Budget (Scotland) Act 2009 Amendment Order 2009 (Draft)
Good morning and welcome to the Finance Committee's 27th meeting in 2009 in the third session of the Scottish Parliament. We have received apologies from Jeremy Purvis, so I welcome Liam McArthur as his substitute. I ask everyone to turn off mobile phones and pagers.
I will make a brief opening statement on the draft Budget (Scotland) Act 2009 Amendment Order 2009.
I thank the cabinet secretary for his opening statement. I now invite questions from members.
It is interesting to hear that the money that was voted on in the budget several months ago now appears in the autumn budget revision. Obviously, the headline items were the town centre regeneration fund, the moneys for modern apprenticeships and the additional funding for home insulation. People have perhaps been wondering for a while where the money for those came from, so I suppose that we should expect some reductions to have been made to the original budget lines to free up the money for those items. Am I correct in that understanding? What is the explanation?
Clearly, one could expect either increases in resources coming into the budget or reductions in other budget lines to pay for those new commitments. Although I cannot remember the exact language that was used at the time of the budget, I am pretty sure that I said to Parliament that an increase in non-domestic rates income beyond what had been expected allowed us to afford some of those priorities. The town centre regeneration fund has been paid for out of the capital acceleration that we agreed with Her Majesty's Treasury. That is where the resources for those three commitments have come from.
This might not be strictly relevant but, while we are talking about the subject, I will take the opportunity to ask about the town centre regeneration fund. Is the cabinet secretary still insisting that all that money should be spent within the current financial year?
We have relaxed the conditions to an extent. We would normally allow resources to be drawn down only when contracts—for example, a construction contract—are at a stage of completion. For the town centre regeneration fund, we have allowed money to be drawn down in those circumstances but also when contracts are put in place. We do not require the work to be completed before we allow the resources to be drawn down, so long as we are certain that the work has been contracted. That offers a degree of flexibility to accommodate the circumstances of particular projects.
I will not ask from which budget line you have found the resource to send a letter to the Calman commission to ask for borrowing powers. I want to ask about a more anoraky issue. In the introduction to the supporting document on the revision, you talk about the IFRS and public-private partnership projects, which are now on balance sheet. Will you confirm that there is no net change to affordability and cash flow for the Government? We covered that many times before there was clarity about what the final arrangements would be. My understanding is that there is no change in affordability.
No. The Treasury has applied the IFRS rules; essentially, we will have to account for private finance initiative projects on an IFRS basis in our accounts, but we will not budget for them in our budget. We have waited a couple of years for that clarification, but we now have it. PFI projects have come on to the Government's account in a fashion that is essentially cost neutral to the Government.
I forget the wording that you used in your opening statement, but it is quite clear that the adjustment for the IFRS has been made in some budget headings but not in others. It seems from what you are saying that, even in the areas that have not been agreed, the Scottish Government still expects that the effect will be cost neutral.
That has been our expectation throughout the process. As I said in my statement, we have gone through the first tranche of discussions with the Treasury on the incorporation of the PFI projects into the Government's accounts, which is spending power neutral and cost neutral. We have a further tranche of that work to do with the Treasury—I expect there to be just one further tranche. There might be further instalments, but I expect the incorporation to be both cost neutral and spending power neutral.
In response to Malcolm Chisholm's question, you said that the town centre regeneration fund has been afforded through acceleration in the capital funding agreed with Westminster. I note for the record that Stromness, in my constituency, with which you have a family connection, is a recent beneficiary of the fund. In accelerating that capital funding, are you suggesting that it has not been pre-allocated to any other area? Will you be more specific about whether the funding has had to be moved away from some future capital project in order to fund the town centre regeneration fund now?
Clearly, accelerated capital expenditure gave us an opportunity. The Treasury in these circumstances—as in all circumstances—makes financial allocations to us but does not specify how that money is to be spent. In no circumstances does the Treasury apply conditions, other than the financial rules that we have to observe. It certainly does not tell us how the money should be spent. That is an intrinsic part of the devolution settlement. The Treasury has accelerated capital expenditure and the Scottish Government has chosen to deploy it through the town centre regeneration fund, which I am pleased to hear has benefited Stromness.
I appreciate that the Treasury will not apply any conditions but, presumably, there was an expectation prior to the financial difficulties, or economic crisis, in which we find ourselves that that money would be forthcoming for capital spending in future years. From what you are saying, it sounds as if it had not been earmarked for any other purpose prior to the request being made to the Treasury.
I have to set out annually the detail of the Government's expenditure programme. I do that year by year in the context of the spending review. Any future decisions on allocation of capital expenditure are set out in the budget document for 2010-11, which is the next year for which we are considering these questions.
In the pre-budget report of 2008 and the subsequent budget in April 2009, we received around £84 million of consequentials. Has all that generosity now been allocated?
Not all of it has been allocated. We have made a series of announcements so far in relation to the college estate and capacity in the further education sector, but we still have some consequentials to allocate.
Have you any idea when you will do that?
