Budget (Scotland) Act 2010 Amendment (No 2) Order 2010 (Draft)
Good afternoon and welcome to the 26th meeting of the Finance Committee in 2010, in the third session of the Scottish Parliament. I ask everyone present to turn off all mobile phones and pagers.
Usually, we have only two revisions of the budget during the year, with the autumn budget revision being the first time we amend our budget. However, this year we have already had a summer budget revision, so this is the second of three routine revisions to the budget that occur in-year. The final revision will be the spring budget revision, which will be laid in late January.
Thank you. We now move to questions and clarifications, beginning with Linda Fabiani.
I think that everyone here agrees that the times are unprecedented. We have taken lots of evidence on the reform of public services and the necessity of preventative spending. I am interested in what you have said about the change fund—the £70 million that has been taken from within NHS board allocations for closer working between the national health service and local authorities. Can you give me a better explanation of that and how it ties in with your views about how to ameliorate the effects of the cuts? How does it relate to preventative spending, working together and the reform of public services?
I point out that that was not in the budget revision. It is up to the cabinet secretary whether he wishes to answer.
I am in your hands, convener. The £70 million change fund that has been announced as part of the budget that I set out last week is designed to support some of the alteration to the way in which we deliver services in Scotland. The inquiry that the committee is currently conducting on preventative spending, to which I will give evidence next week, is covering how we can break down some of the barriers that exist within different public services, how we can reinforce what the Government has concentrated on in all its policy interventions, and how we can focus on outcomes and what is delivered to individual members of the public as the driving force behind how we design public services. There is a significant opportunity to be realised there. There is a great prospect of our doing all that, and the change fund is designed to fund that collaboration between the NHS and local authorities as well as other providers—principally in the voluntary sector—into the bargain.
The cabinet secretary mentioned £100 million of revenue funding being moved into capital funding. Where is that expected to come from?
As the committee will know, there are a number of different areas where spending pressures do not materialise as we predict, or there are changes that we can make within particular budgets. There is a range of different sources that will comprise the £100 million that I intend to carry over: there is a revenue saving associated with the transfer of responsibility for police pensions to the Scottish Government; there are revenue savings from the Forestry Commission Scotland arising out of the changes to the way in which its operations are structured; there are reductions in the running costs within the rural affairs and the environment portfolio; there are some savings from unitary charges that we had essentially overprovided for; and there are savings in public service reform and the Accountant in Bankruptcy. There are also capital savings in the Crown Office capital building programme and there is a reduction in the in-year borrowing requirements that are necessary to sustain the capital programme of Scottish Water at this stage.
Thank you. To take that slightly further, within the revised budget it is clear that Barnett consequentials have been used to support capital. Can you tell us how those decisions were made?
On the Barnett consequentials, my officials will give me the balance of how the £76 million was structured between capital and revenue, as it has escaped me for the moment. However, some of the Barnett consequentials are revenue, and we decided because they were one-off consequentials to invest them exclusively in capital.
Good afternoon, cabinet secretary. I just want to understand what the £714 million for the pensions relates to. Is that additional capacity: do the teachers and NHS pension funds in Scotland have £714 million extra? Is it an accounting mechanism, or what?
No. Essentially, it is pay-outs of pensions to pensioners.
So there is increased—
The amount arises from changes to a number of the actuarial considerations that underpin pension payments, which happens annually. There is revaluation of pension liabilities based on changes to actuarial assumptions. The discount rates that are used are revised regularly. Those costs are supported by annually managed expenditure, which is provided for by Her Majesty’s Treasury.
Pensioners who had served in the NHS or as teachers will have received £714 million more in their pensions. There is more pay-out in Scotland.
I do not know that it is as simple as that. A highly sophisticated level of calculation underpins all the pension calculations. Administrative changes are undertaken that affect the calculation that looks at the value of future liabilities, and the Treasury makes provision for that on an on-going basis.
