Finance Committee, 19 Feb 2008

Meeting date: Tuesday, February 19, 2008

Official Report 133KB pdf

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Subordinate Legislation

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Budget (Scotland) Act 2007 Amendment Order 2008 (Draft)

Good afternoon and welcome to the Finance Committee's sixth meeting in 2008, in the third session of the Scottish Parliament. I ask everyone to turn off their mobile phones and pagers.

Agenda item 1 is to consider the Scottish statutory instrument that provides for the spring revision of the 2007-08 budget. The draft Budget (Scotland) Act 2007 Amendment Order 2008 is subject to the affirmative procedure, which means that the Parliament must approve it before the order can be made and come into force. We have before us a motion in the name of John Swinney, which invites the committee to recommend to the Parliament that the draft order be approved. Before we come to the debate on the motion under item 2, we will have an evidence session to clarify any technical matters and to allow explanations of detail to be given while officials are at the table. I point out that officials cannot participate in any debate that follows the moving of the motion, although they are welcome to stay at the table during it.

I welcome to the committee John Swinney MSP, who is the Cabinet Secretary for Finance and Sustainable Growth; John Williams, who is the Scottish Government's head of finance co-ordination; and Martin Bolt, who is also from finance co-ordination. I invite the cabinet secretary to make an opening statement explaining the order.

Thank you, convener. I am pleased to be back before the committee to discuss the final changes to the budget for 2007-08.

As the autumn budget revision was used mainly to restructure the budget according to the Scottish Government's new portfolios, it did not include many of the routine internal transfers between programmes and portfolios that would normally have been reflected in such a document. Today's budget revision represents our final opportunity to amend the budgets for 2007-08, so it includes a number of transfers between budget lines in order to align them with predicted spend for the remainder of the current financial year.

Table 1.3 on page 4 of the spring budget revision document shows the budget that was agreed in the autumn budget revision and the changes that are sought in the spring budget revision. As members can see, there is only a slight increase in the overall budget. Table 1.4 on page 5 shows the proposed changes by type. I will draw the committee's attention to a few of the highlights of the spring budget revision.

The changes that are proposed in the spring budget revision result in an increase in the approved budget of approximately £157 million, from £30,902.6 million to £31,059.4 million. That is net of additional funding of £89.7 million from national insurance contributions, which is treated as income for the purposes of parliamentary control. Therefore, gross expenditure is increasing by £248 million.

The largest part of the increase is accounted for by the £179.6 million from Her Majesty's Treasury for additional national health service impairments cover and to fund the housing debt repayments for Inverclyde Council, both of which are outside the departmental expenditure limit. In addition, the Scottish Government received a transfer of £60 million from the Treasury to fund provision for Scottish agricultural and biological research institutes pensions, as well as some further minor transfers. Members may wish to note that the most recent NHS impairments forecast indicates that there could be a decrease in the expected figure of £90 million. That is a good illustration of the uncertainties that surround such expenditure, which led the Treasury to reclassify it as annually managed expenditure from 2007-08 onwards.

Members will recall that the autumn budget revision approved the draw-down of £655 million of end-year flexibility balances from the Treasury. By proactively managing budgets through our internal monitoring processes, we are determined to minimise the level of underspend that emerges this year, which will contribute to the EYF balance that will be published by HM Treasury in July 2008. I acknowledge that that process was begun by my predecessor, Mr McCabe, when he made the early decision to bring forward and accelerate certain items of capital expenditure in 2007-08.

As a result of our actions, I am confident that the previously published balance of more than £1.5 billion will reduce to less than £1 billion. We will ensure that those funds are used to benefit the people of Scotland as intended. That is, of course, an agreed level of access to the remaining balance of EYF funds that I secured as part of our spending review settlement.

