Budget Process 2005-06
Welcome to the 26th meeting of the Finance Committee in 2004. As usual, I remind people to switch off all pagers and mobile phones. We have received apologies from Wendy Alexander and from Jeremy Purvis, who will arrive late.
The first item on our agenda is consideration of the Executive's draft budget, which was published on 15 October. Arthur Midwinter has produced two papers for us: one gives an overall view of the draft budget and the other is the draft guidance to subject committees. I will ask him to speak to the papers and I anticipate that we will want to have a brief discussion. I will ask members whether they agree to the guidance to subject committees, which will then be issued. I add as a caveat that we will take evidence later from the Scottish women's budget group and we might want to make minor amendments to the guidance on the basis of that evidence. We can deal with that offline.
For information, I remind members that, in addition to taking evidence from the Scottish women's budget group today, next week we will take evidence from David Bell from the University of Stirling and from Irvine Lapsley. We hope to have the Minister for Finance and Public Service Reform before us on 9 November to talk about the spending review and the draft budget and on 15 November the Deputy Minister for Finance and Public Service Reform will attend our external meeting in Cupar. That will constitute our formal evidence taking and we will then produce a draft report, taking into account the reports from the subject committees. As usual, there will be a debate on our report in the chamber just before the recess in December.
I ask Arthur Midwinter to speak to his papers.
Professor Arthur Midwinter (Adviser):
Convener, I hope that you will allow me a little licence to congratulate committee members on their nomination for the committee of the year award, which is an important recognition of the way in which this committee conducts its business. I have always taken the view that the Parliament is at its best when it acts on a cross-party basis and that is certainly the case with most decisions in this committee. The nomination is a recognition that the Finance Committee is rigorous but fair in its scrutiny of the Executive and practical and constructive in its recommendations. I wish members all the best for when the night arrives.
In the guidance to subject committees, I am simply trying to put stage 2 in context because we are still in the first year of the reformed system. I am keen to avoid the situation arising—although I am sure that it will—in which members of other committees attack the Executive for reducing the number of targets when it was doing so on the recommendation of the Finance Committee. I try to set out for the other committees the background to the current stage: recommendations on spending have been made and we are examining the Executive's responses and the revised targets that are being produced as part of the biannual review of targets and the spending review. I drafted the questions on that basis.
I add a final point on the Equal Opportunities Committee. This year, for a number of reasons, I deliberately did not set a question on equal opportunities. First, it is hard for the Equal Opportunities Committee to make recommendations with regard to the spending proposals, which are across departments. Secondly, I am aware that that committee has not yet had a reply from the Executive to its stage 1 budget report. We might need to chase that up; I have arranged with the clerks to meet the Equal Opportunities Committee clerks at 2 o'clock today to discuss how best to take the issue forward. It would be helpful if I came back with an update on the position after members have heard evidence today. There have been staff illnesses on the equal opportunities side of the Executive, but it is surely unacceptable that we have not had a reply at this stage.
Are there any questions on the draft guidance?
I congratulate Arthur Midwinter on his presentation. He is either dumbing it down or making it more relevant to the rest of us—
It is definitely the second of those.
The paper is understandable, lucid and clear. When we have such assistance, it makes things much easier.
I suggest that some of the questions that we pose to committees should be more open. The committees could give us quite simple answers to some of the questions and get away with a yes or no. I am talking about the first few questions in paragraph 5 of the draft guidance. We should ask more open questions, such as how the budget in a particular portfolio contributes to meeting the key objectives of that portfolio, to economic growth and to improved competitiveness throughout Scotland. We should try to get committees to open up and we should not allow binary responses.
From past experience, we will not get yes/no answers. There is no doubt that we will get fully developed answers. I have no view on the matter—I am happy to listen to what others have to say on it. I am conscious that there is an agreement with the Executive under which certain topics require answers and my draft reflects that rather than giving wider questions.
The staging of the budget process means that committees had a chance at stage 1 to deal with more open questions and to make recommendations. They are now being asked for a specific response to the way in which the Executive has acted. If a committee feels aggrieved in relation to an Executive response, it is possible for that committee to put its views. To highlight the fact that we are not looking for yes/no answers, we could consider a format that asks committees whether they are content and the reasons for that.
