Budget (Scotland) Act 2010 Amendment Order 2010 (Draft)
Good afternoon and welcome to the 16th meeting of the Finance Committee in 2010, in the third session of the Scottish Parliament. I ask everyone to turn off mobile phones and pagers, please.
As I am sure the committee will be aware, this is only the third time since devolution that we have had a summer budget revision. It happened previously in 2003 and 2004, and is largely a technical exercise. In common with the previous summer revisions, the proposed changes are mostly about the cost of capital. In 2003, the cost of capital was introduced for the first time. In 2004, the rate at which it was calculated was reduced from 6 per cent to 3.5 per cent. This year, it has been removed completely from all central Government budgets. The headline impact, as set out on page 5 of the supporting document, is a reduction in the 2010-11 budget of approximately £1 billion. However, that is a non-cash reduction for an item that we will no longer budget or account for and, as such, it has no impact on the Government’s spending power.
Thank you. I invite questions from committee members.
Will the minister clarify whether the Barnett consequentials from the last pre-budget report are the only part of the revision for which he technically needs to seek parliamentary approval and authorisation to allow the spending of the resource? I am sure that it is good practice to revise the budget to take account of the changes in the way that the information is presented, but they have no net effect on spending power.
I would have to defer to the parliamentary draftsmen on some of those issues. From my perspective, it is essential good practice to demonstrate at all times the up-to-date spending totals that we are managing. The practice that I and my predecessors have followed is that, when there are changes to published spending totals, we seek—expeditiously—parliamentary consent for them.
When you last appeared before the committee, we discussed the treatment of the 2010-11 budget and your decision not to take the negative Barnett consequentials—the reduction in spending for that year. We discussed whether you needed parliamentary authority in that regard, and you rightly said that you do not need parliamentary authority to spend less in the budget. However, today, you are presenting a revision in which, in every single area bar one, you are reducing the total. It seems an odd precedent. If you are asking us for parliamentary approval to reduce budget lines for the revision, would it not have been appropriate to give the Parliament the opportunity to approve or reject a decision not to reduce budget lines for 2010-11 as a result of those significant consequentials?
With the greatest respect, you rather ignore political choice. On the changes in relation to the cost of capital charge and IFRS, I am raising with the committee under the proper protocol material changes to budget issues over which I have no discretion. Clearly, I have discretion in relation to the public expenditure changes that the chancellor announced a few weeks ago, on which I have opted to take a particular stance. Obviously, I have explained that to the committee. However, the two cases are fundamentally different.
That is a very good rationale, although I do not entirely agree with it. Will we find the First Minister standing up and denouncing the fact that there is £900 million less in the budget, or is he fully up to speed with the fact that the reductions are merely technical, non-cash items?
As I am sure that Mr Brownlee well knows, the First Minister speaks authoritatively and emphatically on all these questions. I am also sure that Mr Brownlee will enjoy the First Minister’s remarks on this and all other subjects.
I have the luxury, which you do not, of not having to enjoy the First Minister’s remarks on every topic, but I will leave it there.
I want to concentrate on the decisions that influence spending powers. As you said, cabinet secretary, the budget revision contains only the earlier Barnett consequentials, and I suppose that this is a question about the time lags, which I think I raised with you the last time you came to the committee with a budget revision. At that point, there seemed to be enormous time lags between your announcement of the deployment of Barnett consequentials and their appearing in a budget revision. The current example is your announcement in March of the £76 million of extra spending power, which three months later is not in the summer budget revision. I am curious as to why there needs to be such a lengthy time lag before the announcements are reflected in budget documents.
Decisions are taken on each occasion about the most appropriate opportunity for us to seek parliamentary approval for proposed changes. This felt like the most timely opportunity to bring forward the particular changes that were announced as a result of the consequentials that arose from the pre-budget report in 2009, which were obviously material to the announcements that I made during the budget process in February. I simply bring the changes to Parliament at what I consider to be the most appropriate time to set out the details.
I have not really thought much about this point since I last asked you about it, but it might be argued that that practice involves putting such changes into a budget revision once most of the money has been spent, so that they cannot be voted down by Parliament. I do not particularly disagree with the changes—in fact, I strongly agree with the money that you have allocated to affordable housing—but I presume that, if somebody had wanted to oppose them, theoretically they would not have had an opportunity to do that today. Indeed, I do not know when they would have had such an opportunity. There is a general procedural point that, in principle, it would be good practice to bring to Parliament as soon as possible any decision to allocate new money. That would mean that, if a member disapproved of the decision, they would have an opportunity to vote against it and to suggest an alternative.
I suppose that there is a point there, although that opportunity is available to individuals—the committee could decide not to recommend the approval of the draft order today, the consequence of which could be that the money envisaged in the revision could not be allocated.