Okay.
I do not know quite what they would have thought, but it was pretty clear that I was moving expenditure that could have been spent this year into next year.
So, it is underspend.
Yes, it is underspend. It is planned underspend that I have taken certain decisions to create.
So the judgment was made not to redeploy that £100 million of underspend now; you are waiting for next year.
That is correct. I made that judgment for the clear reason that I had expected a fall in our capital budget next year of about £600 million to £650 million. In fact, the fall is to be £850 million. I judged it to be important to create as much compatibility between this year’s capital programme and next year’s in order to sustain capital investment in the economy.
In all the statements that the Government has made on this budget year, it has spoken about wanting to get cash out the door for shovel-ready projects, but £100 million of that cash is sitting in a bank account, not being issued.
We can spend the money only once. As I said to the committee a few months ago, I must look at the pattern of economic recovery as carefully as I can. I do not think that anyone who looked at the scale of the reductions in public expenditure in 2011-12 would not be seized of the challenge that I am faced with in identifying resources that will provide the ability for us to manage some of those reductions. That has underpinned the decision that I have arrived at. I advertised clearly to the committee that I would give the matter consideration later in the financial year. I have now reached that point and taken the relevant decisions.
I understand the points that you make, but I am still confused about the fact that £100 million is being left over from this year’s budget, which could have been put to work supporting the economy now. The construction industry, for example, is crying out for work.
The construction industry would, if we did that, be sitting in front of us in 12 months saying that the fall in the Scottish Government’s capital budgets was even greater than had been predicted or planned. What would we do in those circumstances? The judgment at which I have arrived—I appreciate that it is a judgment—is that, where we identify resources that can be saved in this financial year without an impact on economic recovery, we can deploy them in 2011-12 to support and boost economic recovery.
We are in danger of moving into debate when we are meant to be seeking clarification. A debate will follow. Members should be aware of the danger of moving that way.
The cabinet secretary or his officials might be able to help me on motorway and trunk road investment. I cannot correlate the figures that show the result of changes for motorway and trunk road investment in schedule 3.6 of the autumn budget revision with the figures in the draft budget that show a starting point in 2010-11 for the same budget line.
Will Mr Purvis give us the numbers on which he is focusing?
If I am looking at the right figure, the total in the ABR proposed budget for motorways and trunk roads is £551.4 million. The starting point from 2010-11, in table 7.11 of the draft budget, is £544.1 million.
I do not know whether my officials can provide any information. The difference between the two figures is £7 million. We will have to write to you with a detailed explanation.
Thank you.
What appears in the ABR is the budget on the basis of which Parliament approves it. That differs in some ways from the draft budget, which is based on the control aggregates from the Treasury. When we produce each year’s budget bill, a table at the front of the supporting document explains the difference between the draft budget and the budget as approved in parliamentary terms. Some matters, such as non-departmental public body non-cash costs and local authority supported borrowing, are not approved by the Parliament but appear in the ABR, so some difference will always exist.
I know that, but the motorway and trunk road budget started as £533 million and £17.7 million of changes have been made in the autumn budget revision. If you have an explanation, that will help.
That is the substance of the summer budget revision that we undertook, which was to remove the cost of capital as a concept from Government accounting. The cost of capital was introduced in 2004. In essence, it was another accounting technique to try to provide more effective management of the public finances that are applied by the United Kingdom Government. In 2010-11, it was removed from all Government accounting. Numbers will therefore look different from budget document to budget document. In essence, that is because characteristics such as the cost of capital have been removed from the process.
Given Andrew Goudie’s report and the independent budget review report in July, which told us of what is coming down the track, it must have been a fairly unwelcome letter that you received from the United Kingdom Government asking you for a £7 million contribution to an upgrade for tax equipment. Was any thought given to including that in this revision?
