Spending Review 2004
I welcome the press and public to the 13th meeting this year of the Finance Committee and, as usual, I remind people to switch off their mobile phones and pagers. We have received apologies from Ted Brocklebank and an indication that Jim Mather might be late.
The first item on the agenda is consideration of the spending review 2004 as part of our budget scrutiny. We have with us the Minister for Finance and Public Services, Andy Kerr. Accompanying him from the Scottish Executive Finance and Central Services Department are Richard Dennis, finance co-ordination team leader, and Richard Wilkins, who is a member of the spending review team. I ask Andy Kerr to make an opening statement; I believe that he intends to make a presentation, which he estimates will last about 15 minutes, after which he will take questions. Members have been given a handout that relates to the minister's presentation.
I hope that the committee has had an opportunity to take a good look at the new format of the annual evaluation report. I am sure that later in the process we will discuss the AER and the way in which we are, I hope, continuing to improve the efficacy of the information that we provide to parliamentary committees and the wider public.
As members are aware, this is the first of my two appearances before the committee on the budget process. The reason for my giving a lengthy presentation is to provide background information that will give members greater clarity on what will happen next—that information might guide the committee's thinking on how to cross-examine me and the Executive more deeply when I return later in the process. I hope that my presentation will meet that expectation. I will talk about the prospects for the spending review and tell the committee a little about how we in the Executive are taking it forward. To do that properly will take a wee bit of time, but I hope that it will be time well spent. I am certainly happy to take questions at the end of the presentation.
We promised the committee an assessment of the likely outcome of the spending review to inform its stage 1 discussions. As members know, we intended to include that in the AER, but we could not do so, because of pressure of time arising from the need to get the report out before the start of the new financial year and because the United Kingdom budget was not announced until 17 March. Through this presentation, I hope to discuss in a less formal way the information that the committee seeks to know and understand.
I should make it clear from the start that we have no privileged information on the outcome of the UK spending review. All the information that I am about to give, and the information that Richard Dennis and Richard Wilkins have been working on, is publicly available. Most of it comes from supporting documents to the budget statement, from the red book or from seven or eight other documents that were used as part of the process—most of the supporting documentation was published alongside the Chancellor of the Exchequer's budget. I have every confidence that the committee's researchers have, or will have, access to those documents.
Slide 2 shows us the changes in the UK fiscal position. As the committee knows and as I have been saying, there have been warnings for some time that the current spending review will not be as generous as the previous two. The budget showed us that, as we look forward, the UK's fiscal position is not as positive as it was thought to be at the time of the budget in 2003, as became apparent from the chancellor's statement. The current budget is forecast to return to surplus slightly later, and net borrowing is forecast to remain slightly higher, than was forecast in the previous year. In context, with gross domestic product running at £1,300 billion, those are relatively small changes, but they mean that there is even less reason to expect large increases such as those that we received in previous years.
Slide 3 attempts to show that the overall economic outlook remains positive and strong. GDP is forecast to grow between 3 and 3.5 per cent in 2004-05 and at trend thereafter. In the slide, we try to put the spending review in context by pointing out the economy's underlying strength. We have a fairly tight settlement, but we should not lose the bigger message on the performance of the economy.
Slide 4 uses the same projections to show that the average current budget from the start of the economic cycle in 1999-2000 to 2005-06 is in surplus by about 0.1 per cent of GDP. The UK therefore remains on track to meet the golden rule, even on the most cautious case. That reinforces the messages about strong fundamentals in the economy and slower growth in future public spending. Of course, the apparent tightness disappears when we consider that by 2005-06 public spending in Scotland and indeed in the UK will be at historically high levels after a fairly lengthy period of rapid growth. It is clear that no country can afford to increase public spending as rapidly as that every year.
Making forecasts about the forward fiscal position requires detailed assumptions about the future level of public spending. Slide 5 shows some of the assumptions that we use. Budget 2004 set, for the first time, firm overall spending limits for the SR2004 period, based on the key assumptions that are set out in the slide: no tax changes, no changes in 2005-06 and so on. When we turn that into cash and project forward from 2003-04 to 2007-08 in terms of current capital spending, we get the numbers that are indicated in slide 6.
I point out by way of a health warning that the Treasury does not spell out its assumptions in full detail. For example, we know that, of the total expenditure that is set out in the slide, annually managed expenditure will account for £220 billion in 2005-06, but no assumptions are given for the split between departmental expenditure limits and AME for 2006-07 or 2007-08. Of course, we will receive consequentials only on DEL increases.