Okay.
I want to go back to the general points that follow from Mr Brownlee’s questions on the use of data in relation to the impact of the revision. If the DEL budget is reduced, even though, as you said in your opening remarks and as the booklet that comes with the revision says, there is no cash impact on spend, how will the Scottish Government use the revision in the presentation of the 2010-11 DEL?
In all budget documents, we show allocations on a like-for-like basis. In other words, if the cost of capital is stripped out of 2010-11, it will also be stripped out of 2009-10 and 2008-09 in the presentation of financial information in future. As far as those changes are concerned, we will deal with a restated budget line for technical reasons and to take into account the additional £23 million in DEL consequentials arising out of the pre-budget report.
I assume that the Government will not treat the £279 million reduction in DEL as part of the percentage difference in DEL in 2010-11.
That goes back to my point about showing these allocations on a like-for-like basis. If an in-year revision in the budget involves stripping out, say, the cost of capital, we strip that element out of previous years’ figures to ensure that we have what the Treasury describes as a clear line of sight from one number to another and that there can be comparability.
And it would be a relatively straightforward exercise to make such like-for-like comparisons over the spending review period from 2007-08 onwards.
I do not have the current spending review document in front of me, but the annexes at the end of the document contain a comparison table that sets out the numbers for this review on a like-for-like basis going back at least to 2003-04—and perhaps even earlier than that. In setting out the data for the next spending review, I will take the same retrospective approach in taking these factors into account.
So this revision will have no meaningful impact on next year’s baseline block grant.
As I said in my opening remarks, these technical adjustments, which relate to cost of capital issues, are spending-power neutral. We will show them on a like-for-like basis.
On the use of capital, the committee has previously discussed with you the need to provide what you have termed in the past “capital cover”. Does this revision have any impact on any decisions that you might make in that regard?
There is no impact in that respect. Clearly we must show—and will continue to show—the allocations of capital expenditure, but some of the capital cover issues that we have discussed in previous meetings will have related to the application of IFRS, which has now been resolved with clarity.
In previous evidence to the committee, you said that you could not or would not look at funding Scottish Water differently because you would have to cover the associated capital expenditure and capital charges, which you could not do with a fixed budget. This revision removes all that, does it not?
In the budget document we showed two items: support for Scottish Water borrowing and cost of capital charges. The cost of capital charges are removed—they are £195 million in the 2010-11 budget—but we are talking about the removal not of £195 million of spending power but of £195 million of non-cash arrangements. That is a practical illustration of how the budget document will look different. Nothing has changed, but the document will look different, because that line has been removed.
However, if Scottish Water was funded through borrowing not from the Scottish Government but from other sources, there would no longer be a requirement to include the budget element in relation to the cost of capital, which you have previously said that you would have to include.
I think that I have answered your point. We do not have to recognise the capital charges in that fashion—that is the line that is coming out. Of course, if the borrowing that had been undertaken was from a third party and not from the Scottish Government, the £150 million would not show in the “Support for Scottish Water Borrowing” line, either—
Absolutely—
However, a few steps would have to be gone through before that could arise, with which I am sure that you are familiar.
You have said to the committee in the past that even if Scottish Water borrowed from another source, there would be budgetary consequences, because you would still have to provide the capital cover with regard to the interest charges—
I know your affection for the Official Report, so I am sure that you are referring to a comment that I have made. However, I cannot think that I would have marshalled such an argument for not taking the step that you are urging me to take—or rather, speculating that one might take—on Scottish Water, because a range of other issues would be involved. I do not think that the accounting treatment would necessarily have been a major factor in my arguments, but I stand to be corrected if I have not remembered everything that I have said.
I should be fair and say that I know that that is not the main reason why the Scottish Government is not changing how Scottish Water is funded. I am just exploring one of the areas in which an obstacle has been presented. We will both look into the issue.
I am happy to do so but I am not sure that I recollect the discussion to which you are referring.
Why has the Government not taken this opportunity to include other revisions in relation to consequentials that arise from decisions that have been taken at Westminster, which you have announced to the Parliament?
The only consequentials that I have not yet sought the Parliament’s consent to spend arise from the UK budget of March 2010. I took the view that we would not show those consequentials in the draft order because, in essence, I wanted to take a cautious approach and see what steps the incoming Administration would take in relation to those announcements before I sought the Parliament’s consent for expenditure. I will seek the Parliament’s consent in the autumn budget revision.
Does that mean that what you announced on 14 April in the debate on the economic recovery plan might be affected?
No. I intend to spend those consequentials, but I was waiting to see what stance the incoming Administration would take in relation to the 2010-11 budget. I now know what that stance is.
I am not sure why that could not have been brought forward in the current revision if you intend to spend the money in the way in which you announced in April.