I tried not to be condescending to them, but in saying that—
Perhaps in the letter we should say that it would be helpful for—
We had a series of meetings with the other committees and made it clear to them that we were trying to rationalise their commitment of time to the budget process by clearly separating the two stages, one of which deals with strategy and the other of which deals with detailed proposals. We did that because we had received complaints from committees about the amount of time that they had to put in. The slimmer structure reflects that.
As we are happy with that guidance, do you want to move on to the main paper?
I will raise three or four of the most significant issues, but the paper is a highlights paper in the sense that, as I have said before, I am happy with the budget document as a whole. I am happy that it is more focused on the key issues and that the format reflects discussions between the committee and the minister.
First, on budget priorities, members will recall that in relation to both the annual evaluation report and "Building a Better Scotland: Spending Proposals 2005-2008: Enterprise, opportunity, fairness" I expressed misgivings about the four challenges. I said that only economic growth is meaningful as a criterion for strategic decisions in the budget and that the other three criteria were so general that almost anything could be defended under them. It is interesting that those challenges are not mentioned in the budget document. The budget priorities are narrowed to three that are similar to those in the past: economic growth, closing the opportunity gap and sustainable development. It helps to have that clarified. My view was that by having four challenges and a couple of cross-cutting themes below them, we had so many priorities that they were becoming meaningless.
As for key decisions, on the basis of the whole cycle that we have had this year, one advantage of the document is that the committee now spends less time complaining about the information and focuses more on the decisions that the Executive has taken. Many of those are similar to the trends that were identified in BABS. I explain for the committee's benefit that the enterprise networks have a standstill budget, which we may want to raise with the Minister for Finance and Public Service Reform, because no rationale is given for that; it is simply stated. Economic growth is the top priority, but the one budget with the responsibility to promote economic growth is standing still. There may well be a good explanation for that.
The increase in the local government budget is low. After our previous meeting, the First Minister said in Parliament that he had a target of 2.5 per cent. To clarify the position for members, I went back over the documentation and saw that at our previous meeting an Executive official said that, in his statement of the previous week, the former Minister for Finance and Public Services had stated that, on the basis of the settlement, there was no need for local government to depart from the trend of recent years. Of course, as I am careful about such matters, I checked the trend, which was for a 4.8 per cent average in the past five years. The advice that the committee has received and the advice that civil servants are giving are not inconsistent, but that is the second time in the past few weeks that the positions set out by the Minister for Finance and Public Services and by the First Minister have had apparent contradictions. I would like all that to be cleared up.
Another interesting aspect of the budget document is the growth in non-domestic rates income, which is not the result of a change in the rate poundage. We should pursue that in questions. The cause may be the dropping out of past safety nets for revaluation effects, which are contained in the total. The growth of over 7 per cent in NDRI is surprising and means that the grant element is rising only marginally.
I have highlighted for the committee the fact that growth in capital will not really start until next year and raised questions about the future of public-private partnerships. Local government has had only two bidding rounds and we may want to find out whether another round is planned before the parliamentary session ends.
Overall, I am happy with the approach that the Executive is now adopting to cross-cutting issues. However, too many examples remain of departments arguing that they advance cross-cutting themes simply by undertaking their core functions, when the link is tenuous. Nevertheless, overall, a general improvement has taken place. I have given examples in which it is difficult to see a link between the stated functions and the wider cross-cutting objective, which is closing the opportunity gap in one case.
Problems of tracking funding and outcomes remain. It is important to reach an agreed position with the Executive on that, because the Executive says that it wishes to target resources on results, but it cannot do so in some cases. I have given a good example from the budget document of the inconsistencies in the presentation of local government information, for which our minister is responsible. The claim is made that all spending by local government benefits economic growth, then the rest of the chapter concentrates on minor programmes that local government has funded, which total £400 million and do not relate to the £8 billion.
The finance and public services chapter leaves service spending to the relevant portfolios, so the education and young people chapter deals with the education element of the block grant and the justice chapter deals with the police and crime, yet for the committees the data on spending on those services are not available by portfolio, so nobody is scrutinising them at that level.