Before we consider what the budget may mean for Scotland, I underline that that is the point that we have reached with our assumptions. In the remainder of this part of the presentation, I will not be dealing with hard facts. The committee's guesses—or those of its advisers—may be as good as, if not better than, ours. We await the outturn to see exactly how we have done. However, I hope that our sharing of how we see the situation, in the spirit of openness, will be of use to the committee.
Slide 7 shows the consequentials that have already been announced. The spending review on which we have embarked is perhaps a little unusual in that we already know the lion's share of our consequentials. The settlement for health for the period to 2007-08 was announced as far back as 2002, in the budget for that year. Budget 2004 also announced the SR outcome for the Department for Education and Skills. The DFES covers higher and further education, but it does not cover the part of the education budget that is funded through the local government settlement.
There were other announcements in the budget, such as those of a guarantee of a real-terms increase in spending on defence and transport and of a cut of at least 5 per cent in real terms by 2008 in the budgets for the Department for Work and Pensions, the Inland Revenue and Her Majesty's Customs and Excise. Although those are pointers—the reductions that have been announced underline the message that this will potentially be a tough round—they do not give us the hard numbers with which we can work solidly. That health warning remains.
Slide 8, which is entitled "The guessing game…", puts on the record my position and that of the officials. When it comes to filling in the blanks to allow us to estimate what our total spending review outcome will be, we do not have any additional information that is not available to the committee. There is a wide range of potential outcomes that would fall within all the parameters that the chancellor has fixed.
The slide illustrates one way of making a forecast, but I do not claim that it is necessarily the best or only way of doing that. One of the parameters that we agreed for the presentation was that everything that we used would be either freely available in the public domain or easily replicable by an independent researcher. As members can probably guess, Executive officials have a number of more complicated models. However, although the possible outcomes range fairly widely, arguably what the slide shows is as good a guess as any. It would be misleading for me to give the committee a range within which the outcome may fall or to provide an estimate of the degree of confidence that I have in these figures. However, I hope that it is useful for the committee to see where our current thoughts lie. The figures are no more than ball-park estimates, so members should not place undue weight on them.
Slide 9 shows what the figures would mean for Scotland and some of the effects that they would have. I remind members that consequentials are not our only source for resources for allocation. Anything that we generate ourselves—from improved value for money, from non-domestic rates or from council tax—would be additional. We will need to consider carefully issues such as whether we should set aside provision now to help to meet further pressures later and what level of contingency fund the Executive will need or should have.
Without improved efficiency and productivity, inflation and pay pressures will take a substantial part of whatever increases we receive. I have repeated that message on a number of occasions, most recently at the Scottish Trades Union Congress conference in Glasgow. As I pointed out then, pay accounts for roughly 50 per cent of Executive spending and is extremely important to us. Members must realise the importance of holding growth in the pay bill to no more than inflation.
Members will see what a large share of our likely overall allocation comes from the health consequentials. As we have said previously when discussing spending reviews and budgets, devolution would be less than effective if we were simply to mirror Whitehall allocations. Members will recall that in the previous spending review we decided that, although the full health consequentials should be spent on health, they would not all be spent by the Health Department or in the national health service. Some were spent on physical activity co-ordinators, nutrition and alcohol and drugs work, for example. We are aware of the pressures on the NHS in Scotland.
I will move away from talking about the potential allocations to talking about how we may use them. It is appropriate that, having indicated how we see the numbers at the moment, I now discuss issues relating to the spending review process. If it is acceptable to you, convener, I will now move on to that aspect of the presentation and deal with that part of our work.
Our work in the spending review is done in the knowledge that, as I have pointed out, the increases in public spending that we receive will be much smaller than those from which we benefited in 2002 and in 2000. However, as a result of the two previous spending reviews, we are starting from very high baselines and levels of expenditure. As I have said repeatedly, that gives the Government an opportunity to realign some spending within baselines, to ensure that it matches our priorities more closely. The 2004 spending review is intended to ensure both that new resources are allocated as effectively as possible and that, where appropriate, existing resources are realigned to meet priorities.
