Draft Budget Scrutiny 2013-14
Our second item of business is to begin oral evidence sessions as part of the committee’s scrutiny of the draft budget for 2013-14. I welcome to the committee Colin Borland of the Federation of Small Businesses in Scotland; Garry Clark of Scottish Chambers of Commerce; Michael Levack of the Scottish Building Federation; David Melhuish of the Scottish Property Federation; and Alan Watt of CECA Scotland.
I have received apologies from Dave Moxham of the Scottish Trades Union Congress, who is unwell this morning and unable to attend.
As the meeting is in a round-table format, there will be no opening statements and we will proceed straight to questions. A couple of minutes ago, I advised Garry Clark that he would be kicking off the meeting.
Garry Clark (Scottish Chambers of Commerce)
Cheers for that. [Laughter.]
Paragraph 3 of the Scottish Chambers of Commerce submission states that the most effective way in which the Scottish Government could support long-term growth in Scotland’s private sector is
“to ensure that capital investment is maximised and that the focus of such spending should be on enhancing connectivity, both in terms of transport and digital infrastructure.”
I would like Garry Clark to kick off by expanding on that and explaining why it is important for Scotland’s sustainable growth.
I will let people know about the meeting format while Garry is thinking about that. Anyone can ask a question of Garry or make a point. We will not go round the table so that everyone asks one question—anyone can come in at any time; it is just a question of catching my eye.
You may wish to move on to a different aspect of the draft budget or you may wish to comment on something that someone else has said—it is completely up to you. If you have a specific point on a comment that someone has just made, you might want to let me know with a sign that you will be asking a wee supplementary as opposed to moving on to something else.
You might speak three or four times in the next half hour, or you might speak once—it depends. I want everything to flow as much as possible. If things slow down, I will quote an aspect of someone’s submission to move things on, as I did with each of the six papers last week, but that might not be necessary.
Garry, the floor is yours.
Thank you, convener. We are led by our members on this, and we look at the budget with the understanding that the Scottish Government has a limited pot at its disposal. The question that it must answer is how best that money can be invested.
Our members are of the view that, to deliver the best long-term benefits for the Scottish economy alongside short-term boosts, investment in capital infrastructure is an extremely important route. We understand the constraints under which the Scottish Government has been working over the past couple of years, and we welcome the fact that it has sought to maximise capital investment and to redirect revenue spend into capital spend in order to get the biggest bang for its buck.
I have singled out transport and digital technology for the long-term benefits that investment in both those areas will have. That is not to say that we should not invest in schools and hospitals, as was announced in the budget last week. The additional investment provides a much-needed short-term boost, particularly for the construction sector. We are all aware that the performance of the construction sector against other sectors has caused the return to recession this year. That sector needs a strong boost, and capital spend is the best way of delivering that.
That capital spend needs to be coupled with measures to ensure that as much of it as possible is spent here in Scotland on Scottish businesses. The Government is currently consulting on procurement legislation, which we hope will increase the chances of achieving that result. We hope that we can keep within Scotland as much as possible of the £9 billion procurement spend that exists in the public sector in Scotland to deliver the maximum benefit to Scottish businesses in the short term and to create the infrastructure that we all need in the longer term.
All things being equal, you want expenditure to be focused on giving Scotland a long-term competitive economic advantage rather than on shorter-term capital projects.
Yes. We want to use this opportunity to create the kind of Scotland in which businesses find it easier to compete, to connect and to do business. By delivering capital projects, particularly in transport and digital technology, we can move towards achievement of those goals.
No one has indicated that they want to join the discussion at this point. Any twitch of an eyebrow will be taken as a sign. [Laughter.] Gavin Brown is indicating that he wants to come in.
I thought that raising my hand might be more effective than twitching my eyebrow.
Garry Clark has touched on capital spend. One issue that was raised in the budget last week was the non-profit-distributing model of the Scottish Futures Trust and the £2.5 billion that will be allocated over an eight-year period. Schools were mentioned specifically in relation to that, but I understand that it will be 2014-15, as opposed to 2013-14, when the £80 million is accelerated. We hear the rhetoric about the NPD model, but what is happening on the ground in relation to it? I have heard Michael Levack talk about it in the past. Is there investment on the ground and, if so, to what degree?
I appreciate Garry Clark’s helpful comments. Like him, I will concentrate on the construction side.
Michael Levack’s submission was pretty clear about his organisation’s understanding of the impact of the reduction in capital expenditure based in Scotland on what can be done. I was intrigued by a comment in yesterday’s media by Donald MacRae, the chief economist of the Lloyds Banking Group Scotland:
“Higher spending on infrastructure and capital investment projects would benefit this elusive recovery, which is highly dependent on a tangible increase in both consumer and business confidence.”
Can Michael Levack or other witnesses comment on what other things we can do as a Government, apart from continue to lobby the UK Government to recognise the need for increased capital expenditure?
11:15
Michael Levack (Scottish Building Federation)
We are comfortable that the Scottish Government fully understands the position of the construction sector and seems to be attempting to bring projects to the market. However, there are a couple of issues.
I am pleased about the First Minister and the president of the Convention of Scottish Local Authorities writing to all local authorities to ask about any shovel-ready projects—I welcome that. That action followed the construction summit that was held in Glasgow several weeks ago at our request.
We hear a lot about shovel-ready projects. How many projects are still stuck in the constipated public sector procurement system? Yes, we probably need more cash from the UK Government to filter down through the Scottish budget, but we call on all local authorities and public sector bodies to ensure that all the projects that are on the wish list or the infrastructure investment plan—whether they are NPD projects or other projects—are actually coming to the market. Currently, that is not the case: progress is very slow in terms of projects coming out.