The United Kingdom Government was not formed until about 13 May and we have been interested to see exactly what further decisions would be taken about the 2010-11 budget. We now have confirmation of that, in the statement that came out, I think, last Monday from the Treasury.
With regard to the impact on this year’s budget, you previously told the committee that you wished to defer all the reduction until 2011-12, but you indicated that, if there were elements that you thought would not have an impact on economic recovery, you would consider making those reductions now. Is it your view that there can be no reductions anywhere in the budget for 2010-11 without there being an impact on the economy?
There might be particular lines of expenditure that are not absolutely fundamental to economic recovery. The Government can take a view as to whether it is appropriate to spend that resource in the current context. That is the purpose of the comment that I made in answer to a question from, I think, Mr Brownlee, when I was in front of the committee previously. Obviously, much of the Government’s thinking about the issue is tied up with the question—to which we do not yet have an answer—about the treatment of end-year flexibility by the UK Government. If there is to be an underspend in 2010-11, it will be material to me to understand how that will be treated and whether access will be provided to that resource to offset the budget reduction of £332 million that we currently face for 2010-11.
My question is a brief follow-up to Mr Purvis’s question. At First Minister’s question time last Thursday, the cabinet secretary was accused of having some kind of secret list of potential spending cuts. Would he care to illuminate us on whether such a thing exists? If it does, where is he thinking about making the cuts?
Miss Goldie was perhaps rather excitable in her interpretation of evidence that I had given to the Finance Committee, in which I made the fairly routine point that, in advance of the United Kingdom election, I had asked my officials to consider what the approach would be and what issues we would have to consider if there was an in-year reduction in our budget for which we did not have the ability to defray expenditure. I asked for that work to be undertaken, which I thought was a sensible precaution to take. However, Miss Goldie rather inflated the significance of what was involved.
Just so I am clear, is it still your intention to continue to defer any impact of the £332 million of cuts until next year’s budget?
Yes, but I have given the committee a caveat to that previously, which is that if I identify areas of expenditure that I do not think are material to economic recovery, knowing that I now have to face a £332 million budget reduction in this year, I may well take the step not to undertake that expenditure. However, a lot of my view on that relates to how end-year flexibility is treated and whether the UK Government will take the view that any end-year flexibility that is held at the Treasury at the end of 2010-11 will be considered as resources that can be allocated against the £332 million budget cut that we have to deliver in 2010-11.
And you have received no indication yet of the stance that the UK Government might take towards that.
I have no confirmation of the UK Government’s stance. It is still being discussed, and I have no issue with that—it has to work its way through our discussions with the Treasury.
Was it discussed at the recent joint ministerial committee?
It has been discussed with the UK Government; I cannot recall whether it was discussed last Tuesday at the joint ministerial committee. I have certainly discussed it with the Chief Secretary to the Treasury. I will confirm to David Whitton whether it was discussed at the joint ministerial committee, as I cannot remember offhand.
Which chief secretary was it? We have had two already.
It was the original chief secretary, David Laws.
So it has not been discussed with the new chief secretary.
No, but a lot of discussions are under way with ministers and officials in the Treasury about working arrangements and the approaches that the UK Government will take. Those discussions are all very open, and I have no issue with the way in which they are being conducted. We will address those points in the context of a wider discussion on financial issues.
The previous Government was particularly generous about the use of and access to end-year flexibility. Is there any indication that the new Government will not be like-minded?
I cannot remember whether Mr Whitton was present for my explanation about end-year flexibility decisions in Parliament last Thursday—my recollection has let me down a couple of times today. I made the point that the year in which the single largest amount of end-year flexibility was utilised was 2007-08, when I inherited budget provisions and commitments from the previous Administration. In the succeeding years I have never managed to spend as much end-year flexibility in one go as the previous Administration managed, but that is, of course, all now on the parliamentary record.
The cabinet secretary is keeping his secrets secret, which is wise; but I digress.
There were a number of discussions about IFRS. We are going through a number of different processes with the Treasury, and we have made changes to budget provision as we have reached agreement. This particular issue was only just resolved in January with the Treasury, and the Budget (Scotland) Bill was already on course, certainly to be published by that time. That was our first opportunity to secure agreement on the issue.
To go back to the decision to postpone the £332 million reduction, local government will expect to take its share of that amount, and councils throughout Scotland will be pleased that they are not being forced to make the reductions this year. However, some councils might seek to make some of the reductions this year to increase their reserves and take away some of the pain from next year. What is your stance on that?
Individual local authorities may decide to take that course, which is available to them under their financial arrangements. The size of the local authority budget in 2011-12 will be a material part of my discussions with the Convention of Scottish Local Authorities, which will have to take into account the consequences of our decision to defer the £332 million reduction in this financial year.
