Finance Committee, 22 Feb 2005

Meeting date: Tuesday, February 22, 2005

Official Report 285KB pdf

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Budget Process 2005-06

Agenda item 3 is consideration of a paper from our budget adviser, Arthur Midwinter, on the Executive's response to our report on stage 2 of the 2005-06 budget process. Members will recall that we took evidence on the Executive's response from the Deputy Minister for Finance and Public Service Reform on 1 February. Unfortunately, Arthur Midwinter was not in the country at the time, which is why he will give us his views on the key points now. I invite Arthur Midwinter to speak briefly to his paper, after which members can make comments.

I am sure that my absence was not behind the minister's appearing at that time.

There are large areas of agreement. About two thirds of the committee's recommendations have been accepted, which is a sign of further progress in how we handle such matters. However, I will concentrate on the four areas of disagreement in which the committee should not, I think, simply take the Executive's line and leave matters at that.

First, on equality proofing, I am disappointed that the valuable information that we received last year on costs in the equality section—which the committee praised and recommended to the Executive—has disappeared this year. In fact, we asked whether that model could be used for all cross-cutting approaches, but the Executive appears to have excluded such an approach in trying to co-ordinate how it does things. The result is that, in respect of equalities, we have no way of knowing how much is being spent on inequality, on economic growth or on closing the opportunity gap, as we did last year. From memory, I think that more than £400 million of expenditure was identified that clearly advanced the equality agenda. That was progress.

Secondly, the Executive has suggested that the Finance Committee and the Equal Opportunities Committee are asking for targets to be set for individual employing organisations, such as health boards and local authorities. However, that is not what the Equal Opportunities Committee asked for—it asked for a national figure and national outcomes. The Executive appears to have interpreted that request in a rather curious way. Through one of the groups that I sit on, I am privy to information that suggests to me that some data that we have requested are already available to the Executive through its gathering of statistics. Therefore, I would like the matter to go back to the Executive and to be pursued further.

If we can have data only on employment of the groups within the equality agenda for the Executive's own budget, we will have no idea whether the policy is being implemented successfully throughout Scotland, particularly given that the NHS and local authorities are such big employers. I would like the committee to agree to my chasing up what can be provided in an informal discussion with Executive officials. Otherwise, we will not be able to monitor an important element of the strategic agenda.

Secondly, there are similar arguments about the economic growth target. The absence of a national or strategic target is preventing effective monitoring. It is clear that the issue is complicated; however, targets are set for the closing the opportunity gap strategy throughout portfolios. I have always believed that it is possible to generate not necessarily a target, but some kind of growth index that would allow us systematically to measure progress. The committee might need advice from someone other than me on how best to develop that; for example, an economist who is fully up to date on such matters. Given the response that Tavish Scott gave in evidence when he offered to discuss matters further and suggested that the committee might want to make proposals, we should try between us to find a way of getting a sensible set of indicators that we can use.

Thirdly, I turn to council tax. The Executive appears not to acknowledge the pressure on council tax that is caused by cutting grant in the guise of making efficiency savings—I noticed that there was an exchange about that before I came in. By taking £200 million out of the grant, the Executive is putting pressure on council tax levels. In the 1980s, the approach that was adopted by the then Scottish Office was to set cash limits. It agreed the cost of a service and then set a cash limit—which was normally 2 to 3 per cent below the expected inflation rate—as a way of putting on the squeeze. In the 1990s, for about five or six years the assumption was that all pay and price increases would be accommodated through efficiency gains. That was the way the squeeze worked. I see the handling of efficient government within the local government budget as a continuation of that approach.