Progress is also very slow in what the Scottish Futures Trust has delivered on the ground. We want the momentum to increase, because only when the shovel goes in the ground do we protect employment and create apprenticeship opportunities. We have to look no further than the Scottish Futures Trust pipeline information, which was updated based on the best information available in July 2012. I will not go through the SFT document, “Revenue Funded Infrastructure Investment in Scotland”, in detail, but it is clear and concise. How many of those projects have a confirmed site start date? Not many. Too many of them have a start date that is yet to be confirmed or are due to start in the last quarter of 2013 or in 2014.
We are in a perilous state as an industry. We do not have a begging bowl out. We do not get grant funding per se—we are not a subsidised industry. All we want is work so that we can keep people gainfully employed and offer apprenticeship programmes. The simple answer is to get procurement moving.
We have the consultation on sustainable procurement. We have been waiting for a standard Scottish pre-qualification questionnaire for a number of years. We need to act quickly. We need to accelerate that process while complying with European Union procurement rules.
David Melhuish (Scottish Property Federation)
The Scottish Futures Trust has a potential role to play in aiding local authorities to bring forward some of their unused capital assets and put them on the market. That would raise receipts that could perhaps be invested in infrastructure. It would also bring properties on to the market in often quite good locations, which would have the benefit first of getting them off the local authority’s balance sheets and secondly of getting them back into productive use in the market.
Property experts are saying that city centres are where a lot of businesses want to put staff. That is where they want to be now—not so much in the business parks; more in the city centres. A lot of those local authority assets are placed very nicely in city centres. The Scottish Futures Trust could perhaps look into that.
Okay, thank you. Colin Borland, in your submission you say that we are not capitalising on small businesses’ potential to expand. Can you talk to us about how we could best take that forward?
Colin Borland (Federation of Small Businesses)
There are a number of key stages in the life of a business. Once it gets beyond start-up, one of the stages is probably when someone moves from their garage or their spare room into their first premises. There are some interesting things in the budget about bringing disused properties back into use. We will need to iron out the details—a few anomalies always crop up when we are dealing with non-domestic rates—but that is a particularly interesting move.
The other big stage in the life of a business is the move from being a self-employed one-man band to becoming an employer. There was the £15 million announcement in the budget on making it easier for small businesses in particular to recruit. We welcome that in principle, but we are going to have to work closely on the details. We have had job subsidy schemes before that have not really worked. They have been attractive to large public sector employers and not so attractive to our people.
Various other interventions around unemployment and youth unemployment have also been welcome, but they have not quite addressed the issue on the scale that we need to address it on.
Towards the end of October, we will be publishing a paper that tries to dig into some of these barriers because the fact is that the situation is a bit more complicated than someone simply saying, “Oh, this is far too expensive” or “This is far too difficult”. We know that for many people those are not barriers at all, so we have to find out what is preventing a sector with a fantastic record of employing people from taking on more employees. Some of the softer intelligence that we are getting has raised concerns about sustainability of employment and how businesses ensure that they do not take people on—or, indeed, take people from another job—and then pay them off three months later.
I call Michael McMahon, to be followed by Elaine Murray.
I want to follow on from the convener’s comments by trying to tie the issue of small businesses to Michael Levack’s earlier remarks. When Scottish Enterprise came before us recently, it made the observation that only around 10 per cent of small businesses have the capacity to grow. If there is capacity to grow at that level, is it better to invest directly in those small businesses or to focus instead on the contractors who could subcontract to them? Should we skew the spending, if you like, towards bigger contracts to ensure that smaller businesses can get a spin-off or some form of indirect benefit?
As happened last week, just as Elaine Murray is about to come in, other people want to make supplementaries to previous comments. I will let Colin Borland and Michael Levack comment on Michael McMahon’s question.
Mr McMahon has asked a very good question about latency and the size of the latent potential. Some figures suggest that the net balance of firms that are seeking to reduce headcount and those seeking to take people on is moving in the right direction, but it is still slightly negative.
In the piece of work that I mentioned earlier, we are trying to dig into the issue and find out what exactly the demand is. For example, would an extra person be good for a business or is it as well contracting out? After all, that is a risk-free and, in some senses, attractive option. I will be interested to see what the report reveals, but if we are going to support expansion with public funds we need to remember that increasing staff or moving to become an employer is not like buying another van; it does not increase the capacity of a business in that way. Instead, it changes a business’s character. Extra staff are not simply fulfilling orders or keeping up with work; they can be out making contacts, expanding the business and changing how it moves forward. For that reason, we think that the focus on employment and helping small businesses to realise that potential will probably create economic value.
It is a very pertinent question. Whatever the cuts to budgets—and political parties can argue about the numbers—we need to get jobs at the coalface and the shovel in the ground.
There is an issue with the procurement process. In a recent quarterly survey of all our members, a significant majority of companies with an annual turnover of under £2 million said that they had basically opted out of public sector procurement. There might be a little private sector commercial activity, but the businesses that rely on and want to work with the public sector in the way that they have for decades are not now seeing the opportunities.
I have not seen any hard evidence that the bundling of contracts produces tangible results and benefits. There might be some headline saving on predicted costs and so on but, as far as the reality of employment is concerned, there is simply no evidence that local businesses are being allowed to flourish and develop enough to take on people and apprentices in their local areas. We have not got the balance right between bundling projects for efficient procurement and allowing the development of small to medium-sized businesses, which might well be wary of subcontracting.
I invite the panel’s responses to what is a slightly different question. In advance of the budget statement, the Cabinet Secretary for Finance, Employment and Sustainable Growth said that it would be a budget for construction. To what extent has he been successful in that objective? If you do not feel that this is a budget for construction—and if we bear in mind that Scotland has fairly limited opportunities to raise funding—what changes would you propose to give the construction industry more encouragement?
I would like to go back to Colin Borland and the Federation of Small Businesses. I declare an interest in that I have an association with a business that is a member of the federation. The FSB has been very good at declaring what the barriers to taking on extra staff are for very small businesses or microbusinesses. I have been pounding on about that for a while. Do you see FSB as the conduit to help find answers to those barriers and make things easier?