How do we do that? I will describe some of the process for the spending review. Each portfolio must prepare two key documents: the spending review assessment and a list of the portfolio's aims, objectives and targets. Portfolios have already submitted draft aims, objectives and targets to me, which will be finalised during the summer. The spending review assessments will be submitted next week. Those assessments provide me with a clear indication of the pressures that each portfolio faces. Portfolios are expected to show what they will deliver for different amounts of resources—we are concerned with the delivery of outcomes and outputs.
I have asked portfolios in the assessments to give me information on several key issues: the scope for efficiency savings; the ability to realign resources by reducing funding in areas that we no longer consider to be priorities; the pressures that they face and whether they require additional funding to deal with those; and their main priorities for spending.
The spending review assessments form the basis for the discussions that Tavish Scott and I will have with spending ministers in late May or early June. We will then report back on the emerging picture to the Executive's spending strategy group. As I am sure members are aware, the group consists of the First Minister, the Deputy First Minister, Tavish Scott, the permanent secretary and me.
By the end of June, the spending strategy group will have a clear understanding of each portfolio's priorities, the levels of outcome that portfolio ministers will promise to deliver for different levels of resources, the extent to which budgets can be realigned and the trade-offs that are involved in delivering efficiency savings. We will also have had the chance to study the reports of the Finance Committee and the subject committees, so we will know what committees see as the priorities for the spending review.
Tavish Scott and I will undertake a further round of meetings with spending ministers in August, after we know the outcome of the UK spending review. We will bring a final package of proposals to Cabinet at the end of August, before announcing the results of the spending review in September. As soon as possible after that, we will publish the draft budget. When we do that, we will provide information about how we have responded to committees' stage 1 recommendations.
I am sure that members will be relieved to know that I have reached the conclusion of my presentation. The entire purpose of the spending review process is to enable us to make the most of the resources that Scotland has at its disposal. That is a vital task and we are doing everything that we can to get it right on every occasion, as we acknowledge that we take resources from taxpayers—hard-working families and businesses in Scotland. The Finance Committee is right to take a keen interest in that task. That is why we have worked with the committee to enhance its scrutiny of the spending review process. I am sure that committee members will want to make many points about my presentation and areas on which they seek fuller information.
I crave the indulgence of the committee and suggest that we split questions into two groups. First, we should ask about the numbers that the presentation contains. Secondly, we should consider the spending review process. That is a reasonable way in which to proceed.
I cannot recall Gordon Brown describing any part of the budgetary process as a guessing game. I am encouraged by the minister's candour in indicating that it is and that the process is a matter of filling in the blanks—a sort of fiscal "Blankety Blank".
I will ask the minister about efficiency savings and press reports at the weekend concerning the UK position, which he covered in the presentation. I refer to reports about a leaked paper from the Treasury, which indicates that up to 20 per cent of all public spending is wasted—in the sense of its achieving no purpose, little purpose or no demonstrable purpose. Will the minister give us an idea as to whether he thinks that in Scottish Executive expenditure over the year—even if we just take the first year of the Administration, 2003-04—there has been wasted expenditure? What is the figure for such wasted expenditure? Is it 20 per cent? Why is the minister only now looking for efficiency savings in the process? Will he explain why the process did not result in savings last year and in the first session of Parliament?
Does the minister feel that, in relation to non-departmental public bodies—known to 99 per cent of us as "quangos"—there has been a complete failure on the part of the Scottish Executive to exert any control over a form of expenditure that in some cases seems to be out of control? Let me be quite specific: I refer to Scottish Water, Scottish Enterprise, the Scottish Environment Protection Agency, Scottish Natural Heritage and VisitScotland. I take it that the minister will consider the issue as part of overall expenditure, but does he accept that there has been a complete failure to control elements of waste, particularly in the realms of quango expenditure? If not, will he tell me what form of control there has been over the past five years because, with great respect, I am not aware of any?
As ever, we have got off to a positive start with Fergus Ewing. I have to say that I disagree with everything that he said—both the intonation and the meaning behind it. I will challenge some of those points right now.
I was trying to give the committee an insight into the process that we are currently embarked on. There is a guessing game at the moment because, at this point of the cycle in the budget process, decisions about resources that will affect the Executive have yet to be taken elsewhere. However, that does not prevent the key work from taking place. I have been working on the spending review for months. If I remember correctly, the first papers about the processes that we would be involved in went to the Cabinet in November 2003.