When we had to start using IFRS, there was a great deal of discussion of how private finance initiative/public-private partnership charges would be treated under the new accounting standards. Is that matter settled, or is discussion still on-going?
The issue is settled. The United Kingdom decided to implement IFRS—I hope that I get this the right way round—by applying them for accountancy purposes but not for budgetary purposes. I was concerned that if IFRS were applied for budgetary purposes—this goes back to one of Mr Purvis’s points—we would have to secure appropriate budget cover for the PFI schemes that were coming on balance sheet, as well as the capital budgets that we would ordinarily be in a position to deploy. There is no guarantee that that would have been achieved. The arrangements that were ultimately arrived at of applying IFRS for accounting purposes but not budgetary purposes avoided the problem.
Will the increasing annual cost of PFI/PPP project charges have an impact on budgets in future years, especially during difficult times?
A revenue cost arises annually from PFI schemes. At the close of this parliamentary session, that cost, which must be paid from revenue budgets, will be close to £1 billion per annum. That has nothing to do with IFRS—it arises from the fact that there is an annual repayment of the unitary charge for the schemes. We must deal with that factor. The costs in question are fixed, negotiated contractual costs that are unavoidable. They must be paid in the context of a revenue budget that is likely to reduce in real terms. That will be a significant challenge with which to wrestle.
Does the treatment of the unitary charge as a revenue cost not apply equally to the Aberdeen western peripheral route, the Borders railway, the Falkirk schools and the Aberdeen schools that the Government has signed off? Is the approach not identical?
A revenue charge arises from the projects that Jeremy Purvis has mentioned. Equally, a revenue charge will arise from the Network Rail regulated asset base, which is another of the repayment mechanisms that we must show.
I return briefly to the points that you made first to me and then to Mr Whitton about the potential use of the underspend as a means of providing cover for the in-year reductions that have been mentioned for 2010-11. Given everything that you and the Government have said about the importance of getting Government expenditure out of the door in Scotland now, because of the economic situation, it must be pretty inconceivable that the Scottish Government will have any underspend at the end of this financial year.
As Mr Purvis will appreciate, I must operate within a fixed budget. I have managed to do so in 2007-08, 2008-09 and 2009-10, and I intend to do so again in 2010-11. As my predecessor probably appreciates, I have absolutely no alternative—I must underspend to ensure that I avoid overspending, if that is not too much of a statement of the obvious. There is no doubt that there will be an underspend this year—that is a natural product of our financial arrangements.
You overbudgeted by £100 million in an effort to keep the underspend as low as possible.
That is correct.
So any meaningful underspend will have to be over and above the £100 million by which you overbudgeted.
That is correct. I point out that that is what the Government has done in each financial year for which it has been in office. It has succeeded in delivering that financial performance on exactly the same model in each financial year.
Will it change the way in which Government departments operate if the finance secretary is now saying that he would like them to deliberately underspend on the present budget lines?
That is not what I am saying; I am saying that we have routine arrangements in place, which have been in place for the best part of 18 months, whereby for items of expenditure over a particular level, agreement must be secured from the director of finance for that expenditure to be undertaken. That is a routine part of the financial management architecture that we have in place now and is the test that gets applied to all decisions. In some circumstances, items of expenditure have to be referred directly to me to be judged. There is additional scrutiny of the effectiveness of expenditure, which allows me to deploy the tests that I set out earlier.
That is quite significant. I had understood an underspend to be something that happens when there is an intention to spend in a particular financial year but, because of circumstances beyond your control, to do with the signing of contracts, weather conditions or whatever, some projects cannot be completed, but you are now saying that judgments will be made about the timing of expenditure outside the financial year, the budget for which the Parliament has voted on, in an effort to offset the effects of a decision that the Treasury has taken. How will the underspend happen if you are saying that judgments will be made about the timing of spending in a deliberate attempt to ensure that some money is available in the next financial year?
What I am saying to the committee is exactly what I said to it the last time I was here, which is that in undertaking financial management during the year, the Government observes all the patterns of public expenditure. I have referred to the procedures that are in place that allow me the maximum amount of control over the way in which public expenditure is deployed within the Government’s budget.
I think that we have had a fairly good run up to now. There will be an opportunity to debate later, and we are almost debating rather than having straight questions and answers. If there are no further questions, we will move to the debate. I invite the cabinet secretary formally to move motion S3M-6480.
Cabinet secretary, as you do not wish to make an opening statement and no member wishes to contribute to the debate, I invite you to wind up.
I have said enough for today, convener.
The committee will now communicate its decision to Parliament formally by way of a short report, which will provide a link to the Official Report for the meeting. Are members content with that?
Before the next item, I will allow a short suspension for the officials to change over.