A number of concrete things could be done. Not 500yd from where we are sitting, some of your colleagues are taking evidence on the business gateway and the new contract for that. Depending on how that is drawn up, there is scope in the contract for support and tailored advice about when to take on a member of staff, whether it is right for a business and how it is done. Indeed, there is scope for account managing someone through that process so that it is done correctly.
Our view is that support is probably best sited in the business gateway. It would not be appropriate for the FSB to take it on, because we are very clear that we do not take public money. Some 95 per cent of our income comes from membership fees, which means that we are accountable only to our members. If we were to start to take public money—whether from local authorities or central Government—we would have an issue about our independence. Therefore, it is something that is better done elsewhere.
I was not suggesting that the FSB becomes a Government agent. However, a lot of very small businesses would benefit from reassurance, and an interpretation by the federation of some Government agencies’ information into what might be called small business-speak might not be a bad idea. A lot of members trust the information they get from the FSB. Do you agree that it could play that role?
I am sorry that I misunderstood your question. Members of the FSB have, as a right of membership, access to a 24-hour employment helpline. We have fact sheets that tell people how to go about doing things, and members know that there is a friend on the end of the phone who will tell them how to go about a particular move or activity. That is vital and crucial, but there is a step before that, where businesses have to become interested in taking people on. We can have all the tailored services we like, but if people are not buying they are not buying. The first rule of marketing is to create demand.
I will return to Michael Levack’s point about bundling. I would like to bring in Alan Watt, as he is aware of my concerns about the process of bundling.
In my area, three separate projects were bundled together. On paper they all looked complementary and they fitted together quite well in terms of geography, but two of them were shovel ready, if you like, and the third was subject to a public inquiry. By putting the three projects together, they were all, in effect, held up. Sometimes that kind of practical decision making has not been conducive to moving projects forward. Does Alan Watt have any examples of that type of practical decision making becoming a barrier to his organisation seeing progress being made?
Alan Watt (CECA Scotland)
It is a dual-edged sword, in many ways. There are economies in bundling projects together but, as you say, it comes down to the lowest common denominator: if part of a project is delayed for any reason, the rest of the bundle will be delayed.
The Aberdeen western peripheral route is an example of that: if it had been carried forward in three separate contracts, part of Aberdeen might already have traffic flowing—certainly to the north. We can see the sense in the long-term in putting projects together because of their maintenance, but the short-term sacrifice is that work is not available on the ground.
11:30
Elaine Murray asked about the construction industry’s reaction to the budget, which was described as a budget for construction. I did not make a written submission, because I learned that I was going to be here only just before the draft budget was published, so I felt that it would be better to see what was in the draft budget first.
By the way, CECA stands for Civil Engineering Contractors Association. I should have said that at the outset.
Civil engineering is heavily dependent on public sector funding. Anything between 60 per cent and 80 per cent, depending on how the economy is going, is publicly funded. Two of our clients are Transport Scotland, which accounts for 25 per cent of the civil engineering output in Scotland, and Scottish Water, which accounts for 20 per cent. You can see our huge dependence on decisions that are made in the Parliament.
The industry’s reaction to the budget is that, if it holds the line—in other words, if what is in the budget actually happens—civil engineering in Scotland will stabilise. To come back to Michael Levack’s point by a rather convoluted route, the bigger companies will start to deliver the bigger projects, leaving the small and medium-sized enterprises to deliver what they deliver traditionally and most economically.
If it all goes according to plan, civil engineering will stabilise. That is hugely dependent on the NPD model, the Scottish Futures Trust and the hubs for the Borders railway, the M8 bundle and the Aberdeen western peripheral route. However, there are a number of ifs within that.
Jean Urquhart made a point about the role of business organisations in delivering some of the solutions. Scottish Chambers of Commerce works with the Government and public sector agencies on providing solutions for some of the issues. For many years, we have operated a business mentoring Scotland programme, which provides support to businesses that are looking to grow, expand and take the business to the next level. That might involve recruitment of additional staff.
We have also recently started working with the Government on delivering a pilot project that is aimed at getting graduates into graduate-level jobs. That got up and running at the beginning of the month and currently operates in Dumfries and Galloway, Ayrshire, Lanarkshire and Renfrewshire. One graduate has already been placed and five more are in the process of being placed, so the project is hitting the ground running.
I will comment on Michael Levack’s point about getting projects that have funding attached to them up and running through the procurement process, to which Alan Watt just referred. At a meeting of our national council that I attended yesterday, there was huge frustration at the lack of progress on rolling out broadband connections in the Highlands and Islands. There is a really ambitious programme for that, but it does not look as though there will be any movement on it until at least next year. That is worrying. The Aberdeen western peripheral route was announced in 2003 and approved by ministers in 2009 but, of course, we are still waiting.
There are many programmes. We need to get them up and running quickly.
I share your frustration about broadband, as my constituency includes two islands within the Highlands and Islands area. I have been in regular contact with Highlands and Islands Enterprise about that. It has been a case of delay on delay, which is disappointing and must be addressed.
Is the problem not the amount of money that is going into capital spend but the regulatory process? One or two people have made such a comment.
Are the witnesses happy with the idea that £200 million is switching from revenue to capital expenditure? Should it be more or less? From what Mr Watt said, it sounds okay.
Yes. It is not growth, but it will certainly lead to a steady state within civil engineering. Civil engineering is only one sixth of Scottish construction, so I speak only for part of the sector.
Transport Scotland and Scottish Water, with whom we deal regularly, are good at telling us what is in their forward programmes. I have checked with them that their budget provisions are adequate to deliver what is in their programmes.