The review follows on from some of the successful work that we have done in the past on matters that relate to the points that Fergus Ewing raised about efficiency. I continue to work with Treasury ministers—I meet the Chief Secretary to the Treasury frequently—and my colleagues, the Executive officials, continue to work closely with officials in the Treasury in London.
Let us tackle the interesting issue of waste of public sector expenditure in relation to productivity. I do not call putting a classroom assistant into a primary school a waste of public expenditure, albeit that that is not reflected in the calculation that was carried out for the paper to which Fergus Ewing refers, nor do I consider it a waste of public expenditure to put more nurses into hospitals, even though that, too, affects the productivity figure. I suggest that what we seek to achieve in public services in Scotland, which is an increase in quality in public services, needs to be reflected more accurately.
How can we get such an increase in quality? On some occasions, that is achieved by increasing the number of staff. We all agree on that. I am sure that the Scottish National Party's manifesto made a commitment to increasing the number of nurses, doctors and police. The difference is that we had a way of paying for such an increase and the SNP did not.
When we look behind the press reports, we find that the simple ratios adopted do not reflect the political priorities of the Executive. An extra classroom assistant, smaller class sizes or a nurse who can spend more time with a patient all reflect an increase in the quality of public services, which I think is to be welcomed.
On Fergus Ewing's last point—if I have not covered any of the other points that he raised, he is welcome to come back to me, as I am sure he will—it annoys me that, when people see things happening in London, they assume that nothing has been happening in Scotland. Nothing could be further from the truth in relation to the Executive's efficiency measures, which we have been undertaking for a number of years. We have probably the best-developed procurement system in Europe, if not the world, through eProcurement Scotl@nd. I chunter on about that in press release after press release and refer to it in speech after speech, so it is surprising that all of a sudden the issue becomes interesting because something has happened at Westminster.
Our e-procurement system in Scotland is saving the NHS money. For example, the cost of a tunic is now half what it was four years ago because of what we achieve through the e-procurement system—a 51.7 per cent reduction in the cost of a tunic is something that we should talk about more. I talk about the issue, but perhaps that does not get reported in the papers that Fergus Ewing reads.
The committee can rest assured that, through e-procurement, we are seeking to obtain substantial savings in the health service and throughout the public sector. A small example—going from the macro to the micro—is the work that we have done on the facilities management contract in the Executive, which saved us £2.5 million and led to 50 job losses because of changes in the way in which we are carrying out that work.
Another example is the endless work that we are putting into the modernising government fund, which allows local authorities and the public sector to work together to produce efficiency in investment in infrastructure, in particular in information technology and sharing best practice. We are working across 32 local authorities and 15 health authorities to ensure that we are collating information and upgrading our skills in relation to efficiency and effectiveness.
It is a bit rich to say that we have only just discovered efficiency. That is not true. We have a good track record and we are continuing with that focus. We understand that the money that we spend comes from hard-working families and businesses in Scotland and that our responsibility in the Executive is to ensure that we spend that money wisely. That is what we are doing.
I will let Fergus Ewing have a brief follow-up question. A party-political exchange is not really what we want.
The Scottish Executive's expenditure has risen from about £16,000 million to about £23,000 million. My view—it is shared by many commentators—is that we have not seen a corresponding 50 per cent increase in productivity, performance or improvement in our public services or in any other area of Scottish life. The minister mentioned two examples, but frankly those are drops in the ocean.
The minister did not respond in any way to my question about quango expenditure. Will quangos be included in the process of efficiency savings? Will he give me any idea of the scope of the efficiency savings that will be sought? Does he agree that at the very least some expenditure by quangos should be diverted to essential public services? Does he also agree that such a pledge should be made to the Scottish people to reflect their real priorities, which are supposed to be the Executive's priorities, but which do not appear to be reflected in the pattern of expenditure increases since 1999? The top priority of growing the economy has had about the lowest increase in expenditure.
Fergus, I think that you have asked the question.
Not in response to that question, but in response to the Executive's desire to ensure that we continue to focus on service improvement and on economy and efficiency of service provision, quanqos and NDPBs are under that pressure and remain under that pressure.
Each minister with responsibility for an NDPB has available to them a series of measures and tools in the toolkit by which they can ensure that the resources are well spent. There is increasing scope for doing that. Fergus Ewing can rest assured that, when I report to the public and to the Parliament about our increased effort on value for money and efficiency, those issues will be included. The top three items for consideration in the Gershon review are procurement, shared service and back-office function. We are pursuing those matters, we have been doing so and we will continue to do so.