Members will recall that when we have asked for grant-aided expenditure figures for major services to be published, we have encountered resistance on the ground that that would infringe local discretion. Ministers have said that spending is a matter for local discretion. The budget document says that the Finance and Central Services Department's monitoring role ensures that priorities for closing the opportunity gap are met. It is difficult to see how spending can be a matter for local discretion and yet still meet Executive priorities. That raises a host of inconsistencies.
In one sense, we have had an advance in the publication of information on closing the opportunity gap. We now know that about £1 billion of programmes are targeted directly on closing the opportunity gap. I have calculated that that is about £800 per capita of additional spending on groups in the Scottish community that are classed as poor or deprived. However, we have no analysis of the £17 billion that is spent through the health and local government block grants on tackling closing the opportunity gap. Members will remember that we pursued Andy Kerr last year on his claim that GAE figures did not need to be published because it was more important to focus on outputs than on inputs. At that time, he recalled that in the previous year he had told us that the Executive was trying to reach agreement with local authorities on local outcome agreements and he took responsibility for the lack of progress on that. I checked and they are no further forward on agreeing a set of local outcome agreements. If the Executive is pursuing a resources-with-results approach to the budget, key issues remain to be addressed.
The final point is on objectives and targets, which have had a general improvement overall. For the record, I say that targets are reviewed for every spending review and that they apply for a spending review period. I expected all the targets to be reviewed and I knew that the review was taking place. The targets that were set in 2002 will be reported on to the committee, but that will happen after the cycle ends in 2006, so I guess that it will be 2007 before we have output data about performance against targets. We discussed that with Executive officials six months ago and said that, whatever happens, the Executive must report on the 2002 spending review targets at some stage.
The big question is how the Executive cannot set a target for its top priority or how it can choose a top priority for which it cannot set a target. That is totally inconsistent with the Executive's approach to the budget. I agree with the statements in the document that growth is influenced by global and national, United Kingdom factors and by external factors that we cannot affect and I certainly agree that it is difficult to link growth to Executive spending. Therefore, the question is how the Executive can adopt a top priority if it says that it cannot target resources on the priority and cannot explain effects. That is inconsistent with saying that it wants to be measured by outputs and results. Similar problems exist in dealing with poverty, on which much progress will depend on decisions by the UK Government and by individuals and on wider external factors.
It is interesting that neither the draft budget nor the recent review of "The Way Forward: Framework for Economic Development in Scotland" contains even an economic growth benchmark for us to refer to. Obviously, the data exist, but they are not in the documentation, although economic growth is a top priority. The argument is that we are trying to obtain a sustainable economic growth rate that is higher than the current level. However, according to the key documents that set or do not set the targets, not even a benchmark to start with exists. Apart from those points, I was happy with the draft budget document.
Thank you for that. I remind members that we are scrutinising the Executive, so Arthur Midwinter is providing us with issues that he thinks we might want to pursue with the Executive. We will try to achieve clarity on those matters so that we can develop them with the Executive.
At the end of your comments, Arthur, you spoke about a target for growing the economy. I thought that the Executive had an existing mechanism for measuring progress of the smart, successful Scotland process, which looks at comparators with countries that are part of the Organisation for Economic Co-operation and Development. There is a notional target within that strategy. Should the Executive be using that mechanism more explicitly to allow itself to be held to account?
You might recall our initial discussion of the subject about six months ago, when we played with the idea that, just as in poverty, there should be a composite indicator based on six different measures. We ought to explore whether that could also be done in relation to economic growth.
Not one of the targets that you referred to measures economic growth. There are targets that measure our share of research and development spending and our share of capital investment, but not economic growth. I appreciate where the Executive is at when it says that it does not want to set a target for growth because growth can be influenced by other factors, but that raises the much more basic question why one would choose as a top priority something that one would never be able to report on or say that it was the direct result of action taken by the Executive.