I do not want to start dropping into the figures but, although we welcome all the Scottish Government’s efforts to prioritise capital spending, we point out that the latest spending plans show a net reduction in capital spending of some £5.7 billion or 25 per cent between 2009-10 and 2014-15. I fully appreciate that things might not be different if a different political party were in power or if we did not have a coalition Government, and that those are just the facts of the position that we are in. In addition, I appreciate the fact that demands continue to be made for further finance from the UK Government. However—this brings us back to the point that Elaine Murray asked about—the construction pipeline of work is not due to start until well through 2013. That is what caused concern at a recent meeting of our major contractors forum: the work is just not coming forward quickly enough.
We often hear about leadership—that we need people to take a lead on things and we need people to be entrepreneurial and to take risks. That is what we need at the moment. There are just too many projects in the infrastructure investment plan that are being held up for some reason or other. It might be difficult for the Scottish Government to unlock a project such as the Aberdeen western peripheral route, which is going through various legal challenges in the courts, but there are many other projects on which there are just too many excuses for delay in procurement or, indeed, cancellation or postponement.
The IIP that was published at the end of last year predicts that revenue and capital expenditure will not return to 2009-10 levels until 2026. That must be extremely worrying from a business planning point of view for any business of any size that is looking to find a potential marketplace in the Scottish construction industry, where the opportunities for export are extremely limited. It is critical that we have action now.
Can I just press you on how much of the issue is to do with finance and how much of it is to do with regulation? It is clear that money has been allocated to some projects for 2016, so they will happen in 2016. Are you saying that there are many projects to which money has been allocated for this year or next year, but which are being slowed down by regulations, planning and so on?
It would certainly appear so from the information that we are given, from the IIP and from the update that the Scottish Futures Trust publishes.
The original consultation on the SFT was scant on information and detail. We supported the SFT having a central function to facilitate the procurement of larger and more complex infrastructure projects, but things are just not moving at the pace at which we need them to move to protect jobs and to sustain employment and apprenticeship training. In comparison with the sector anywhere else in the UK or with any other sector, the Scottish construction industry has a record that is second to none in training apprentices and providing a high-quality four-year apprenticeship, but we can take young people on only if we have some confidence in the work that will come through the pipeline.
I intend to let Gavin Brown and Bruce Crawford in, but before I do so I want to mention something that David Melhuish said in his submission. He said:
“A major planning application will be scrutinized by an array of public sector agencies and authorities and on occasion directly by the Scottish Government itself. There are a number of reasons why this is the case”.
He mentions the long-term implications of development and so on. He goes on to say:
“such regulation can also restrain and constrain the contribution of the property industry”—
and, of course, the construction industry—
“to the economy and SPF members believe that there is still considerable room for improved co-ordination and reduced regulatory demands”.
In my constituency, money has been allocated to construct a bypass from the financial year 2014-15, but Transport Scotland has said that that assumes that there will be no public local inquiry. The design is all ready—there is not a problem in that respect—but even if the consultation goes well, if someone locally throws up a hand grenade and objects, the project could end up being put back. That is another area in which the Scottish Government does not necessarily have all the controls. In the event that such an objection materialises, all that it can do is have ready projects that it can roll with, to which there is not that level of objection.
I am sorry—Michael Levack wants to respond.
That is why we are very pleased that the Scottish Government supports the proposed cut in VAT on repair, maintenance and improvement to 5 per cent. That issue sits with the Treasury, of course.
Equally, that is why we need to divert more money to increase energy efficiency in existing stock rather than beefing up regulations for new build when we are building so few properties and commercial buildings.
It is within the Scottish Government’s gift to divert a fairly modest amount of money to supplement existing investment in energy efficiency measures. One could argue that that would not be subject to regulatory delays, and could be used to protect employment, as well as apprenticeship training, which is important.
Four people want to come in. I will take Gavin Brown and Bruce Crawford first.
My question is on a slightly different issue, so others can go first.
Is Bruce Crawford’s question on this point?
My point is on the gap that Michael Levack identified between expenditure a couple of years ago and expenditure until 2026. Nobody in this room can really address that issue—it must be addressed somewhere else.
What can we, as Scotland Ltd, do to persuade the Chancellor of the Exchequer that the only way to fill some of that gap is to understand the importance of capital expenditure and how we can best deploy it?
From my understanding—I need to check that I am right—an additional £30 million was put directly into energy efficiency measures in the budget process, which, I hope, will deal with some of the issues that Michael Levack raised.
I want to put that last figure into perspective. The cost for retrofitting one superstore—not even to modern building standards, I am told—was £2 million. The actual cost in terms of potential impairment of value and the impact on the financing and viability of sites still remains to be seen. That said, the Scottish Government has introduced an operational ratings option, which is welcome.
The convener quoted my comment on the regulatory process, which is true. We are aiming for better co-ordination in pulling together the various consents at the beginning of a planning application. We need better co-ordination between local authorities and agencies, and we accept that developers have a role to play in putting information up front.
If the system can be cracked, we can reduce the time that the process takes; in some cases it is 18 to 24 months before we see shovels breaking the dirt. The emphasis is not on trying to get past the regulatory system, but on making it more efficient.
I want to widen out the discussion to seek our witnesses’ observations on the extent to which the budget is a budget for growth. All committee members have received a paper from our adviser Professor Bell, in which he concluded that an important issue for the Finance Committee to consider is
“The argument that this is really a budget for growth, when the main beneficiary appears to be resource spending on health.”
I will throw that out to our witnesses, and ask them for any observations on the question of overall growth with regard to the budget.
There are two issues. One is the problem with the SFT and the slowness of the pipeline. Does anybody have any indication of what the problem is? If it is not just about regulation, is it to do with the financial model and the difficulties in getting the funding in place to progress those projects? Does that need to be addressed in some way?