We have the new emphasis of the Executive's setting a target for council tax increases, which has been resisted in the past, but we have no exposition in the Executive's reply of why it thinks that the maximum 2.5 per cent increase is manageable. We are told simply that there is no need for increases above 2.5 per cent. Over the past five years, the average increase has been between 4 and 5 per cent at a time when the Executive was not reducing grant but maintaining and increasing it. The argument has been made that there have been high levels of grant in recent years. The way local government finance operates is that once the levels of grant are in, they are in and they exist to meet commitments; the grants are not money that is splashing around in the system waiting to be used. What matters are the changes in the present year. If we have what is, in a sense, an inelastic tax that does not increase automatically with inflation and we want to spend above inflation, the tax will rise unless we provide compensatory grant. Reduction of the grant is liable to put further pressure on council tax. The committee should express its continuing concern about that; it is important to put that on the record so that when the council tax increases come in higher than 2.5 per cent, the committee cannot be blamed.

Finally, on efficient government, when I was away in January the committee was asked to approve a new budget that was, apparently, made in expectation that £405 million of efficiency gains would be delivered. However, you were not told how, which seems to me to be bad practice. As a result of our continuing dialogue with the Executive, it has produced a breakdown of the savings—which you now have—using the kind of single-line approach that we would use for approving budget revisions. We will have to pursue in questions what those lines mean. At least we now have the breakdown. I think that we will get much better information once the technical notes are available.

I found it difficult to fit elements into the categories that highlight what efficient government is about. Some of them are simply called "savings" and are not clearly back-office functions, except for procurement, which is identified as saving £207 million.

The modernising government fund and the efficient government fund involve small amounts of money, but they are highlighted as being big sources of efficiency savings. Are they genuine savings or is it just slippage? We need to pursue that question. Further, what is meant by the lines that say simply, "efficiency savings" in relation to the Scottish Commission for the Regulation of Care, the Forestry Commission and so on? I look forward to the technical notes, which might provide some answers to those questions.

Thank you. Your paper is useful. I reiterate a point that you made earlier: we are making some significant progress and the larger part of our recommendations has been taken on board. You were also right to focus on the four areas in relation to which there are continuing issues.

On council tax, you made a point about the implications of how funding for local government is allocated in terms of the efficiency assumptions. An issue was raised—in respect of Dundee—about population decline in certain local government areas. Do you have anything to add to what you said about that?

If the report that I read was accurate, the issue related to the loss of population from the Dundee boundary into Monifieth and surrounding areas. Going by letters that I read in The Courier this week, I have to say that the minister will need Machiavellian skills to persuade the people of Monifieth that they ought to be part of the city of Dundee.

The local government structure is a mess: the reform was poor and there are all sorts of problems associated with it, but they are not the cause of the current crisis. The current crisis is caused by the efficiency gains—

By "crisis", you mean the council tax.

The council tax increases and associated pressures are caused by the efficiency assumptions—not by the problems that there might result from mismatches that flowed from local government reorganisation.

However, the minister has pointed to an example that is not the problem but is a symptom of one of the big problems in the local government grant settlement system, which is the assumption that local authorities that face population decline—which some of the poorest areas in Scotland do—can accordingly adjust their spending pro rata. They have an element of fixed costs—they have to take care of the same number of roads, if not more, each year and they have to make similar capital investment in education stock and so on. Therefore, to assume that spending can be reduced pro rata is questionable. The issue is not about boundaries but about how population decline and the grant settlement are handled. That could be an issue that we could pursue further, particularly if we decide to consider deprivation.

I have often drawn comparisons between the way local government grant and the national health service grant are allocated and how the Executive is funded through the Barnett formula. The Barnett formula creates a stable system because the increases apply only at the margins, whereas in the local government and health service grant settlements, population change is fed in straight away across the whole grant, which means that quite significant changes can occur. The issue relates not only to the boundaries but to the broader picture. However, although such elements might help to explain variations between councils, they do not explain the likely general increases in the council tax.

That is very interesting, particularly in the context of what we intend to do in respect of deprivation. Perhaps we will talk about that more specifically. I would welcome information that would highlight the stabilisation mechanisms—or lack of them—that affect local government as a result of population decline; such information would be useful.