I had not given thought to including that in the revision. I asked my officials to engage in further discussion with HM Revenue and Customs on issues that were connected to the £7 million indicative cost that HMRC had suggested. Given that fact, it would not have been appropriate to include the cost in the autumn budget revision.
You say that even though you knew that it was a bill that you would have to face. Surely you would have made some provision for it or made some kind of set-aside.
The amount of £7 million was a surprise to us. Up until that time, the number that we were dealing with was a potential £1.2 million. For some time, my officials have been involved in discussions with HMRC to seek clarity on that £1.2 million—what it would pay for and what it would deliver. We wanted to know what product would result from paying that sum of money. It is fair to say that it took us some considerable time to get clarity from HMRC on what was involved and how it would be taken forward. We knew that we would have to go through about two years in which we would be to-ing and fro-ing with HMRC about the money.
As I understand it, there should have been an annual payment of £50,000. Where has that gone?
An annual payment of £50,000 was made by the previous Administration to maintain the database of addresses and personnel involved in the Scottish variable rate. The £1.2 million figure—or £7 million figure, I should say—is about ensuring that the Scottish variable rate infrastructure is compatible with the current infrastructure of the UK tax system. That is quite a big issue because, as Mr Whitton will probably now have realised, the previous Scottish Executive paid £12 million in 2000 and surrounding years to set up the infrastructure for the Scottish variable rate. For me to be faced with a £7 million bill essentially to make the SVR compatible with a system that my predecessors had already paid £12 million for begs a few questions. Understandably, the Finance Committee might want to ask me about some of those judgments when it probes me about how I decide on public expenditure. The £50,000 payment is simply about updating addresses. The £7 million figure is about updating the infrastructure of the system to make it compatible with all the changes that have taken place in HMRC’s systems since 2000.
But if—
Just let me finish.
But if I understand you correctly, cabinet secretary, you took the decision not to pay the £50,000 just to keep the addresses updated.
The point that I am making—
Was that correct?
The point that I am making is that the £7 million was requested of us to ensure that the Scottish variable rate system could be operated compatibly with UK tax systems. That is the question that I am faced with and was faced with in July 2008, with three weeks to provide an answer.
2010.
Sorry. It was 2010, with three weeks to provide an answer and with an indicative cost. Some pretty substantial questions need to be examined about the basis of the figures, which is why I welcome the fact that Parliament is to debate the matter tomorrow.
With due respect, there is also a substantial question about why you took the decision not to pay the £50,000 for what would be regarded as an annual upgrade.
I think that Mr Whitton has to be very careful about his terminology. He uses the term “annual upgrade” but that is not what we are talking about. The £7 million figure, which is the figure in question and is the basis upon which the Secretary of State for Scotland has written to the party leaders in Scotland, is about ensuring that the architecture and infrastructure of the information technology systems for the SVR are compatible with the existing tax system of the UK.
I remind you that the debate is to follow and that other members wish to come in. Does Mr Whitton want to ask another question?
Just one, to clarify the situation, because I want to be clear. Does the £7 million that we are talking about include a back payment going back three years? Has HMRC rolled it all up and said, “Well, there is £150,000 that you have not paid us, Mr Swinney, and we are adding that to whatever we were going to charge you for the new infrastructure?” If you like, you have a tab running and you have not paid it.
I think that even HMRC would have difficulty inflating £150,000 to £7 million—that would stretch even HMRC.
I understand that. I am just asking you whether the amount is included in the sum of money for which you are being asked.
My point is that the £7 million figure is about ensuring the technical capability of the SVR system to work alongside current tax systems in the UK. I think that I should probe that figure to establish whether it is justifiable, bearing in mind the fact that my predecessors already spent £12 million on the project.
Yes, but the figure was £1.2 million then, not £7 million.
Does that not also indicate—
It does not explain why you did not pay the £50,000.