The other issue concerns the investment in infrastructure. There has been a significant cutback in the Edinburgh to Glasgow improvement programme, which was funded through borrowing from Network Rail rather than through the capital programme. Are we missing a trick in not exploiting the advantages and opportunities of those alternative mechanisms for supporting infrastructure?
I want to come back to Gavin Brown’s point about the extent to which the budget is for economic growth. When we look at the figures, it seems that the overriding issue for the past year or so has been consumer confidence and the impact that it is having. Until we address that, we will not address the wider concerns. Figures that were released this morning show that the lack of consumer confidence is now feeding into the industrial sector, so business investment is forecast to drop.
The solutions to that are many and varied. If there was a simple answer, we would have found it by now. However, one thing that we must do is address the issues of jobs and confidence. It does not take an economic genius to work out that, if people are worried about losing their jobs or have lost their job, that will have an effect on the wider economy. For that reason, that issue will certainly be our primary focus in the coming months and we urge that it should be the focus for policymakers, too.
11:45
The convener asked about barriers, and Bruce Crawford touched on that. We have discussed public inquiries. I want to put down a marker that the process that the Aberdeen western peripheral route has gone through should never happen again. A minority should not be able to delay a project of that magnitude for as long as it has done. I am probably preaching to the converted, but that is worth saying.
Thank you for that point.
I want to follow on from the issues that Gavin Brown and Colin Borland talked about. The SCC submission discusses the focus on sustainable economic growth and states:
“It would be even more welcome if government policies, including budgetary commitments, were measured against this Purpose.”
I wonder how easy that is in practice. The exchange that we have just heard suggests that the issues are more about confidence than about where we spend the money. My simplistic view is that building houses is the best thing that we can do and that building transport infrastructure is the second best. Some people suggest that spending on the health service is perhaps not so good.
It is probably no surprise that none of us has come up with a measure that will match each and every budget with the Government’s stated central purpose—that is difficult to do. However, we need to move towards that and find some way to measure how individual provisions in the budget make progress towards achieving the central purpose. We know what the central purpose is and we are all behind it, but we need to measure our and the Government’s progress towards achieving that purpose.
To come back to an earlier point, I agree absolutely with Colin Borland that prioritising the creation of employment is crucial to achieving that central purpose. There are many routes towards that, some of which are revenue based while others are capital based. At the end of the day, the issues of having people in work, employed and productive, having successful businesses and growing our economy are all part of the same equation. In that part of our submission, we discuss whether there is a way in which we can measure progress towards success.
You are asking a question, rather than making a statement. Are you asking whether it is possible to measure that, or are you saying that you believe that it is possible to do so and the Government is not doing it?
It ought to be possible, but work needs to be done to find the right solution, and a simple solution that everyone can understand.
I see that Colin Borland is champing at the bit.
I just wanted to say that a common theme seems to be emerging from people who have experience in sectors that are worth far more money than we are used to dealing with. The common theme seems to be that the amount of money is not as important as the execution. If the execution is right, we stand a better chance of delivering what we all want. That requires a focus on the actual businesses that make up the majority of our economy, rather than the ones that certain people might wish made up the bulk of our economy.
To suggest that this budget, or any budget at this time, could be a budget for growth in the construction sector is out of touch with reality. Many construction businesses are in survival mode or, at best, recovery mode. We have to get that message through, because when we hear political rhetoric and announcements from any political party to suggest otherwise, frankly, that hurts people who have lost their businesses.
As Garry Clark said, we must look at the wider economic benefits. We appreciate that we have only X pounds to spend, but we need to get moving with that. When we bundle contracts together, we should not simply be thinking, “Well, this will save us 10 or 15 per cent.” Some of the savings claimed by SFT over the past three years range from £120 million to £150 million per annum. Yes, the figures have been validated by third parties, but let me make a simple analogy: it is like me claiming to save £3,000 per annum because I do not smoke. Given that I never smoked in the first place, I am technically not saving that money—I am just not spending it. When we bundle contracts together, we must look at the theoretical financial benefit. After all, construction is not like buying Coca-Cola or toothpaste—it is not a case of buy two, get one free. We must find a simple mechanism for considering wider economic benefits before we make essential decisions that affect employment and can therefore stimulate growth.
As a supplementary to your point, Mr Mason, I point out that the Transport Scotland study suggests that current trunk road capacity can support nearly 80 per cent of current planned housing allocations. As a result, there is scope for the existing infrastructure to cope with the choice that you suggested between spend on housing or transport. Of course, that does not cover the issue of health, which you also mentioned, but there is more capacity than is commonly believed to build more housing without upsetting the transport infrastructure.
As much of the discussion has made clear, the proposed procurement reform bill is intrinsically necessary. Obviously, it will take time for it to go through—it is at the consultation stage at the moment—but a lot of businesses in Scotland, certainly those in my sector, are looking to it to provide long-term salvation for indigenous businesses. So many things are tied up with tidying up procurement and, indeed, various local benefits can be gained through using local providers instead of going for the cheapest price or incoming people. The procurement reform bill should cover those matters and we cannot wait for it.
Coming back to the point about evidence gathering and checking outputs as much as inputs, I wonder whether Colin Borland wishes to comment on the small business bonus scheme in that respect. No one will disagree with moves to support small businesses, but counting the number of small businesses that we have and the number that receive the small business bonus does not tell us the number of jobs it has created or the number of businesses it has kept afloat in these difficult times. How do we get that information? As the committee has found repeatedly, regardless of what sector we are looking at, if you spend public money you need evidence of the impact of that spend.
I am using the small business bonus scheme as an example, but there are many such examples. It is not enough just to count the number of people receiving it; we need to know what impact the money has had on small businesses so that we can ensure that it is being used effectively and that it is not being given to companies that would never have survived anyway or companies that are doing okay. For want of a better example, the owner of a small business told me that his company was doing fine and that he used the money he had saved on his rates on a nice golfing holiday in the Algarve. That is hardly what you want to spend public money on.