Like the convener, I thank the budget adviser for his report. I propose three technical amendments, whose aim is to clarify sections of the report. Paragraphs 15 and 16 are slightly shorthand in style. If I cannot understand them, I suspect that others might also be in the same position.

For clarification, it would be helpful if paragraph 15 were rewritten. We need to make it clear what the figure in the efficient Government document of December for anticipated savings in 2005-06 is and what the figure for the same heading in the January budget document is. If we can see how those two figures can be reconciled, that will be for the better. Am I right to assume that the £405 million figure comes from the January budget document?

Yes—it is in the appendix.

We should rewrite paragraph 15 to say that we were told in December what the savings in 2005-06 would be, but in January we got the budget and the figure was £405 million.

I am not sure that we are talking about something that we can take further. Would that information be just to inform ourselves?

I was going to move on to my second point about what we should do. I assume that the report will go on our website. Before that happens, perhaps we can clarify the point that I raised. What change took place between December and January and why?

The report is on the web already.

The report will have gone on the website this morning.

Perhaps the budget adviser could write an addendum about what changed in a month and why.

My second point concerns your point to the effect that the committee should not endorse "such unquantified savings" and that we should

"continue to express … concern over this practice".

What happens elsewhere? Are we trying to achieve greater transparency than is the case elsewhere or are we just trying to reach the same level of transparency?

There is a normative position. From the first time I spoke to the committee, I have said that the committee should never sign up to efficiency savings if the Executive cannot tell you how they will be delivered.

What is happening in the rest of the United Kingdom, for example? At the time of the budget spending review, did the Government say how the budget was going to be spent?

It probably did not do so with the level of detail that I would like.

I am not trying—

I am not saying that the Executive is doing anything that may or may not be happening elsewhere in the devolved Administrations.

I just think that my first question on reading that phrase was whether the Executive has quantified how it will spend the money. Where do we stand on that?

My final point concerns the phrase:

"The Executive has provided"

the total

"and it is attached."

I have looked through the response but cannot find it. I note that, rather unhelpfully, it does not provide a total—I am sorry, I have just noticed that it does. The total is £744 million. Although there is no heading to this effect, I assume that that figure is for the three-year period. The text refers to—

I thought that we were getting figures only for this year.

The overall total is £344 million.

The figure must be for the three years.

The helpful thing to do would be to ask for a further breakdown. The budget that was published last month says that there will be £405 million of savings, but we do not have a breakdown of the figure. That is not helpful—half a billion pounds is quite big money. Let us go back to the Executive and say, "It is helpful that you have given us the breakdown of three years, but could we have a breakdown of the £405 million?"

That is what we asked for—I assumed that we had got it. Unlike Wendy Alexander, I had not looked at the total.

Do not worry.

I see that the water savings are still included.

Indeed. I have one last question that concerns efficiency savings in local government. Perhaps we could be provided with a table on the subject.

You said that difficulties will be caused to local government by the demand for efficiency savings. I am confused, but only because I have not yet seen the analysis. Are the demands that are being made of local government in any of the next three years in excess of 2.5 per cent a year? Although I do not want an instant answer to the question, how fair or unfair are the demands that are being made of local government? If we are to know the answer, we will need to know on which side of the 2.5 per cent per annum figure the demand falls. I suspect that it is less that 2.5 per cent in each of the three years.

Well—

It would be helpful to have that information to inform the debate about whether local government has been hard done by and whether it is being asked to make savings of more than 2.5 per cent in any of the next three years.

It is.

The question cannot be answered, because people make different arguments about what councils are asked to provide. Councils say that they have been asked to provide certain services because of different pieces of legislation, but central Government says that it does not cost that much.

We are talking about grant reduction.

The Executive quantified the matter in a paper that came before the committee—I remember seeing that. One difference with the present proposals is that the savings target is higher. I have not quantified the savings into percentages, but the savings in local government will be roughly half of the total savings, even though local government accounts for only a third of the budget.