In its reply, the Executive listed five or six indicators that it uses within the economic development function, which is probably the subject of scrutiny by Alasdair Morgan's old committee—the Enterprise and Culture Committee. We need to have a further discussion about getting a meaningful strategic target for something that is described as a top priority. We can use existing targets, but they will not tell us whether economic growth in the next few years will be above the current benchmark. We will not find that out from the budget documents because they contain no benchmark and we will not be able to know how much of the growth is down to the actions of the Executive. That is the problem.
There are two issues. One is the question that you ask—to what extent can Executive spending deliver clear outcomes? The world is complicated, so we can never argue that Executive spending is necessarily the sole producer of a definite outcome. That is the inherent problem with outcome measures, as we have discussed many times before.
The other issue relates to growth targets or comparators. Given that the economy is heavily dependent on worldwide economic and trade factors, it might be that we cannot simply set a growth target. However, we could set a benchmark by looking at the performance of other economies, whether they are similar or not. I thought that that was what the Executive had done in its attempt to assess progress through the smart, successful Scotland strategy. If a benchmarking process is already in place, instead of bemoaning the fact that there is no clear target for economic growth, we should ask whether we are happy with how the benchmarking is working out.
We do not need to be precise. It would be madness to say that growth is 2.5 per cent this year and that we will hit 3.5 per cent next year, or something like that. However, there ought to be some kind of statement and target in the budget, although not as in "A Smart, Successful Scotland", which has about 18 targets. Unless there is some target for allocating resources to the top priority of economic growth, the process will be flawed. We ought to have discussions with the Executive about how that idea could be developed.
We need to have those discussions with the Executive, which is why I seek clarity on the matter today.
I am not arguing for a specific target, but we need some way of measuring progress. Perhaps we could use data about and comparisons with economic growth throughout the nations and regions of the United Kingdom—
Or other European countries. If we want to be in the first or second quartiles, as opposed to the third or fourth quartiles, we should flag up that point.
Arthur, in paragraph 14 of your paper, you mention PPPs. What is your opinion on PPPs? Are they not a method of blurring the figures so that people think that they are doing better than they actually are? For example, Hairmyres hospital, Wishaw general hospital and the Edinburgh royal infirmary cost £351 million to build, but over the term of the PPP they will cost just under £2 billion. That is a false economy. It is a regressive approach, which puts burdens on future generations to pay for things that we require right now. The only way that people can see of getting what we need now is to go into the open market and borrow money at an exorbitant rate, making the taxpayer pay through the nose.
In accounting terms, PPP was introduced to be a way round the conventional controls on capital spending. It was intended to take projects off budget because they would not be regarded as public spending. Later, the Executive still wanted to take some credit for those projects and started counting them, despite the fact that they do not relate to public expenditure.
The value of PPP is a much wider question and the answer is not yet clear-cut, based on the research that has been done. There are mixed views on it within the academic community. The publications on PPP fall into for and against camps and are often driven by the starting point of the writer rather than by the outcome of the work. I am not in a position to make a judgment on the merits of PPP—
Is that because of the unavailability of figures?
For the purposes of academic research, one would have to spend a lot of time going through the detail of project after project before one could reach a sensible judgment. People will not do that unless they have a pressing reason for doing so. One tends to get articles with a very general level of appraisal rather than articles that go through the exercise.
The previous Finance Committee, of which Alasdair Morgan and I were members, spent a year looking at PPP, so we have spent a lot of time dealing with the subject.
I have a supplementary question. In paragraph 13 of your briefing paper, you talk about the accounting change. Can you point me to that information in the budget document tables?
I am afraid that I do not have the budget document with me. My guess is that there is a bullet point somewhere that explains the accounting change, but I will write to you about it if that is okay.
That is fine.
That would be easier than finding it now—it is probably information that I found in the small print.
You mention non-domestic rates. I remember that, when we pressed the minister on the previous projected increases—I think that it was at our meeting in Portree—he said that any increase would mostly be the result of the tailing off of transitional relief. However, if that is not the case, there are not many reasons why NDRI should increase, apart from in those sections of industry where valuation is based on turnover. For most premises that pay non-domestic rates, there is a valuation and a rate poundage. If we exclude the rate poundage from the effect, the valuation will not change unless—
The rate poundage was pegged in line with inflation, so an above-inflation increase cannot relate to the rate poundage; it could relate to growth in the yield. These things are not an exact science. One might discover that the initial estimate of the yield was inadequate. It is interesting that the yield is projected to fall again in the last year of the cycle.
