Finance Committee, 20 Sep 2005

Meeting date: Tuesday, September 20, 2005

Official Report 178KB pdf

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Budget Process 2006-07

The fourth item on the agenda is consideration of two further papers from Arthur Midwinter. One is guidance for the committee on the Executive's draft budget for 2006-07, and the other is guidance for subject committees.

I ask Arthur Midwinter to speak to the two papers. I will then offer members the opportunity to come in.

Paper FI/S2/05/20/2 gives the committee my initial thoughts on the draft budget that we received about a month ago. I remind members that, under the new process, this is what we regard as a light year. We take seriously the business of three-year settlements. The big decisions are taken in the spending review year, and we have agreed with the Executive that the committee will concentrate on reporting changes to the plans. That saves us having to go over material that we have already examined.

Overall, there is an increase of £277 million over previous plans. The bulk of that is accounted for by an increase in public sector pensions, which falls within annually managed expenditure. The only other item to note is the transfer of supporting people funding from AME to the departmental expenditure limit; the transfer of that big sum of money puts it within the part of the budget that Parliament can influence.

The third point that I will draw to the committee's attention, which I learned about after I had drafted the paper, is that there is still no provision made for 2006-07 to use the £200 million that was kept in reserve as a result of the partnership agreement two years ago. I have looked out the material from two years ago to send to new members of the committee but, to explain, after the election, there was a period of negotiation between the coalition partners on spending, and additional funding was approved as a result of the negotiations. Approximately £500 million of the additional funding came from business rates because the yield was greater than anticipated owing to the lower level of appeals—the figure worked out at about £125 million a year over a four-year period. A figure of £100 million-plus from one of the public sector reform budgets was also put into the pot to fund the additional commitments, as was some money from the Treasury with regard to debt reclassification.

Overall, more than £700 million was made available: £500 million was allocated and £200 million was kept in reserve in the expectation that budgetary pressures this year might need to be accommodated. I point that out to the committee because £200 million happens to be precisely the sum that has been announced to Parliament as being needed to reduce business rates. The committee endorsed the decision that was made two years ago and reckoned that it was good practice to keep £200 million in reserve to deal with unknown budgetary pressures. The 2006-07 budget has not yet made use of that £200 million.

On the overall format of the document, the changes in information are in line with the committee's previous recommendations. There have been only minor changes to targets, which I have reported in paragraph 3 of paper F1/S2/05/20/2.

I am still concerned that the Executive has 94 spending priorities, which is far too many. In some cases, there seems to be a priority for almost every level 2 programme in a portfolio. Such an approach will certainly not be rigorous or systematic enough if we move into a period of retrenchment. Fewer and clearer priorities are needed.

Another plus is the provision—at last—of comprehensive information on grant-aided expenditure. The justice committees have always published GAE provision for the police and fire services. For those who are unfamiliar with local government, I am talking about the sum of money that the Executive thinks ought to be spent on each individual local government service throughout Scotland; that forms the basis of the RSG. One difficulty that the Education Committee has found in trying to monitor the education budget, for example, is that the amount shown in the draft budget is tiny, as the bulk of the budget is locked into the block grant. However, the document now contains comprehensive GAE information for all services.

I considered cross-cutting spending. For the benefit of new members, the committee asked the Executive to go beyond using the language of cross-cutting in the exercise and to demonstrate to us where money is being spent and which spending programmes are regarded as contributing to economic growth, social justice or sustainable development.

In my first stab at the figures, I came up with £1,576 million of spending on programmes to grow the economy, £918 million that has been identified in the portfolio chapters as contributing to equality and £21.25 million of spending on sustainable development. Those figures are almost certainly underestimates and therefore inaccurate. For example, the whole capital programme is regarded as being positive for economic growth and we know that the impact on sustainable development is required to be considered in capital investment appraisals, but the figures are simply my record of what is in the document. The document can be improved even further, and there is scope for even better integration of strategic issues, budgets and targets.