The committee might want to pursue that matter in due course.
I agree with the Minister for Finance and Public Services that the issues surrounding waste, as it is simplistically called, rest on whether there are sophisticated measures of productivity. As the minister rightly says, one person's classroom assistant is another person's waste.
There is no doubt that waste will feature prominently on the political agenda for some time to come. Getting a handle on what constitutes waste and what does not is about having sophisticated measures of productivity and measuring the value of services to consumers, which is not easy. I will ask a number of questions—which it might be appropriate for officials to answer—about the work that is going on in that area.
How does the Scottish Executive's Finance and Central Services Department feel about the current measures of productivity in the public sector in Scotland? Is it happy with those measures of productivity in public services or are any of those measures under review? If so, on what timescale will that take place?
The question was directed at officials, so I might add something after Richard Dennis has spoken.
Richard Dennis (Scottish Executive Finance and Central Services Department):
We accept much of what Wendy Alexander says. We would obviously like to have much better measures of productivity. The minister has described how, as part of the spending review, every department is re-examining its aims, objectives and targets. Part of the minister's function is to challenge his colleagues on whether their targets are the most appropriate ones and whether they tell the public the most about what the Executive is trying to deliver.
I would be surprised if the new set of targets that we will publish in September is the greatest and that we will not be able to improve on it. Improving such measures is a long-term challenge. Work is on-going. Members will know that a huge amount of work is going on down south, with which we tend to keep in touch. However, I suspect that it will be many spending reviews before we get to where we would like to be.
That is a fair comment, but I will add a couple of things. Not all the measures are sophisticated. For example, on the procurement side—where dramatic savings are being made, as will continue to be the case—it is a fairly crude measure to say that we are paying half what we were paying four years ago for a nurse's tunic, but nonetheless that is good for the efficacy of the spending of taxpayers' money.
How do we improve the measures of productivity? Richard Dennis spoke about some of the roots of the problem. Under public-private partnerships, for example, we have the public sector comparator. The work of the Accounts Commission for Scotland and Audit Scotland ensures that there is benchmarking throughout the public sector. The national health service's internal system—the name of which I cannot remember—has a huge measurement function, which points to efficiency and effectiveness of service delivery. The measures are in place in some of those areas and the fact that they can always be improved is a challenge for us.
The other aspect is to examine where the private sector has been implementing most of its efficiency measures. It is predictable that the areas involved are procurement and overhead costs, which relate to issues such as the space that is occupied, centralisation and back-office function. There are lessons that we can learn from the private sector and comparisons that we can make in that regard. Technology is enhancing our ability to do that. I do not think that the committee's discussions so far have reflected the fact that a toolkit is available.
I share the minister's sense that, because of Scotland's scale, we are probably ahead on procurement. It is easier to get a grip on how we buy things in Scotland, because of our scale, but my concern is not about how we buy things, but about how we measure what we are doing. As you rightly say, a huge amount of work is going on elsewhere and I am not for a moment suggesting that we should replicate all that. Nevertheless, it might be helpful if officials could write to us about how we are staying in touch with the improvements on how we measure productivity.
The Office of National Statistics has produced revised statistics for productivity in health and education in England and Wales. Does the Executive intend to ask the ONS to produce the same experimental data for Scotland? We could ask the ONS to do that so that we stay in touch with what the Atkinson review and others are likely to reveal at a later stage. It is not worth pursuing the matter now, but perhaps Executive officials could write to us about how we are staying in touch with the debate on measuring productivity in public services in England and Wales and, specifically, whether the ONS is going to be asked to produce the same data for Scotland that it has already produced for England and Wales.
I think that we have already written to the Executive on that issue, but your general point is right.
I want to have a closer look at the ONS data in the first place. The key issue is whether we are asking the right questions. We will respond to the committee on that.
I want to discuss the change in the targets and how that will be reflected in the budget, given that the challenges that are identified in the AER relate to four areas. The visions in those four areas will be achieved by all portfolios; it will not be possible to do that by pinpointing performance or investment in a particular portfolio. As regards the spending review process, will you be expecting departments to indicate how much money they are allocating to each of the challenges? It is obvious that spending on a public service does not necessarily ensure that the service will be excellent. How will you be able to track that? Are the four challenges your budgetary priorities? How do you expect portfolios to demonstrate that their proposed investments reflect those priorities?