What HMRC has said to us in the post-2007 period is that work had to be undertaken to ensure that there was an upgrade of the SVR system to ensure that it operated compatibly with the UK tax system. My officials were exploring with HMRC for some time a proposition that we thought was in the order of £1.2 million to improve the system. We then went into a prolonged period of uncertainty. In July, that indicative cost suddenly became £7 million. The Finance Committee and the Public Audit Committee would certainly want to know what decision-making process I used around such a sum of money.
I want to pick up on a couple of points in the budget revision. We are talking about 2010-11. If I have picked up his point about SVR correctly, the cabinet secretary is talking about future fiscal years. The Secretary of State’s letter is talking about after 2011, so if HMRC gets in touch with you after July next year, it will, by definition, be talking about the fiscal years after 2010-11 because we are already in that year. I appreciate that a decision was made not to exercise the SVR in financial year 2010-11, but if the Scottish Government had decided to exercise it, is the cabinet secretary saying that it could have been exercised in 2010-11?
I am saying that, since 2007, HMRC has made it clear to the Government that in order for the Scottish variable rate to operate, the system would have to be improved. For a prolonged period during the process, I was under the impression that one of HMRC’s propositions was that the improvements would cost £1.2 million. As I said to Mr Whitton, that proposition disappeared after a while and the next figure, which we got on 28 July, was an indicative cost of £7 million.
I appreciate that, but from what you have just said, it seems to me that if changes were required to the system, the SVR was not available to be exercised. When did HMRC tell the Scottish Government that system changes would be required for the SVR to be capable of being exercised?
That advice was given to me when I became a minister.
In May 2007.
Yes, May 2007.
It just strikes me as odd, to say the least, that today we are discussing a budget revision of £77 million, under procedures under the Public Finance and Accountability (Scotland) Act 2000 and the written agreement between the committees and the Government, but at no point in the past three years has it been thought that Parliament or the Finance Committee needed to be told about the apparent inability to exercise a power that could raise £1.2 billion.
If Mr Brownlee will forgive me, I think that that question is one that I might helpfully address in my statement in Parliament tomorrow.
Helpful comments on that would certainly be quite useful.
No. In the spring budget revision, I will restate the budget to remove £100 million. In a complementary way, the UK Government in the winter supplementaries in the House of Commons will, in essence, restate the Scottish budget and take £100 million out of our departmental expenditure limit total in 2010-11 and apply it to our DEL total for 2011-12.
In other words, there will be an underspend—
I am sorry; let me finish my answer for the sake of completeness.
On page 7 of the autumn budget revision document, you helpfully list the sources of funding for the Scottish Administration. We are talking about a revision for which, for the things over which you have control, the policy decisions were substantively announced in April, before the general election, and we are taking decisions in November. In the accompanying document to the revision, there is a non-domestic rate income forecast of £2.068 billion. Is that forecast from April 2010 or November 2010?
That will be the forecast in the budget bill in the spring. I cannot give a precise date for the estimate, but it will be the most up-to-date estimate of non-domestic rate income that I had to put into the budget bill in February. I can state that figure only once in the year.
Does the Government have an updated expectation of what the figure is at this stage? It might not be £2.068 billion.
There are always variations one way or the other from the figure that we put into the budget bill on non-domestic rates. Sometimes the estimate is correct, sometimes we underestimate and sometimes we overestimate. In essence, the volatility is managed through the non-domestic rate account, which is held in the consolidated fund. In some years that operates in surplus and in some years it operates in deficit but, crucially, the Treasury takes a close interest in its management over a sustained period of time.
Are you able to share with us your current estimate of non-domestic rate income for this financial year? It is a crucial component in determining how much flexibility there is and how much of an underspend you might end up with.
It is not a factor in underspend at all. I guarantee the figure of £2.068 billion in the budget bill, so if the income comes in at, say, £2 billion, I am £68 million worse off. I guarantee the figure to local authorities, so they have to receive £2.068 billion.