That information would be helpful. The 2.5 per cent figure is important, because that is Gershon's formally stated position on the maximum possible savings that are commensurate with not cutting front-line services. One may or may not agree with that view of Gershon, but it is critical that we know whether the savings are to be more or less than 2.5 per cent, because that will help us to get a handle on how real the cries of pain are.

The second difference is that the money is to be taken away, rather than left to be reallocated if it is saved. The money is to be taken off the grant, which is a key difference.

You are right in your assessment of the feelings of the citizens of the republic of Angus, but we will leave that on one side.

I was interested in what you said about the difference between efficiency savings and other savings. In debate, ministers might argue that a saving is a saving and that it does not matter whether it is an efficiency saving. However, I suspect that it does matter, if it is claimed that there is some merit in being more efficient. I understand why increasing the sentencing power of sheriff courts to five years will save money for the Crown Office and Procurator Fiscal Service, but that is not an efficiency measure, it is a judicial measure. It has been decided that sheriffs will have a power that only the High Court had before, which is nothing to do with efficiency. Similarly, alternatives to prosecution are being introduced not for reasons of efficiency, but because they are a sensible way in which to proceed in the judicial system. Alternatives to prosecution might save money, but they are not an efficiency measure, because they do not mean that the same job is done more efficiently.

When we get the full details, all that we will be able to do is to compare the proposed savings with the initial criteria. It is clear already that some of the proposals will not fit those criteria, which in fact probably makes the savings target more attainable than it was. Initially, I felt that the Executive could not reach the efficiency target because of the areas in which it claimed savings could be made. If, as you say, the targets are simply for savings in some cases, they become more realistic.

I have concerns about what are described as cash-releasing projects, which is a nice way of putting it. As the trade union representatives said, it is all very well saying where the money is to be saved, but we cannot see where the Executive intends to release the cash that is saved. A number of the proposed savings are in Executive priorities. I am not sure why youth crime is placed in the education portfolio, but there is to be a saving of about £3 million on that and a saving of £1.4 million on additional support needs, even though recent legislation will increase the amount of funding that is required to support young people in schools. There is even to be a small saving on Gaelic, but legislation is going through that will increase expenditure on Gaelic. We need to see the other side, which is how the money is to be redistributed.

I suppose that we will get that information in the technical notes that are to be provided.

Youth crime is a budget line that is under the control of a department whose remit is wider than simply education. There is not a big budget for that, but the proposed savings are large—the question is whether they are to be efficiency savings or just savings.

I agree with Wendy Alexander that we should see the savings in percentages for each of the budget lines, if possible. That would give us a better view.

We are supposed to get a technical note for each of the projects, so we should wait for the additional information before we decide what to do.

I wonder whether Professor Midwinter knows whether the efficiencies in the supporting people programme are over and above the reduction that the Office of the Deputy Prime Minister has imposed. If they are not, the Executive cannot really claim additional savings.

I do not know.

I thought that that was Treasury funded anyway.

It is transferred.

It is transferred, but we can use it for something else. Is that right?

Once it is transferred and has gone into the block, it can be used for something else. Usually—I include that caveat—Treasury money is transferred because pressure on the budget is rising. The same thing happened in relation to the provision of free care for the elderly. All such factors are open-ended to begin with. When they build up, they get transferred into the block with tight control over the sum of money.

We do not have the technical notes, so I accept that the situation is not clear at the moment, but if the UK Treasury has reduced the amount of money available and is giving the Executive less money, how can the Executive claim a saving of £27 million unless that is over and above the saving that the Treasury has already made?

In that case, the figure might come down to the Executive's argument that different local authorities put forward different charges for similar services. Again, we need to wait for the more detailed technical note.

I might have missed part of the argument, but it seemed that, basically, whatever money we were getting was being reallocated among local authorities. I must have missed the part about the total also being reduced, but perhaps that is not an argument for this committee.