It would be interesting if we could find out a bit more about the methodology that is used for such projections. It is clear that the yield could increase. If one builds a new Parliament building, one will get a lot of income from it.
The figure went from £1.6 billion to £1.8 billion almost overnight during the previous spending review. In the AER, the figure was £1.6 billion, but by the time the draft budget reached us in Portree the figure had increased to £1.8 billion. Now it has been forecast that the figure will rise to £2 billion and then decrease slightly in the last year of the cycle.
It is a substantial increase.
Yes. If there were a similar increase in the council tax yield, that would give local authorities a great opportunity to constrain the council tax. From what I have seen, the projections for council tax are for modest increases in yield due to the fact that new household formation is at a much lower level.
I have a question about paragraph 12. Perhaps I have not looked at the budget in sufficient detail, but I could not find in the budget document what the paragraph says about aggregate external finance and so on.
I am sorry—would you repeat that?
Paragraph 12 raises issues about the composition of AEF and so on, but I could not find what it refers to in the document. Perhaps I did not look in the right places.
It might be easier if I write to you too.
Yes. Just drop me a line.
I certainly found the figures before I did the calculations. In fact, I refer to page 154 of the document, which shows the breakdown between revenue support grant and non-domestic rates.
Thanks.
I want to return to paragraph 9 of your report and an issue that we asked about before the meeting started. The paragraph states that
"rural development and fisheries … received significant increases."
Page 141 of the draft budget document considers fisheries in particular. You are absolutely right—the document talks about fisheries grants and so on increasing in 2005-06 and 2006-07 above this year's figures. Is money for decommissioning included? The document mentions assistance being given
"towards investments in the fishing fleet".
I remember that you asked that question last year and it was said that the money was not included, but we can check for you.
I think that I asked Tavish Scott that question. Where would the decommissioning figure be, if it is not in there?
I have no idea—I will need to check that.
It will be a one-off budgetary category.
The figure might have been a one-off supplementary that the Parliament approved simply to allow decommissioning to happen. The moneys could have been underspent moneys from somewhere else that were simply brought forward.
Perhaps we will pursue that matter a little further.
Yes.
The 2005-06 figure for fisheries grants certainly seems to be a significant increase. I wonder what that includes and whether ports and harbours are included. There is a loose phrase about assistance being
"given towards investments in the fishing fleet".
I will chase the matter up with the finance people.
Thank you. That would be useful.
I want to return to my hobby-horse of economic growth targets, which Arthur Midwinter wrote about rather well in his paper. Given the amounts of money that are at stake and in order to be fair not only to Scottish taxpayers but to UK taxpayers, the argument that I would want to take forward as we engage with ministers is that such targets are necessary.
Equally, there is another issue vis-à-vis Scottish Enterprise and our overall competitiveness. It could be incredibly damaging for Scotland's long-term prospects if the impression was allowed to travel abroad that Scotland did not care about economic growth and that economic growth was treated as so much mouth music without there being any particular target.
That is not really a question—it is more of a statement.
I am not sure that Arthur Midwinter should be asked that question—it is a question for the minister.
The issue must certainly be raised with the minister.
In your opening gambit, you made a point about the improvement in the information being provided, which we all acknowledge is significant. The key point that I take from what you said is that we should continue to clamour for more and better data. The key element of the data that we currently have—and the one element that might give us a means to keep our finger on the pulse of and monitor economic growth—is gross domestic product. Scotland's GDP worries me considerably. Like others, I have looked in detail at the Royal Bank of Scotland's recent report "Wealth Creation in Scotland: A Study of Scotland's Top 100 Companies", from which I managed to get an expansion of gross value added by the top 100 companies. The report considers net profits, payments to employees and depreciation. If one does calculations that are based on what one understands to be the shareholdings of those companies and the location of their work forces, it looks as if only around 19 per cent of that GVA component, which is reputed in the report to be 56 per cent of Scottish GVA, applies here. Should not the committee clamour for better data? Perhaps Scotland should do what other countries do and produce gross national product data that give us a clearer indication of how wealth is moving in line with performance and how it is moving in a way that is more relevant to and reflective of what real people in Scotland experience.