As a comment on our previous item, I cannot resist drawing to members' attention that the draft budget reports the need for baselines and input and output measures in the efficient government exercise. The problem is that that information is lacking in the document.

The draft guidance is fairly straightforward. The committee should not spend so much time on the budget this year, as it is a light year. The paper lists a number of issues about which I would like to obtain information from the subject committees. For example, they could be asked whether they are content with the ministerial responses that they received last year. We are trying to develop a partnership approach with the Executive to obtain information that the Parliament finds useful. The subject committees could be asked for their views on the spending plans that are referred to in the new resources section, whether they have any proposals to change funding within priorities and so on. The draft guidance has a fairly standard list of questions that we should ask committees.

Members may agree to the papers or amend them as they wish.

Do members have any questions for Arthur Midwinter?

I have a pedantic comment rather than a question. Is there a typo in the draft budget briefing note where it mentions the £277 million? It mentions growth and then a reduction. I did not follow the arithmetic.

I do not think that there is a typo. There has been a £401 million rise in the DEL and an £184 million reduction in AME. If one figure is taken from the other, the result should be around £277 million.

Are the specifics written down in the budget document?

Yes. As I mention in my paper, the difference is mainly due to two big changes: an increase in AME to cover increased provision for public sector pensions and a reduction in AME because the supporting people budget has been put into the DEL.

Your paper comments that different portfolios take different approaches to the cross-cutting priorities, with some portfolios making statements about policy and others referring to specific spending initiatives. Which of those approaches is most useful?

My clear view is that I want to know on which specific things money is being spent. When the equalities team crawled all over the budgets with the portfolio budget holders about two years ago, that was the first time that we learned that about £400 million had been allocated to promote equalities. Budget documents do not need broad statements of policy intent; they are supposed to provide a basis for financial control by the Parliament. We need to know how the portfolios are addressing the cross-cutting issues and what resources are being targeted at them.

I hope that we can make a recommendation along those lines to departments such as the Education Department, which does not follow that approach at the moment. We might want to encourage subject committees to take that forward.

Absolutely. The communities portfolio is a good example.

I want to return to the issue that Derek Brownlee raised. If £184 million is subtracted from £401 million, that leaves £217 million, not the £277 million that is stated in your paper.

I will check that. It could be a typo.

I am sure that it could. I continue to make a plea that we be given tabular data rather than numbers and narrative. I also like numbers that reconcile.

We will make allowances for your failings.

I will deliberately not answer that, but I ask you to read the subtitles.

I could go on. The figure for sustainability is given as £20.25 million in your table but as £21.25 million in the narrative. Those wee details are important, because our credibility is at stake.

Okay.

I want to make three points about the questions that we should ask subject committees to consider.

First, is it worth asking the subject committees to consider which targets should be kept and which should be sacrificed, given the context of a budget tightening exercise? As you have pointed out repeatedly, the Executive will need to prioritise targets and narrow the range of its targets. In the context of the run-up to the next spending review, should we ask subject committees to consider where the priorities should sit in terms of the existing targets?

The targets and the priorities are different things. The targets are reviewed automatically in each spending review, so we should receive a report on the Executive's performance against its existing targets at some point during the next year. The targets have also been reduced from about 160 to about 100. We should probably ask the subject committees to consider that issue next year, once we know when the spending review will be. Has the minister made an announcement yet on the spending review?

No.

Just before the spending review is the key time to ask the subject committees to say which targets they find useful.

Although we have reduced the number of targets by getting the Executive to strip out many of the process targets, my point is that, as you said earlier, a priority target is attached to almost every level 2 priority in the portfolio budgets. Instead of the subject committees waiting for the Executive to go through the spending review process, they could perhaps be asked just now to look a bit further ahead than this year's budget and consider, given the context of a tightening financial climate, the direction in which their portfolio or department should head if the targets need to be thinned down. Is that too strong a suggestion to make at this point, or is it worth pushing in that direction?