The gauntlet has been well and truly thrown in your direction, Colin.
Indeed.
On the first question, we will be able to find out the impact of the small business bonus only by asking as many people as possible how their business is working and what the impact has been. The last time we did work of any scale on this matter, we found that it had made a difference between survival and failure to one in eight recipients. That is a significant number, although I admit that that was during the very difficult period at the height of the credit crunch a couple of years ago, and we are looking at the issue again to find out just how many businesses the bonus is making a difference for.
In respect of that one in eight figure, it is difficult to say how many businesses receive the bonus. We can look up the number of properties that do so, but even if we knock the total of 85,000 receiving the bonus down to about 80,000 we are still talking about 10,000 businesses. Given that our average member employs about 7.5 members of staff, it is clear that the bonus has saved a lot of jobs that would not otherwise have been saved.
The small business bonus is in essence a tax threshold, so you need to start modelling what might happen if you moved that threshold up or down and what impact it would have on the tax take. Given that getting rid of all small business rates relief would impact on collection rates—for a start, businesses would go out of business and would therefore not pay any rates at all—we would need to consider such a move in a bit more detail. We also need to look at other reliefs operating alongside the small business bonus; for example, if we were to adopt the same model for charitable relief and simply stop it tomorrow, one would assume that all the charities would keep going, which means that we would get more from stopping charitable relief than we would from stopping the small business bonus—on the assumption, of course, that everyone stayed in business and that the extra money was collected.
There is a lot to model, but you also need to listen to what business owners are saying. Some might make a frivolous remark about going on a golfing holiday in the Algarve, but I would be surprised if that was actually happening. In fact, at the weekend, I was talking to a couple of businesspeople, one of whom has not paid himself for six months—and he has a baby. He said, “I’m paying the staff and keeping the roof over their heads and I’m paying my bills, but I am not paying myself.” With gas bills going up 20 or 30 per cent, rents and other overheads increasing and footfall going down, the bonus is making the difference. We should, by all means, explore the scheme, but we tinker with these things at our peril if we do not first have a really good think about what we are doing.
Do you want to come back on that, Michael?
I use the small business bonus only as an example. The inability to determine the outcome of something because it has not been measured is a theme that has come up repeatedly at committee. There is no evidence to say that by spending X we get Y. We count how much we spend and look at whether the number of people who are receiving that spend is increasing or decreasing, but we do not know whether we are getting the intended outcome or whether there might be better, more targeted ways of achieving the same outcome.
I agree with Colin Borland. I do not think that businesses will object to an assessment of the small business bonus scheme’s success. I have already mentioned a number of the contract delivery projects that we are involved in; business mentoring Scotland, for example, reports back annually to Scottish Enterprise and Highlands and Islands Enterprise on how the turnover of the businesses with which we have engaged has increased, on the new jobs that have been created and on other forms of positive growth. The programme has been operating in one form or another for 10 years now and if it had not been successful we would be doing something else.
We are also looking at getting 100 graduates into employment this year through the graduate recruitment incentive. That is the measurement that we are using. We would have no objection to looking at Government policy and finding out whether, say, the small business bonus scheme is achieving the desired result and what results it should be achieving. I have not come across some of the more exotic examples that have been mentioned; I am not saying that it does not happen, but the anecdotal feedback that we have received is that the savings are largely being reinvested in the business or being used to employ staff.
We have tried to measure the impact of the small business bonus; after all, that is where the figures that I mentioned come from. We know that it has made a difference between survival and collapse and has allowed other businesses to reinvest. The figures are there, and they have not been contradicted in any meaningful or credible way. In the absence of anything else, the scheme has been a success.
FSB has made a number of comments about skills and employment, suggesting that some of the national criteria are a bit wide—I think that the word “rigid” was used—and that they need to be more local and focused. What specifically can be done to help in that respect? The suggestion is that businesses out there want to expand; if we could provide better help, they would, but the present system is not working.
12:00
There is a disconnect between some employability initiatives and the sort of jobs that are available. The majority of businesses in Scotland are small businesses and the jobs that they have do not fit as neatly into boxes as those in a public sector organisation or a large public limited company might do. In a typical job in a small business, although someone might be employed as a forklift truck driver they might also take orders, be a delivery driver, be in charge of health and safety and their job might have many other aspects. It is difficult in those circumstances for an employer to say, “I want to take on an apprentice to discharge this type of job.” There is not a sector skills council that can give the person the appropriate information.
When we design initiatives to make it easier to employ people, we must take into account the job market and what most jobs are about. We should move away from the rigid approach that was perhaps appropriate 20 or 30 years ago and which might also make perfect sense to me if I was designing the initiative and worked in a large organisation. The initiatives must be designed around the jobs that exist.
I will ask about a comment that I think I saw in a Scottish Chambers of Commerce press release just after the budget. I could not find the comment again, but I am pretty sure that that is where I read it. The press release raised some concerns about the increasing percentage of the Scottish budget that is made up by non-domestic rates. Does Mr Clark want to expand on that point?
We made the point that it is projected that there will be an increase of about £500 million in the business rates take between 2011 and 2015. Given that overall budgets are at best static and that there are real-terms reductions in current budgets, our members are acutely aware that they are essentially paying a larger share towards the overall spend in the Scottish budget. We believe that that can go only so far before it becomes unsustainable; it cannot go on for ever. We must look for a more equitable way of allocating finance to ensure that non-domestic rates play a proportionate role.
We have had some frustrations in recent years following the abolition of transitional relief back in 2010, which resulted in a system shock for many businesses because of the level of increase that they faced over a very short timescale. The situation has stabilised in subsequent budgets, although there are moves to take additional pots of money from business elsewhere, such as the change to the system of empty property rates relief. We share the overall objective of the measure, which is to try to get our town centres working and occupied again, but we query whether that is the best way of going about it.