I am looking to do that reasonably swiftly. As Mr McCabe will appreciate, given his perspective, taking decisions on that at an advanced stage in the year has to be judged carefully. There are some issues about which we have uncertainties such as, in particular, the cost of the vaccine for swine flu. A position is evolving on the basis of the scientific advice that we are receiving. That is a significant factor, which the Deputy First Minister and I are considering in deciding how these issues will be taken forward. Obviously, I have to make decisions in advance of the spring budget revision in January.
Does that situation encourage you to think slightly differently about setting a contingency in future?
It would be an advantage if we were in a position to retain a contingency—that would be desirable. Given the spending environment in which we are now operating, in which the sustained year-on-year real-terms increases have levelled off during this spending review period and, as we all realise, we will move into a period of real-terms reductions in spending, it will be a challenge to identify a contingency. That does not in any way undermine the advantage of retaining a contingency. Indeed, the fact that we are operating under tight financial management perhaps increases the advantage and necessity of doing that. I can see advantages to Mr McCabe's suggestion.
Do you think there is any advantage in holding some money at Her Majesty's Treasury?
No, although I am very grateful to my predecessors for all their wise endeavours in that respect.
You did not say so at the time.
I thought at the time that it was a super idea, Mr McCabe. You are in danger of rewriting history this morning.
I detect wisdom and experience in that last remark.
Looking at today's weather, I can understand why there is increased funding of almost £19 million for routine and winter maintenance on trunk roads, which is funded by savings from rail services. Where were those savings in rail services made?
The savings on rail services essentially came from negotiations involving the Office of Rail Regulation and Transport Scotland on track access charges. We had originally made provision to meet the cost of track access charges as part of the contractual arrangement with First ScotRail. After the negotiation in which Transport Scotland was involved, those costs were reduced, so we had the opportunity to redeploy those resources. Essentially, a one-off benefit has emerged in year. We have used the resources to support the routine and winter maintenance budget, because, as we all appreciate, there are many calls on that budget for support. The consequence of that decision will be greater workflow for the companies and individuals who operate on the trunk road network.
There is nothing in the autumn budget revision documents about proposed savings from the cancellation of the Glasgow airport rail link. Have you had a chance to reflect on how you will redistribute the money that you save as a result of cancellation?
It would be presumptuous of me to make plans of that sort. The draft budget is with the Parliament for consultation and a decision, so it would be premature of me to make a judgment in that respect.
So is there still a chance that you might reconsider?
As you know, I am a minister who treads carefully in ensuring that I fully respect the position of the Parliament and its committees—in all their decisions—so it would be premature of me to make such a judgment.
I am delighted to hear that.
I will be even more anoraky than Derek Brownlee was. I am interested in knowing more about the decreases in the annually managed expenditure budgets for NHS and teachers' pensions. You mentioned that the discount rate was increased by Westminster. Why was it increased? How often does that happen? When we consider the raiding of pension funds that has gone on in Westminster, it is clear that the issue is sensitive. Are you confident that what Westminster is doing adequately protects the pensions of NHS staff and teachers?
The discount rate is reconsidered annually by the Treasury, which issued information on the rate on 6 February in public expenditure system paper PES (2009) 01. The discount rate is reviewed in the light of market conditions at the end of January each year. In that sense there is volatility, because market conditions in January might be markedly different from conditions at other times in the year, as we well know. The decision is based on the cost of AA-rated corporate bonds—in essence, it is a market judgment, which has proved to be a reasonably reliable judgment about the sustainability of funds. Of course, as with all aspects of actuarial assessment, there is a risk that the assessment is not correct, but I think that the risk is effectively managed in relation to the payment of pensions.
I take it that the discount rate goes up or down annually. In the current devolved settlement, does it make sense to follow Treasury guidelines on such matters? For example, the Treasury's deflator of 1.5 per cent has been used throughout the budget.
We have no control over annually managed expenditure; it shows in elements of our budget, but I have no discretion over it. In that respect, we clearly observe and follow the direction of HM Treasury.
In the health and wellbeing budget, there is a reduction of £50 million in the anticipated level of capital receipts and there is a corresponding reduction in capital expenditure. Which capital projects have been affected by that?
We are talking about capital sales that take place in health boards throughout the country. There will be a huge range of projects in relation to which officials have judged that this is not the time to undertake a particular asset sale, so in consequence capital programmes—the projects could be anything from equipment enhancements to developments of new facilities—might be delayed for a limited period.
Thank you. That might be useful.
Some of the work on the schools budget reflects an annual adjustment that we make when we are clear about the number of teachers who will be trained within the year, which does not become clear until later in the year. Other transfers have been made in the education budget in relation to protecting vulnerable groups, which have been made possible by judgments on the extent of the teacher training budget.
We move to the formal debate.
Motion moved,
That the Finance Committee recommends that the draft Budget (Scotland) Act 2009 Amendment Order 2009 be approved.—[John Swinney.]
Under standing orders, the debate cannot last more than 90 minutes—[Interruption.] Given that no member wants to speak, I invite the cabinet secretary to wind up the debate.
After such an extensive range of contributions, I am lost for words as to where I might start. I will not detain the committee further.
Motion agreed to.
The committee will formally communicate its decision to the Parliament by way of a short report. The Parliament will be asked to consider a motion on the order next week. I thank the cabinet secretary and his team for coming.
Meeting continued in private until 12:37.