At this revision, therefore, movements in and out of the centrally unallocated provision and within portfolios have been managed to ensure that we maximise the use of the resources available to us in this financial year. Although the net effect of the transfers is zero, they have enabled: £22.6 million of additional support to be made available to the farming community to mitigate the loss of income resulting from the foot-and-mouth outbreak; additional support of £10 million to ease pressures on universities; a draw-down of £24 million to support efficiency and reform projects across the public sector; a draw-down of £8.5 million to meet final claims made against the cities growth fund; and an increase of £44 million in the net borrowing requirement of Scottish Water to support capital works.

Those who have been members of the Finance Committee for some time will be aware that the profile of Scottish Water's requirements for borrowing varies from year to year. This year, we see an increase in levels of investment by Scottish Water as a greater level of real construction work is undertaken. That has resulted in an increased capital requirement.

Other significant movements between portfolios include the transfer of approximately £130 million to revenue support grant—mainly from education and justice—and a transfer of nearly £57 million from health to education to support nursing and midwifery training. The movements result from what have become routine annual transfers that are needed to reflect the most appropriate funding mechanisms for the expenditure.

What appears to be a net transfer from the Scottish block of £5.9 million reflects the transfer of budget provision to support non-departmental public body capital charges primarily in relation to our national cultural institutions. Members will recall that one of the many quirks of the current budget arrangements is that NDPB budgets must be presented for parliamentary approval in simple cash terms.

Details of all significant changes in this revision have been sent to the committee by the Scottish Government's officials prior to this meeting. Further information in respect of the miscellaneous minor items can be supplied on request, but I believe that our business today should concentrate on the major changes. I will be happy to answer any questions that committee members may have.

I want to ask about one or two items on page 11 of the spring budget revision document. The first is the £10 million that has to be transferred to the National Galleries of Scotland in respect of the purchase of the d'Offay collection, which I believe is a joint purchase between the National Galleries of Scotland and the Tate. I understand that the collection is worth about £100 million, so I wondered whether the £10 million was a one-off payment. What will we get for the £10 million?

I do not think that there is an itemised list of what we will get from the d'Offay collection. I understand that the £10 million is one payment that the Government will make but that further payments will have to be made in relation to the d'Offay collection. Those payments will be part of funding decisions made by ministers.

The money comes from a reduction in the capital budget for the Royal Commission on the Ancient and Historical Monuments of Scotland in respect of storage facilities. I can remember being at the RCAHMS some years ago, and it was a much more interesting place than its title might suggest. It has many maps, photographs and other items that require storage. Can you reassure us? Are things simply being deferred until the next financial year?

It is a deferral, not a cancellation. The money will be transferred into a further financial year. The Government will want to ensure that we put in place all the support required to provide the appropriate storage facilities for the RCAHMS collection. We will work to deliver that as quickly as possible within the next spending review.

I also want to ask about the reduction in spending on the Scottish Arts Council. The budget has reduced from £58.6 million to £48.4 million between the autumn budget revision and the spring budget revision—a reduction of £10.2 million.

The Arts Council's budget is always under a fair amount of pressure because of the number of arts organisations that it funds and the vision of expanding participation and fostering cultural events. What will be the impact of that reduction on the Arts Council? Every so often, theatre organisations and others lobby MSPs for more support from the Arts Council. Will the reduction have an impact on local theatre provision?

The £10 million transfer from the Scottish Arts Council is to the "Other Arts" category and is to support the national companies. Resources are shifting from the Arts Council to supporting the national companies more directly. The funding has not been lost from the artistic community; it has simply been transferred to other arts projects.

That is not clear from the budget document, although I knew of the intention to fund the national companies directly rather than through the Arts Council. That makes sense.

Liam McArthur will ask about rail services and the Highlands and Islands Airports Ltd capital grant.

Before talking about rail services, I will ask about a more minor budget item. Operating resources for ferry services are to increase by £8.9 million, which is being reallocated from the integrated transport fund. Will you shed light on what is behind that and what its implications are?