I know that the committee has queried vigorously the Government’s calculations that show where the £18 million that the change to empty property relief is projected to raise will come from. The money seems largely to be coming from the taxation of existing empty properties, rather than from the policy producing a meaningful, positive result by getting our town centres occupied again.
More information has been released this week about the incentivisation scheme to get businesses into town centre properties, which was announced last week. It is a step in the right direction, but we have some queries about the overall increase in the business rates take more generally, which is fairly relentless year on year.
We will also look at property rates in some depth, but we interrogated non-domestic rates quite intensely last year. If memory serves me right, the expected increase in revenue was from inflation; in other words, there was no real-terms increase for existing businesses and, if the projected growth in the sector did not happen, that would be underwritten by the Scottish Government.
Professor David Bell (Adviser)
Exactly the same argument is going on about benefits at the moment. What is the appropriate price index to use? The retail prices index is being used now. People’s earnings used to go up faster than the RPI; now they are growing considerably more slowly and it looks like there is a move to push benefit indexation on to earnings rather than on to the RPI. The RPI is at the top end of possible choices for indexation at the moment. I do not know whether that is a sentiment that Garry Clark shares.
I understand the point that you are making. To some extent, the Scottish Government is a victim of circumstances. The Scottish Government decided to get rid of transitional relief back in 2010, but the transitional relief issue coincided with a revaluation in business rates that was based on 1 April 2008, which was the last point after 10 to 15 years of consistent growth in the Scottish economy.
The Scottish economy then falls off a cliff, it begins to recover, but in 2010, when the rates increases come in, which are based on rateable value at the top of the market, they hit businesses that are at the bottom. It is difficult for businesses to be sustainable, particularly given the abolition of transitional relief, which would have cushioned many businesses from the impact of the increases. The accident of the dates is beyond the Government’s influence; the decision on transitional relief was within the Government’s influence.
Businesses face a unique coincidence in that the RPI rate that was being used to calculate business rates increases this year was 5.6 per cent, which is the highest rate in more than 20 years, but when the rates increases came in, RPI was down at about 3.5 per cent; it is now down at 2.9 per cent. Businesses look at that and say, “I am faced not with an increase that is in line with inflation but with an artificially high increase, which is based on one month’s spike figure.” However, that is the figure that Governments north and south of the border use.
In both cases, an accident of timing has had a material effect on business.
I attended one of your members events in Aberdeen. The minister does not have to increase rates in line with the RPI every year—that is a decision that he makes. There is an in-built problem, in that by the end of a revaluation period a business could be paying something like 20 per cent—in terms of the poundage—more than they were paying at the beginning of the valuation period, because of the indexation.
That will be a particular problem next year, when we have the revaluation results, because for once we might find that rateable values have gone down, which I think would be for the first time since 1990. That could pose questions for the minister, in light of the commitment to match the poundage rate in England. There are in-built problems in the system, which are likely to come to the fore.
Your points, along with many others that have been raised today, give us food for thought about how we will interrogate the cabinet secretary when he comes before us.
In its submission, the FSB said that it has been
“highlighting the need for economic stimulus, to ensure Scotland remained competitive and returned to growth.”
We have had extensive discussions about capital. What other stimuli are necessary?
We have touched on some things, particularly the procurement reform work that is going on. There are particular concerns to do with large construction projects, but the sort of work that our members are involved in with local authorities and other public bodies will become more important, particularly in the context of guaranteeing cash flow for smaller businesses.
When we consider procurement reform we must consider the wider economic impact of decisions. I accept that that is difficult for legislators, because, although the Parliament can put something in primary legislation, what we really need is a culture change at purchasing manager level. It is about how we give purchasing managers or people who are devising a purchasing strategy the confidence to take a longer-term view, because if that was my job and my boss was telling me to take 10 per cent out of a line that year, I would take 10 per cent out of the line. The fact that doing so might weaken the local economic base and make other people’s costs go up, because of an increase in unemployment or because less business would be done in the town, would not matter to me, because I had been told to take 10 per cent out of the column.
There are ways of thinking about the issue, particularly for local authorities. Consideration could be given to how much of the non-domestic rates income—or increases therein—authorities could keep if they took such longer-term decisions. Authorities could be given an assurance that they will not be officially sanctioned for wastefulness or whatever if they pursue such strategies. However, I accept that trying to effect the culture change on the ground that I described will be difficult, particularly if the initiative comes from the centre and works its way down through several levels.
Does anyone want to make a further point before we start to wind up the discussion?
We have not touched on the budget’s implications for housing, apart from in the context of switching funding towards improvements in energy efficiency in the built stock, as opposed to continually beefing up building standards for new build. We welcome the £40 million that will be put towards affordable housing in the next couple of years. However, we are at record lows on completions and outcomes. We must address that.
We hear about innovative funding schemes, but whenever there is a public sector funding announcement I simply divide the number by 32. I appreciate that that is crude and that not all local authorities are the same size, but we must put the measures in context and think about how they will apply to any single local authority. Sometimes when we think about that, the large figures become pretty small.
I appreciate that funding is not necessarily allocated on that basis. However, we must find a way of increasing the volume of house building, because if we are not already at crisis point, we will certainly get there in the next few years.
Is the issue that the house-building sector has shrunk dramatically? Five years ago, there were four private constructions for every construction in the public sector, whereas now the public sector accounts for a disproportionate share of house building, because the private sector is in such a difficult situation, not least because of people’s difficulties in obtaining mortgages.
We have to be careful when we talk about the housing market, because the market is made up of a range of players. Scottish Building Federation members are very much the second and third-generation local businesses, who employ local tradesmen, take on apprentices and build a fairly modest volume of houses in their own back yard. They were swept along with the volume house builders and big players when the property crash happened and the banking system changed.