People should always ask for better data in that field, whether they are members of this committee or of Alasdair Morgan's former committee—the Enterprise and Culture Committee. I am waiting to see how the Executive will respond to the work that is going on in England, which will clearly have implications for how GDP is measured. I understand that one of the assumptions is that growth in the public sector affects GDP. The assumption is that there is no productivity gain; therefore, the increased cash is built into GDP. Obviously, all sorts of difficulties are involved in getting to meaningful figures. I suppose that it is more for the clerks to decide whether this committee, which handles the budget, or the committee that monitors economic development should be responsible.
Do other countries include their public sector spending in their GDP calculations?
I think that the GDP measure that we currently use is the common measure.
I have a specific question about paragraph 12 of your report, which other members have asked about. What beneficial effect will the 7.2 per cent increase in non-domestic rates income have on local government finance?
It will have a neutral effect on local government finance because the revenue support grant will simply be reduced. I think that there was a similar situation last year or the year before. The additional money came through on a supplementary estimate and the Executive simply adjusted the total RSG. The increase will provide no extra money to local government—the source of payment will simply be changed.
I refer back to paragraphs 10 and 11 of your paper, which are on local government. I absolutely agree with you that if additional developments have not been individually calculated, it is important that we ask the minister for those calculations, as they could be a bone of contention at a later stage.
I am concerned about the targets for council tax increases, as there is obviously a huge discrepancy between the Executive's stated targets and what local government says are realistic targets. Although council tax accounts for only around 14 or 15 per cent of councils' expenditure, it is the part about which the public are most concerned. I wonder whether the committee can do a more forensic examination of the facts relating to the figures that local government and the Executive have put out and whether it can come up with accurate information for the public. Would the Finance Committee or the Local Government and Transport Committee do that work? Do you know whether the Local Government and Transport Committee will look at that area? The issue is important, given that local government accounts for a third of the budget and that council tax is quite controversial. Rather than receive hugely different information from different sources, the public should at least be made aware of the facts.
A number of points need to be clarified. It was interesting that Mr McCabe did not make a forecast at our previous meeting, but that the 2.5 per cent figure was quoted the next day. I do not know where that figure came from.
The 4.4 per cent figure is available in the rating review document. For each spending review period, councils are now required to set an actual level for the first year and indicative figures for the next two years. I looked at what happened last year. The vast bulk of councils came in either on the indicative figure or within £10 either way. There were a number of unusual figures that were different from the indicative figures, but local authority finance officers are pretty sharp cookies, and they will have worked out fairly accurately what they would get if the grant did not change, and the grant has not changed.
Obviously, I can produce the kind of paper that you want, but perhaps we ought to discuss the matter with the Local Government and Transport Committee. We should certainly have something back before the stage 2 report is due to be produced. I am happy to do that work if the committee is happy for me to do so, as things are at my fingertips and the work can be done, but we ought to clear the lines with the Local Government and Transport Committee. Indeed, perhaps we should offer the work to that committee.
I know that the Convention of Scottish Local Authorities and local authority finance directors are more than capable of coming up with the figures, but it is a question of what the public can believe. I believe that the committee could act, in a sense, as a referee between the Executive and COSLA to come up with facts that are understandable and believable, so that there is clarity. If quite complex information is coming from different sources, it can be difficult for the public to look at it and decide who is right and who is wrong.
There is a difficulty at the moment, because COSLA is without a finance director, as I understand it. Ought we to speak to the Local Government and Transport Committee about that?
Maybe we should have a wee word with the clerks and take cognisance of whatever comes from the minister when we see him. We should leave that suggestion as something that we can take up, if we feel that it is appropriate, after we have had our session with the minister.
If there are no further questions, I thank Arthur Midwinter for his useful report. Before we move on to agenda item 2, however, I need to ask members to agree the guidance to the subject committees—subject to the caveat that I mentioned earlier about adjustments that we might need to make after we have heard evidence from our next group of witnesses. Is that agreed?
Members indicated agreement.