That is the point. If you came to us today to say, “We said it would be £2 billion, but in fact it will be £1.7 billion,” we might have second thoughts about authorising your £77 million extra expenditure.
Correct.
That is why I was asking what you think the figure is.
It is a guaranteed sum of money, but I must be mindful of two other factors: the current status of the non-domestic rate account in the Scottish consolidated fund—as I say, in some years it is in surplus and in some years it is in deficit—and the best expectation that I can have of the income to be realised out of non-domestic rates, which, again, sometimes we get correct but sometimes we underestimate or overestimate.
I understand that, but it is not obvious from what you have said whether you expect to have got it wrong in an upwards or downwards direction.
I will not know the answer to that question until the end of the financial year.
Will you not have any indication at all until then?
I could give another estimate of what it is—and I have that estimate—but that would not take us much further forward. The £2.068 billion is a guaranteed sum of money that I have to produce to support local authority funding. I can make estimates about the income, and I receive estimates on a regular basis, but I will know the answer to the question of what materialises only at the end of the financial year.
The issue has been taken as far as it can.
I will return to the SVR, cabinet secretary. I understand your concern that £12 million was paid some years ago, and I can understand your concern about a demand for perhaps another £7 million. How much of your concern about the £7 million is predicated on the knowledge that, irrespective of whether the new system cost £1 million, £7 million or £70 million, it would not produce any results if the database that it runs on was not updated?
The question is whether the IT infrastructure can operate compatibly with the UK’s taxation system. When I became a minister, the point was made to me in a briefing that infrastructure upgrading work would be required in relation to the Scottish variable rate system and that that needed to be explored with HMRC.
Do you know of any taxation system that could run without an up-to-date database?
Of course it must have an up-to-date database, but that is not the key question. If there had been an up-to-date database and the IT infrastructure had been unable to operate compatibly with the UK system, the system would not have functioned properly.
But a database is pretty fundamental to any system, is it not?
The question is not so one dimensional. The question is whether the IT systems on which the Scottish variable rate is predicated operate compatibly with the UK tax system, and the advice that I got when I became a minister was that further upgrading work was required to make that the case. We could have had all the databases in the world but, if they had not worked, we would not have been able to collect the tax if the Administration had decided to operate the system.
I understand that there is a multitude of questions. I am asking you the first, fundamental question. Databases do not work—they are just information that would go into the system. If that basic information was deficient and had been allowed to lapse, surely any system would become redundant.
Even if the database of personnel was absolutely up to date, if the IT infrastructure was not compatible with the UK tax system, the information would have been meaningless. That is the point that I am making and why it was important that I established why I was being asked for an additional £7 million to update the infrastructure, bearing in mind the fact that my predecessor had already spent £12 million on the infrastructure. That seems to be the key question.
With respect, cabinet secretary, you seem to be conflating two incidents that are separated by a fair amount of time. You took a decision in 2007 not to pay £50,000 and you were asked for £7 million in August 2010. In your answer, you seem to be conflating the two.
When I became a minister, I was given a briefing that indicated to me that, if the Scottish variable rate was to be able to deliver what is called 10-month readiness—it has always been a feature of the system that it would have to have 10-month readiness, as HMRC could not apply it in a shorter timescale than that—there would be additional infrastructure costs. The Government had been elected on a commitment not to use the Scottish variable rate; so, we had to consider what was the best way to secure those infrastructure improvements to make sure that the system could have 10-month readiness. That is the point that I was making to Mr Whitton earlier about the figure of £1.2 million. That was the first figure that I asked my officials to explore to find out what that would deliver to ensure that the Scottish variable rate system could operate. I was always of the view that there had to be 10-month readiness for the Scottish variable rate.
I appreciate that few of the decisions that someone in your position is asked to make are less than complex. However, I would like to think that, when I sat where you are sitting, I shared as much information as possible with both the Finance Committee and Parliament. Do you in any way regret that, back in 2007, you did not see a case for sharing the complexity of the issue with the committee and Parliament?