I would be quite relaxed if the committee wanted to do that.

I am not certain that it should be done this year or next year, but I think that it should certainly be done before we reach the spending review. By the time of the spending review, it will be too late and we will be in a situation in which decisions are made without subject committees having the chance to comment.

We need to get their views on priorities now. If spending tightens, that will start to happen next year. We are not expecting much additional money next year. We need to have a clear picture of when the spending review will take place, so that we can start to think through the strategy for dealing with issues relating to targets.

My second question relates to demand-led budgets. Community care is an obvious example, although I am sure that there are many others, such as concessionary travel and supporting people. In some budgets, demographic pressures may have an impact on potential spending. Should we ask the subject committees to begin to consider that issue—perhaps not in this budgetary period, but in the future? Should they examine the long-term trends that are affecting spending in the areas for which they are responsible?

Yes. The Executive should also do so. Presumably, behind the scenes the Executive has extrapolations of what demographic trends will mean for its programmes. The Health Department used regularly to issue a statistic that indicated that demographic changes would add around 1 per cent to the costs of the health service, because more elderly people were surviving and so on. Such information would be very useful in the run-up to the spending review, especially when we are trying to encourage a long-term approach to these matters.

In order to achieve that, we may need to ask the Executive to begin to provide such information. It may be an issue for us to take forward next year, but we certainly need to deal with it.

My final question relates to subparagraph 5g. At the end, you ask whether the Equal Opportunities Committee wishes to comment on the information on the equality agenda. Should we ask each of the subject committees to address that issue? The same may apply to the sustainable development agenda.

That would be fine. I thought that I had made that suggestion—I am sorry if I missed it.

It would be helpful for us to separate out the two issues of equality and sustainable development.

I would like to ask a couple of questions about the pot of money, totalling £700 million, that was identified as a result of increased yield from business rates and some other things. I take it that the £200 million reserve to cope with spending pressures has effectively been identified only for the 2006-07 budget. What is the expectation for 2007-08?

The £200 million has not yet been allocated, so if it is not used in the current budget it is available for use the following year. The total figure is higher than I remember—it is £878 million. At the time, £525 million was allocated. A further £150 million was to be built into the current year to fund items in the partnership agreement. We will send out that information to John Swinney. The total over the years was £878 million, and £200 million is left unallocated. The rest has been allocated and used to fund elements of the partnership agreement that have financial implications.

Is there an expectation concerning the yield from business rates in the next financial year?

The documents will include a projection for 2007-08, which we can pass on to you. It may be included in the draft budget.

I will look for that later.

I have a more general point about the mechanism for making an announcement about spending within a budget that has not previously been allocated. Is the only mechanism for that a ministerial statement in which a minister describes how they intend to spend that money or is there an arrangement for regular reporting to the committee, whereby what will happen to the sum of £200 million that has been mentioned, for example, is set out?

I will probably need help from Susan Duffy to answer that. With end-year flexibility, for example, ministers make the announcement in June and the formal proposal comes before the committee in the autumn. We receive the formal budget documents, such as the annual evaluation report, the draft budget, the "Building a Better Scotland" document and the budget revisions. When an ad hoc announcement is made, such as the one that the First Minister made on business rates during his recent statement on the Executive's programme, I am not sure what needs to happen, legally. I assume that such a proposal needs to be endorsed by the Parliament at some stage. I think that the First Minister's proposal was to reduce the business rate take by £200 million next year.

I have not picked up that the proposal relates to next year.

I have a copy of something that was said about that. I do not know whether the committee has been told that the £200 million reduction relates to 2007-08. You are right to say that the year was not specified in the statement that was made.

I have heard nothing about the figure applying to 2007-08.

Someone has definitely told me that the figure relates to 2007-08, but I cannot remember where I heard that. It has been reported regularly on television that 2007-08 would be the relevant year.