The committee will see from the top table on page 18 that the combined changes total £12.5 million. That accounts for several changes, which include an increase in the deficit grant for the Clyde and Hebrides ferry services that arises from the establishment of the new contract, which will increase that budget by £8.3 million. The capital item of £3.6 million that is reallocated from the integrated transport fund represents the first loan instalment for the new ferry for Islay and further support for other vessels.

The piers and harbours grants budget will increase, because progress has been made on the completion of several major projects at Port Askaig, Rothesay, Aberdeen and Oban. As for the items whose budgets have declined, £600,000 relates to the Campbeltown to Ballycastle ferry service, for which no bids were forthcoming in the tender exercise. Of particular interest to Mr McArthur is the fact that northern isles ferries delivered a better-than-expected performance, which produced a repayment of grant, as per the contract arrangement.

Page 17 appears to show an additional £15.1 million for rail services. I am interested to know what additional services might be provided as a result of that additional spend.

We are on page 17. What was the figure?

It was £15.1 million.

I am afraid that I cannot see where the figure of £15.1 million comes from.

The resources are a continuation of the franchise support payments for the operator of the ScotRail franchise. The spend was apparently agreed before the franchise was granted, if that is any help.

There are continuing discussions with ScotRail on the development of the franchise, with the aim of trying to secure greater impact on services for the resources that the Government allocates to the contract. I am afraid that I cannot give the committee today specific examples of where the service changes have taken place in that respect, but in the budget lines we have been able to fund a number of improvements to rail schemes, including the freight connection between Mossend and Elgin and the Lockerbie station footbridge, which was opened earlier this month. We have also carried out studies on options for the Edinburgh to Glasgow rail improvements that have been publicly announced by ministers. I will be happy to shed further light on the rail enhancements for the committee.

On a similar theme, will you set out in a little more detail what the additional capital grant for Highlands and Islands Airports Ltd is for? I refer to the table on page 19. Are you confident that that money will be spent in the current financial year or is it expected to be carried over into the next financial year?

It has to be spent in the current financial year. The increased investment is to pay for the Inverness radar project, improvements to the runway at Tiree, improvements to Dundee airport—particularly in relation to security requirements—and refurbished lighting for the airfield at Stornoway. There is also a general allocation in relation to the improvement of fire appliances for regulatory maintenance purposes.

From the figures given on page 22, there appear to be substantial increases in the lines for routine and winter maintenance and roads improvements. Those budgets could probably expand to accept any amount of money that was thrown at them. What will the extra 40 to 50 per cent be used for?

The premise of your question is absolutely right. We could double or treble the budgets and still make only a small dent in the backlog of work that is required.

Members might be frustrated by the existence of road works throughout Scotland, but my explanation of why they are there is simply that we have a formidable backlog in relation to the quality of trunk roads and, because of slippage in other areas of programmed expenditure, the Government has been able to accelerate some of the trunk road maintenance work that is under way. The increase is much more in relation to motorway and trunk road maintenance rather than routine and winter maintenance, which is performing as we would expect.

It might be helpful for me to say that we are now going to look at page 30. Alex Neil has some questions on Scottish Enterprise.

I also have a question on the additional capital spend for Scottish Water, although I think that John Swinney answered it in his introductory remarks. My question is whether that additional spend is real additional expenditure on investment or whether it is due to rising costs.

In my period on the Finance Committee, when we considered the autumn and spring budget revisions, there was a pattern of the transfer of resources out of Scottish Water's capital investment programme, not because of a lack of willingness to invest but because the programmes were not in a position for the money to be spent at the time. Essentially, that is a lesson about the investment programme. It is difficult to conceive how a programme as significant as Scottish Water's investment programme could begin on day 1 and reach full spending power immediately. The system does not work like that. We are now beginning to find that we need to replenish some of the resources that were reallocated in previous financial years to other priorities. Those resources are being replenished with the contribution that the Government is making now to support the investment programme.

