
I have a quick question on end-year flexibility. Table 0.09 shows that EYF will amount to about £24 million for 2006-07. Where are those shortfalls in spending under the various budgets likely to go? Some sizeable amounts of money are involved.
Usually, EYF money will be returned to the central unallocated provision unless other spending pressures require that the money be transferred internally. I do not know whether the question is about individual portfolios, but that is usually what happens. In the autumn or spring budget revision, any changes that have been made to the budgets are reported back to the Finance Committee.
When will we know where those moneys have gone?
The autumn budget revision order will possibly provide Parliament with a chance to look again at the issue.
Are we talking about next autumn?
No, the autumn budget revision order gives Parliament the chance to look at where allocations have been placed if there have been underspends—or, indeed, pressures—in any of the budgets.
Will the minister clarify how end-year flexibility operates? My understanding is that if a department has an underspend, it is allowed to take forward at least some of those resources into the next year and some are returned to the Minister for Finance and Public Service Reform to reallocate.
As I recall, 75 per cent is retained by the spending portfolio and 25 per cent is returned to the centre. During the year, individual portfolios can place money into the CUP if required, which is reported in the autumn or spring budget revision statements or orders.
How do you monitor efficiency savings? We all know that some councils are more profligate than others. When the energy efficiency drive began, some councils were already prudently managing their affairs, but some councils are now experiencing hardship in delivering services. How do you monitor that?
Councils have been successful in meeting their targets in the first year of the programme: indeed, they surpassed the target of £108 million that was set for year 1 and achieved £155 million in efficiency savings.
We do not monitor councils directly; the Improvement Service oversees the monitoring of local government efficiency targets. It produced a report last year for 2005-06, which is available in SPICe. It is doing more work for 2006-07 and those results will be available some time in the spring next year. In addition, Audit Scotland is reviewing the monitoring process and plans to publish a report on the 2005-06 work shortly before Christmas.
Will some councils reach a point at which further efficiency savings will be virtually nil even if they are prudent and still monitor how they work?
The evidence to date is that councils are more than achieving the targets. You must remember that a substantial amount of their efficiency savings is released for them to reinvest in front-line services. The money is not lost; it is generated to deliver the improved services that taxpayers and consumers want. The efficiency savings agenda is about releasing money within councils to reinvest in providing even better services on the front line. I am very pleased to report that local government has made significant strides forward in the first year and there is no expectation that it will struggle to achieve further efficiency savings in years 2 and 3.
The transforming public services agenda of which the minister spoke in his opening remarks, which includes bringing councils together to share services and work jointly, will also give more scope to produce efficiency savings that can be ploughed back.
In target 4 you refer to promoting Scotland overseas and the fresh talent initiative. As the completion date is March 2008, how far advanced is the target and do you expect to meet it?
We have made good progress in promoting Scotland's international image in several areas. We have a China delivery plan, a USA delivery plan and we are working on a plan for Germany. Ministers have promoted Scotland abroad on many occasions—the Deputy First Minister has just returned from China and the First Minister was in California recently. Part of that effort is to promote Scotland as a place to live and work. The fresh talent initiative has been successful in attracting substantial numbers of people who have chosen to relocate to Scotland. Although I do not have a detailed breakdown on the fresh talent initiative to hand, I am willing to give the committee further information.
I appreciate that answer, particularly the comments on the fresh talent initiative.
I assure the member that a substantial amount of work is done to test whether our promotion of Scotland abroad is working, and to develop the proper image of Scotland to promote abroad. Evaluation work is undertaken. I will provide the committee with more information on the issue, but a huge range of work is undertaken to promote Scotland abroad and to visitors when they come into the country; for example, through the images and slogans at international airports. Work is also done on whether that is effective. If the committee requires it, I will provide a breakdown of that work.
I have a familiar question—I do not know whether it is a perennial or a hardy annual, but it comes up every year. Over the years, the committee has taken evidence from COSLA about its starting point when it considers budgets. A problem always arises with agreement on the baselines from which we work. If we cannot get the Scottish Executive and the local authorities to agree on the starting point for the calculations, we are never likely to reach agreement on whether the budget is sufficient to meet local authorities' demands. Are we making progress toward agreement on the baselines or has it stalled?
In the minister's answer to the convener's question about resources for 2007-08, he referred to the on-going discussions with COSLA about pressures and what extra might be needed. Those discussions, which are positive, have involved an exchange of information on sums of money. For the forthcoming spending review, local government is preparing figures to submit to us next year, which will feed into ministers' and our thinking. We are talking to local government and, at this stage, I am not aware of any difficulties over the baselines for the figures.
Your budgetary plans for 2007-08 state that you will focus your resources on several matters, including
I am very aware of the concerns that have been expressed not only by Highland Council and Argyll and Bute Council, but throughout Scottish councils. A number of councils are under some pressure, particularly in relation to care of the elderly. One of our great difficulties at the moment is to agree baselines and what moneys should be allocated where. It has been confirmed that Argyll and Bute Council is spending substantially below the GAE figure for services for elderly people and that money has been reallocated into children's services. There seems to be a bit of disparity there. Work needs to be carried out jointly with councils to try to bottom out all of that. It is in all our interests to establish what the real costs are and, if possible, to try to benchmark throughout Scotland. I would hope that, working closely with COSLA, we can make some progress on that.
I thank the minister for his evidence to the committee. I thank also his officials, David Henderson and Graham Owenson.