I think that the amount was reducing and the Executive added some money to put it back up.

Yes.

And now the Executive is taking the money out again.

I would rather see the detailed technical notes before saying whether that is happening. It would be helpful to come back to all of the issues that have been raised once we have the technical notes. We have noted down the points that have been raised. Once I have the technical notes, I will be able to produce a note for the committee and do some calculations for members, if they want.

There is a typo in paragraph 8 of the paper. It should say "By contrast" rather than "By contract".

On the numbers—to echo Wendy Alexander's point about reconciliation—I have added up all the totals quickly and have arrived at a figure of £496 million, which I struggle to reconcile with the other figures.

Have you got the third page?

No, I did not get the third page.

I was a bit confused until I got the third page as well.

The missing page will undoubtedly clarify the matter.

It will undoubtedly bring some arithmetical correlation; I do not know whether it will necessarily clarify anything.

I will settle for the correlation.

Talking about correlations, I see that under the heading "Administration" we have a subtotal of £8.4 million, but the detailed breakdown of the lines that should make up that total accounts for only £6 million. Further, on page 5—

The other lines that you mention are separate elements; there is a problem with the way in which they have been printed. The figures for "CAP Reform" and so on should be listed as items in their own right. The problem is to do with the way in which the document has been produced.

I am sure that it is resolvable.

I had assumed that the £8.4 million was the quantification of the commitment to freeze the administration budget in real terms. The relevant figure was something like a saving of 3 per cent per year.

As I said, I am sure that the problem is resolvable.

On page 5, under the heading "Environment and Rural Development", the element that relates to savings in Scottish Natural Heritage, which is listed as "ERD/C3", has no figure attached to it.

I raise these concerns in an effort to boost the credibility of the document.

I stress that the paper was provided by the Scottish Executive; it is not for us to change it.

We can perhaps highlight areas that we are unclear about. That could be part of a debate that could go on between Arthur Midwinter and Executive officials. Obviously, the technical notes that we have been promised will provide more detail on each of the budget lines.

I would like to make a more substantive point about the economic growth target. The argument about preventing monitoring, which is utterly sound, also masks our exposure. Not having a forecast for growth leaves it open to competitors and even people who are thinking of investing their capital or making their life here in Scotland to draw the conclusion that we are not serious about economic growth. That is as big an issue as the prevention of on-going monitoring.

Does the Scottish Executive have a forecast system? Wendy Alexander would know.

No, not even for the minister. I am sure that people who make freedom of information requests would find that astonishing, but you get a nice little table which, as my husband has noted, usually includes, first, the Fraser of Allander Institute—I know that that pleases him—followed by Cambridge Econometrics and Experian Business Strategies. As far as I know, that is all that is available. That is certainly all that was available in my time.

We have to decide what to do with the paper. Arthur Midwinter is suggesting that we should clarify the nature of our request to the Executive about equality proofing and ask for further discussion of the matter. I take it that that is agreed.

Members indicated agreement.

On economic growth, the suggestion is that we get into a discussion with the Executive about how we might progress, and I will report back to the committee on where we get to with that.

On council tax, I am not quite sure how we reiterate our concern that problems remain.

I think that you will find it reiterated tomorrow in the press. I am pretty certain of that.

Let us just emphasise that it is not our fault.

It is probably worth having a note or paper on the point that was raised about the instability linked to population decline, either in the context of what we are discussing now or in the context of our inquiry into deprivation. It could be done either way.

I thought that Arthur Midwinter's point about the Barnett comparators was quite valid. At the same time as the Executive benefits from a mechanism that does not really let population shift change its total revenue very much, it inflicts a totally different mechanism on councils.

It would be useful to have that set out.

Finally, on efficient government, all we can do is to seek to clarify the information that we have got, await the technical notes and resume discussion of the issue once we have that information. We expect to have it by mid March. Is that agreeable to members?

Members indicated agreement.