Good.

The budget for Scottish Enterprise increases by just over £13 million and the budget for innovation support reduces by just under £15 million. Is that a reallocation from one budget to another of money that is essentially for similar expenditure?

Essentially, that is right, yes.

When do you hope to be in a position to tell us what the budgets will be for the restructured Scottish Enterprise and skills development Scotland?

They will have to be in place before the start of the next financial year. We will be reaching conclusions on that very advanced piece of work in relation to skills development Scotland and Scottish Enterprise in the course of the next six weeks. I will be happy to report to the committee on that.

We will now move on to page 42 of the budget revision document, and questions on education.

Before I do, I would like to go back to the subject of the Scottish Water capital investment programme. How will the additional investment bring the Scottish Water investment programme on track with what the Government wishes? How does the £44 million figure impact on future borrowing for Scottish Water over the next three years?

The investment programme has not been constructed in a fashion that would enable us to say that, by February 2008, Scottish Water has to have completed X, Y and Z, so it is difficult to give a sense of whether Scottish Water is on track with its investment programme. However, the Water Industry Commission for Scotland obviously considers that carefully on behalf of the Government.

From the representations that I have received and from the dialogue that the Government has been having with the business community, I have a strong sense that Scottish Water is less of an impediment to the process of economic development now than it was a couple of years ago, when development constraints were a colossal issue. To be fair to Scottish Water, in my estimation it has more than met a number of the significant challenges. We are now clearly moving through a sustained period of investment, and we are beginning to see the fruits of that.

One characteristic of the investment programme and of the financial mechanisms that are in place is that Scottish Water is incentivised to outperform the structure of the programme. The Government might say that it has £180 million per annum of capital borrowing support to invest in Scottish Water but that it is looking for Scottish Water to outperform so that it does not require all that resource. There is an incentive for Scottish Water to perform at a more aggressive rate than was envisaged when the programme was designed. Ministers examine Scottish Water's output carefully in that respect.

Thank you.

Page 42 of the budget revision document covers education and lifelong learning. There seem to be decreases from the autumn budget of £36.6 million for teachers and £53.4 million for schools. I am looking for a bit more detail on the transfers to which those decreases seem to relate. What areas of responsibility do they relate to?

Some of the transfers will relate to such issues as payment for a higher number of student teacher places. Essentially, the budget document shows not a transfer of activity but a transfer in how we pay for particular interventions. For example, on page 42, there is a transfer to revenue support grant for schools public-private partnership funding. The schools PPP funding has been paid for; it has just been paid for through revenue support grant. That is simply a presentational change. There is additional support for the training and recruitment of new teachers, and there is support for pay negotiations.

In the analysis that we undertook, we found that the funding support for PPP projects that was expected when the budgets were designed in the previous spending review was higher than we require at present. In essence, the PPP charges have not been realised as quickly as the previous Administration expected them to be realised and, as a consequence, the resources are free in the present financial year to meet other priorities. However, those charges must be paid in forthcoming years and, of course, the Administration will pay them.

The budget for qualifications, assessment and curriculum is to be decreased by £14.5 million. Can you give more detail of the likely impact of that?

There will be a transfer of activity to the work of skills development Scotland. There is not a decrease but a reallocation of resources to ensure that we have resources in the right place to support the development of the qualifications and skills agenda.

The budget for new educational developments is going up by £12.6 million. What will that extra spending achieve?

I am afraid that I cannot give you specific information on that today, but I am happy to write to the committee with an explanation of that.

Page 45 of the budget revision document shows three separate things that are happening in relation to student loans: money from the student loans subsidy is going into the CUP; there is a reduction in student loans interest subsidy to the banks; and funding for student loans is coming through annually managed expenditure. Will you set those changes in context by explaining the underlying factors that drive them?