We can pursue that with the minister. Arthur Midwinter is right that shifts in spending will emerge during the budget revisions that are made in the course of the year. If the minister makes an announcement to the Parliament on EYF or business rates, it is within the committee's competence to seek further information and I expect that we would normally do that.

When I read the Official Report of last week's meeting, I was struck by Professor Midwinter's comments about a new principle called ad hocery and I agreed with his sentiments. What can the committee do to monitor how the Government makes announcements about additional financial commitments that may affect budgets that are already approved? How can we keep tabs on that?

I certainly consider it to be my role to ensure that any such change is brought to the committee's attention. That is why I raised the issue of the £200 million last week. The fact that I was aware of the £200 million figure two years ago is a sign that I will stay on top of such matters and ensure that the committee hears about them. That is a constant effort because of the way in which ministerial announcements are made. After the First Minister has made the broad statement, other ministers re-announce part of it to tie in with their programmes.

I was unhappy with the way in which the £200 million-worth of further efficiency savings was announced to Parliament out of the blue. There is a three-year strategy, to which Parliament has agreed. It was not as if there was a crisis that meant that an announcement about the £200 million had to be made. I felt that the First Minister's statement was not the place in which to make such an announcement; in my view, that should have been done as part of the budget process. The problem is that four of the parties are probably in favour of the decision; nevertheless, I was not enamoured of the way in which the announcement about it was made.

Perhaps unsurprisingly, I want to take up the fact that the total figure of £20.225 million that you give for the cross-cutting issue of sustainable development is much lower than the figures for equality and economy. In the environment budget, specific sums are mentioned under growing the economy—they add up to the total of £1,020 million that you identify in table 1 in your briefing note—but no specific sums are mentioned under sustainable development, which is why you have no figure in that column. However, several level 3 categories of spending are mentioned as contributing towards sustainable development. Do you have any idea—

Are they costed?

No.

That takes us back to Elaine Murray's point about the need for good information. The information has always been like that. I do not know why. The Executive's general line is that sustainable development is a principle that it applies across all spending. It does not identify initiatives that are deliberately designed to promote sustainable development. I do not know why it does not include that information.

Communities has a recurring £12 million for dealing with contaminated land. There does not appear to be any internal logic, apart from—

There is no consistency between departments. Often, what goes in is left to individual departments. The finance co-ordination team sends out a general framework, but what finally goes into a portfolio is more dependent on how the department treats it. I am not privy to the internal workings of the Executive. As I said, these things are understated, but with a bit of effort the Executive could do the same for sustainable development as it did for equalities. If three big issues are cross-cutting priorities but we cannot tell how much is being spent to tackle them, there is a problem.

An obvious example is that if expenditure on public transport was categorised as a sustainable development priority, the amount that is allocated to sustainable development would increase significantly.

The sustainable action fund is there to support research and development in support of sustainable development. If it were to be counted as spending that supports sustainable development, that would immediately boost the figures. However, no figure is put next to that in the environment budget, which is why Arthur Midwinter has not counted it. I was confused about whether there is an internal logic or—

There might be an internal logic within portfolios but not across portfolios. My counterparts in the finance co-ordination team have been pushing departments for such changes but, given the internal power balance, I am not sure who decides what finally goes in. The document is produced towards the end of the process.

I think that we have finished the questions. There is one modification to be made to the draft budget guidance to subject committees. I invite Susan Duffy to say what the change is.

Paragraph 5g would be changed to, "Further to the above, each chapter contains information regarding departmental contributions to cross-cutting priorities. Does the committee wish to make any comments on this information?" In that way, we will capture all the cross-cutting priorities: sustainable development, equalities and growing the economy.

We will adjust the figures that Jim Mather spotted and recirculate the paper.

Are members content to approve the document that will go out to the committees?

Members indicated agreement.