We have to rebuild that sector. If we want sustainable economic growth, there must be more focus on supporting Scottish local companies, which cannot participate in many of the innovative funding streams, because in the context of complex funding models they need legal input and more support from banks, which they will not get. It tends to be the larger players who can move forward and get involved in new funding models.
You imply that we need to invest more money in affordable public sector housing. Is that correct?
I do not think that any member here, whatever their political party, disagrees that there is a need for that.
There are limitations on capital spending in the budget. Garry Clark talked about spending more money on connectivity and expanding the roads network, which would bring greater long-term benefit to the Scottish economy. An additional £200 million is being switched from resource spending to capital spending, but increasing one side means that we must reduce the other, all things being equal. Where should the balance be struck?
12:15
That is a difficult decision, and the finance secretary has to make it. However, people need a roof over their heads, not broadband—I appreciate that it is not as simple as that. It is important that we do not get into choosing between existing stock and new build: we need both.
Somebody referred earlier to town centres in the context of business rates and so on. I think that it was two budgets ago when some funds were put towards investing in town centres and most of it went into hard landscaping. That is okay, but most main streets and high streets in Scotland are full of coffee shops and charity shops, with empty properties above. We must be innovative in finding ways to fund developments to make those into usable homes.
You commented earlier on something that I have supported since I became an MSP in 1999, which is a reduction in VAT on repair, maintenance and improvement to 5 per cent. I know that doing that is not within the Scottish Parliament’s competence, but what kind of boost do you believe that that measure would give to the construction sector in Scotland? You and I have discussed that personally, but I would like you to inform the committee.
The measure would provide a significant boost. I am happy to provide the quality evidence that we have gathered over recent years to the committee on what such a VAT reduction would create. We talk about measuring income, inputs, outputs and so on for a lot of matters, but there are some things that we cannot measure. However, my gut feeling is that we need to cut down on the black sector of the economy, in which people who have been thrown on the dole queues are out there with a white van working in the building trades and, regrettably, the first question that people ask is, “How do you lose the VAT?” The VAT rate is therefore critical. I do not understand why successive UK Governments have failed to address that issue. If it was done in the current climate, we could turn on a legitimate supply of construction activity that would also help householders who need to move to larger houses because they have growing families but cannot get mortgages because of the current mortgage finance situation.
We are happy to provide to the committee the detailed evidence on the issue that we have gathered and supplied to the Treasury in the past.
Accepting that everybody would like to put more money into housing if it could be found without robbing Peter to pay Paul, is the fundamental issue not where the private sector is in the construction industry? It comes back to what we said earlier about confidence in the economy and people having a secure job and being able to get a mortgage. If there were easier access to the mortgage market, that would probably provide as much stimulus for the private sector housing position as any Government could provide.
It is clearly a combination of all those things. There is not one easy answer or solution. I speak only for our members—I do not represent volume house builders—but I think that private sector companies that are trying to do their bit in their area come across blocks, whether utilities, planning permission or section 75 agreements that are still heavy duty, that constrain the building of affordable houses, even in small numbers in places where the need is becoming critical. We just do not seem to be able to address the constraints. There are all sorts of reasons and excuses—for example, the EU and legal challenges—but we seem unable to address the constraints. Local authorities look to the Scottish Government, but we cannot seem to find the answer to the problems.
We keep hearing from banks about their lending statistics, whether mortgage finance or lending to small businesses, but we find when we speak to our members that the statistics are not borne out on the ground.
I am keen to have further final comments from others.
I have a quick final point. I accept that this is not necessarily within this committee’s remit, but I think that central to the Parliament’s ability is to do what we were talking about earlier, which is to ensure that moneys allocated are spent effectively to enable policies to be executed. That can be done through the proposed better regulation bill that is on the parliamentary calendar for the current term. It will be important for making doing business in Scotland easier, more effective and more certain and for removing a lot of duplication and contradictory advice. There is a clear business and financial case for the bill, although I accept that the financial memorandum will show that it will probably not cost much. However, there is a clear case for keeping an eye on it to ensure that it progresses and for constantly looking at it through the prism of, “Is this going to make it easier to achieve the economic goals that we have set ourselves?”
I underline Colin Borland’s point, because some things have always struck me as a bit strange. For example, I was looking at some regulation issues the other week and I found that it is cheaper in South Ayrshire to license a zoo than it is to license a kennel. [Laughter.]
Which of the two were you looking to license?
We lead sad lives.
I have two points, neither of which is directly related to the budget but both of which have been mentioned in some form or another during the meeting. The first is the investment in the Edinburgh Glasgow improvement programme. A number of our members were disappointed and surprised to see the funding for that programme reduced substantially. It is worth highlighting that the programme’s projected impact seems to have been reduced in scale fairly substantially, given the innovative funding method that was used to take the programme forward.
The second point relates to a VAT issue that is in addition to the issue of VAT on construction and repairs. We would like to focus Westminster’s eyes on the impact of VAT on tourism businesses. A huge number, if not all, of our European competitors have a preferential VAT rate for tourism-related businesses. We are putting Scottish tourism businesses at a disadvantage internationally by failing to have that kind of protection in Scotland. That is a matter for Westminster, but no doubt the Scottish Parliament will wish to take a view on it.
First, I point out that it is not always necessarily about a switch of capital expenditure from one source to another. With the covenant that the Scottish Government provides, the public sector can help induce confidence in investors to come in. A bit of that has been done with the National Housing Trust, so that is perhaps a model that could be expanded to get things going quickly.
Secondly and more negatively, banking regulations for investment in real estate are about to get much stricter through a process called slotting, whereby risk-weighting categories will be increased for lenders considering commercial developments in particular. That comes at a time when we are increasing potential risk through things such as vacancy rates, so it is not a good signal to send out.
I thank everyone for their contributions, which will certainly inform our scrutiny of the budget.
Meeting closed at 12:22.