The net transfer to the CUP from the student loans subsidy is explained by the fact that the proportion of students who take out loans has continued to decrease. Therefore, the level of subsidy has, naturally, also reduced, which releases resources that we can invest in other priorities. The reduction in student loans interest subsidy to the banks is a product of the same issue. However, that is one of the peculiar items that is outwith total managed expenditure but which for some reason is reported in Parliament, just to make the budget even more impenetrable. The original baseline estimate was too high. On the additional funding for student loans, student loans have increased as a result of the change in policy from paying each term to paying every month. That particular change will not be repeated and will affect only this financial year. The issue is one of timing.

On the same page, there are two lines that show an increase for fees, grants and bursaries. We have a couple of recent announcements from your colleagues on changes to grants and today we had an announcement about fees for the proposed Aberdeen dental school. I can understand why those increases are taking place, but are the changes that the Government has already announced the only factors that are driving the increases?

Yes, although some of the issues to do with the recruitment of additional teachers for teacher training may also have an effect on that budget line.

Staying with education but moving on slightly, let us turn to page 47 and drawdown from the CUP. What is the background to the changes on the education maintenance allowance?

Sorry—where is that?

Page 47. EMA is only one of the items mentioned.

There are a number of components in the drawdown of £22.7 million. There are a number of issues relating to the item, particularly the establishment of skills development Scotland. It is a net item, so there are resources coming in and resources going out. Sorry—I am not explaining this terribly clearly.

Essentially, it is an item in which we are operating an internal central unallocated provision within the Scottish Government. There will be factors that release new resources—if I can express it in that fashion—such as the education maintenance allowance. We expect that £13 million can be transferred into other priorities because the requirement for EMAs has not reached the envisaged budget level. There will be other factors, such as the work undertaken to support skills and the wider training and development issues in relation to skills development Scotland. There is also the question of fulfilling the previous Administration's commitments to support engagement with employers on the development of appropriate skills. The £22.7 million is a net item that deals with a range of different projects and initiatives.

So, on the EMA, it is in effect a question of demand.

That is right. Demand has not reached the level that the budget envisaged.

I have one final question on that page. The schedule shows two transfers from individual learning accounts—one to the Student Awards Agency for Scotland and one to the CUP. In general terms, what is happening to that item of spending?

Demand is a driver of the ILA figure. There is simply not the demand to utilise all of the resources that were allocated to that budget item. That is what is driving the transfers to the CUP—which I should stress is an internal Scottish Government budget, from which we can afford other priorities—and to SAAS to support other priorities.

Let me contradict you, cabinet secretary: given the complexity of the subject, you are explaining things very clearly indeed. That is appreciated.

I want to follow up on the individual learning accounts. The expenditure is only some 9 per cent of what was anticipated at the spring budget revision, so there has been a significant lack of uptake of individual learning accounts. Admittedly, they had a shaky start when they were introduced in session 1. Cabinet secretary, it is perhaps unfair to ask you directly on the issue, but does the Scottish Government have any plan to review the operation of the individual learning accounts in light of the lack of uptake? For example, I understand that people cannot use ILAs to undertake Open University courses. There might be a case for reviewing how they are used in order to make them more attractive in the future.

You make a fair point on the budget profile on the issue. The Cabinet Secretary for Education and Lifelong Learning will consider whether we have all the correct arrangements in place to support and encourage the uptake of ILAs, given that there has been such a difference between the performance and what was envisaged in the budget lines. It may be that, as the ILAs are demand led, the budget is a reflection of demand for uptake. Alternatively, we may need to introduce changes to ensure greater participation in learning through them. I am sure that the education secretary will examine that.

Liam McArthur has some questions on the figures under the justice portfolio on page 51 and on the change to the strategic waste fund on page 68.

Schedule 3.3 on page 51 details the proposed budget for the Scottish Prison Service. The proposed operating budget is £211.3 million and the proposed capital budget is £59.2 million. By comparison, the figures in the autumn budget revision were £257.8 million and £100.3 million respectively. I note that the brief guide to the spring budget revision suggests that that is

"due to a delay in the new prison at Addiewell and the termination of the competition to design and build a new prison at Bishopbriggs."