That question takes me on to the territory about which Mr Brownlee asked. I have reflected carefully on the issue since I received the Secretary of State for Scotland’s letter on Thursday. Mr McCabe will appreciate that I am on the receiving end of a huge volume of information; if I shared all of it with Parliament, the briefcases with which members go home every night would be bigger than they are. I must reflect carefully on the issue of what information I could have shared with Parliament and the Finance Committee at the time. That will be part of the substance of what I say to Parliament tomorrow.
I appreciate your concern for our workload.
I invite Malcolm Chisholm to finish this section of questioning.
Tom McCabe has asked some of the questions that I planned to ask. With respect, I point out that the Government’s manifesto commitment on the variable rate is irrelevant, because the budget is a matter for Parliament rather than for the Government.
That is a fair question. As I said to Mr McCabe and Mr Brownlee, I am reflecting carefully on the matter. I will say more about it to Parliament tomorrow.
Do you think that some of the statements that you have made—rather than those that you have not made—gave the impression that we could exercise the power more readily than we can under the circumstances?
There are two fundamentally separate issues. First, page 63 of the 2011-12 budget document states:
It is not untrue to say that the Government will not use the power, but would it not have been more accurate to say that the Government cannot use the power?
I come back to the point that I have just made: the wording in this document is the wording that has been used since 2005-06. I have simply maintained the convention of giving Parliament clarity on whether the Government will be using the power or not.
I invite Jeremy Purvis to ask a question very quickly.
I am grateful, convener. I am still not entirely sure why no provision would be made within the budget revision unless the Government took a principled decision that it would not seek to have the tax-varying power for the coming years. Page 49 of the budget document—the same budget document that we are referring to—states:
Mr Purvis helpfully makes the point that there is a devolved power to vary the rate of tax by 3p in the pound. I have read countless comments over the weekend, saying that the power has been abandoned or lost. That is not the case whatsoever. The power is in statute. I do not have the power to remove that power. It is in law.
Can Parliament exercise that power, cabinet secretary?
Parliament is free to exercise the power. The question is, how much would it have to pay HMRC to deliver that within the timescale envisaged by Parliament?
Given that we have just heard from the minister that there will be a debate in Parliament tomorrow, that might be when the issue can be explored further. We have to move on. Joe FitzPatrick can ask the final question.
On Mr Purvis’s point, could the Labour-Liberal Administration have included in its last budget document in 2006 use of the tax-varying powers as income in that year, had it not taken previous—
I do not know all the detail of where things were at in 2006, but I make the point to Mr FitzPatrick that the system has always operated on the premise that 10 months’ notice would have to be given to HMRC. If my memory serves me right, the budget in 2006 would have been published in September 2006 for the financial year 2007-08. It could not have been enacted thereafter unless—in fact, I do not think that it could have been enacted practically, because 10 months’ notice has to be given to HMRC. The lead-in time for HMRC is 10 months, but the lead-in time for the Parliament getting to that point through its own deliberations would add a significant period on to that.
We must now move on. I thank the cabinet secretary for his answers on a considerable range of finance topics.
I will simply move the motion.
The committee will now communicate its decision formally to Parliament by way of a short report. Parliament will then be asked to consider a motion on the order next week.
Official Statistics (Scotland) Amendment Order 2010 (Draft)
item 4 is consideration of another draft SSI: the Official Statistics (Scotland) Amendment Order 2010. Procedures for the consideration of the draft order are the same as for the order on the autumn budget revision. Rob Wishart, the Scottish Government’s chief statistician, is alongside the cabinet secretary for this order.
Thank you, convener.
I thank the cabinet secretary for that illuminating introduction. There being no questions, I invite him to move motion S3M-7247.
The committee will communicate its decision to the Parliament by way of a short report. The Parliament will be asked to consider a motion on the draft order next week.