That probably explains the difference in the proposed capital budget, but the difference in the proposed running costs still seems quite high. Can further detail be given on that?

The two sources of the change are correctly stated as the delay in the construction of the prison at Addiewell and the change in policy on Bishopbriggs. The Addiewell issue affects the capital budget, but the Bishopbriggs issue affects the revenue budget. Because Bishopbriggs was previously envisaged as a PPP project, it would have involved a lot of preparatory costs that would have fallen into the revenue category. The PPP project would have counted as an item in the operating budget. Essentially, those are the two significant factors of change in the SPS budget.

Does that account for the £46.5 million reduction in the budget for running costs?

Yes.

On page 68, there is again quite a sizeable difference—of an order of magnitude of about £19.5 million—between the figure for the strategic waste fund that is proposed in the spring budget revision and the figure that was previously given in the autumn budget revision. Can you shed light on that?

Essentially, the reduction of around £20 million is due to a payment of £5 million to Dumfries and Galloway Council through revenue support grant for particular local waste projects and to a less than expected demand—of the order of approximately £15 million—for such funding in the 2007-08 financial year.

The strategic waste fund issue reared its head significantly during the budget process. Essentially, the previous Administration set pretty high budgets for the fund but, as the ability to spend those resources did not materialise over the course of time, they were reallocated outwith that budget line on a reasonably regular basis. Consequently, when we looked at transferring the strategic waste fund resources into the local government settlement, there was a mismatch between the budget allocation and the amount that was spent. The Rural Affairs and Environment Committee highlighted that concern in the course of its budget scrutiny. The current situation is that we have now transferred to local authorities the actual spend on strategic waste fund activities as well as additional resources. The 2008-09 budget envisages new spending on the Government's zero waste strategy. That accounts for how we will allocate that spending in the future.

The final questions come from Tom McCabe and refer to Government staff costs on page 72 and the Forestry Commission Scotland programme costs on page 83 of the spring budget revision document.

There seems to be something like a 10 per cent increase in Scottish Government staff costs between the autumn and spring revisions. That comes at a time when the Scottish Parliamentary Corporate Body is handing back £1.5 million to the consolidated fund. Is there a reason for that increase and does it concern you?

Obviously, maintaining clear control over staff costs is essential for the Government. The detail of what is involved in that figure will essentially be designed to meet our recurring costs for running the organisation. I am happy to give the committee a detailed explanation of the pattern of those running costs in relation to staff costs to ensure that it has a clear understanding of all the components that are involved in the figure.

I know that you meant to say how grateful you were for the £1.5 million that you got back from the SPCB.

If Mr McCabe had anything to do with it, which I am sure he did, I am profoundly grateful.

There appears to be a significant reduction—around 20 per cent—in expenditure on the Forestry Commission. Is there an explanation for that?

I will have to give you a written explanation on the changes that have been made to that budget line. I do not know why they would be of that magnitude, but I am happy to provide an explanation to the committee.

I thank the cabinet secretary for that. As we have completed our questioning, we can now move on to item 2, which is the debate on the motion. The officials can remain at the table with the cabinet secretary but will not be able to speak on record during the debate. I invite the cabinet secretary to move motion S3M-1272.

Motion moved,

That the Finance Committee recommends that the draft Budget (Scotland) Act 2007 Amendment Order 2008 be approved.—[John Swinney.]

Motion agreed to.

The committee will now communicate its decision formally to the Parliament by way of a short report. The Parliament will then be asked to consider a motion on the order. Are committee members content for the report to be circulated and agreed by e-mail?

Members indicated agreement.

I thank the cabinet secretary and his colleagues for their evidence and I thank all other colleagues who have taken part in the meeting.

Meeting closed at 14:43.