First of all, the purpose of the spending review will be to deliver the partnership agreement commitments. It is clear that growing the economy is at the top of the list of commitments and every minister will be asked in a focused way what contribution their portfolio is making to that goal. Of course, the partnership agreement is also about delivering excellent public services, supporting stronger and safer communities and developing a confident, democratic Scotland. We will ensure that those commitments are reflected in the aims, objectives and targets, the spending review assessments and the discussions that I have with ministers.
As the Minister for Finance and Public Services, I am getting more used to saying that the issue is not always about money. It is just as important that our commitments are reflected in policy, legislation, the way in which we do things and the bodies that we ask to do things on our behalf. It is arguable that, from a business perspective, the current debate about the consultation on planning will have a much greater impact on business than will discussion of the funding of enterprise agencies. As well as the things that cost us money, there are policy matters that have an effect on delivery. We are talking about policy and programme.
If one speaks to people in business, they go on about two issues in particular: transport infrastructure and the movement of goods, services and people; and education and the quality of people who emerge from our schools and universities. Although those matters are dealt with as part of the budget of Scottish Enterprise, they are not dealt with uniquely in that context. There is work that we carry out across portfolios. In enterprise and education, we are trying to change the culture of young people by encouraging them to go out in life and set up their own businesses. Even though many of those efforts are not necessarily reflected in a budget line for a particular department, they make an overall contribution.
We have the partnership agreement and we recognise that our commitment to grow the economy sits at the top of our partnership commitments. The main focus of the discussion that we will have with ministers will be their contribution to that overall target. However, that will not be to the detriment of everything else that we do. If my daughter needed to do more work on maths, we would not just leave English, arithmetic and everything else behind; as well as suggesting more work on maths, we would advise keeping up with all the other subjects at school. It is correct that we want to focus on one aspect of what we do, but that should not be to the detriment of other priorities or lead to their being forgotten about. We are focused on the need to deliver the partnership agreement.
I presume that you expect some sort of realignment in the determination of your targets or your aims and objectives. I fully accept your point that not everything is about the amount of money that is spent in a portfolio. In some portfolios, the spending of a small amount of money can have a large effect—perhaps a larger effect than the investment of huge amounts of money can have in other portfolios. I take your point on that, but I presume that you expect some sort of realignment and I wonder how those of us from outside the Executive will be able to monitor that process.
I accept your point. I think that we are getting better and better at getting our targets right. We work on them much more effectively through the Executive's chief economic adviser and so on. We are trying hard to ensure that our targets are good and measurable. Everybody has the right to have a view on whether we have the right targets. I am sure that the committee has views on the targets in the AER and those that we want to take us to the end of the spending review process. Targets will be realigned and we will no longer wish to deliver on some targets, which we will try to focus more effectively. The bottom line is that everything that Elaine Murray said about the need to realign, to get targets right and to say that some targets no longer sit with the Executive's priorities was correct.
After examining the layout of targets throughout the portfolios, our adviser said that the finance and public services portfolio had a preponderance of process targets rather than outcome and output targets. Do you need to lead from the front and to recognise that outcomes and outputs are crucial throughout the Executive and are a key dimension of what you are trying to achieve in the matters that are under your control?
There is something in that. When we developed the targets, I recognised that point. My problem in setting targets is that much of the budget is taken up by local government, which is another democratically elected tier of government. We work closely with local government and we can set more focused targets on some matters, but local government funding involves passing on a resource to a democratically elected tier of government.
My big target is ensuring that we spend our money correctly. That is the focus of our work and it is a process issue. That involves holding ministers to account and saying what contribution they will make to achieving the partnership agreement. I will not say that I was disappointed—that is not the right word—but I recognised when I signed off my targets that they were different from other people's targets and were more process driven. Arguably, that is a result of the work in which I am involved. I am happy to reflect on that and to receive the committee's views on that.
I think that we will have views on that. The other big spending dimension is health finance. Much of what you have said about value for money, procurement and other matters operates across the whole Executive but does not appear to operate in the same way for the Health Department, which has its own financial control mechanisms and procurement systems. Are you content with that arrangement, given that that department is a big spender and is likely to be a bigger spender if we deal with consequentials in the same way? Are the same effort and energy being devoted to managing the health portfolio as are being imposed on the other portfolios under the Executive's control?
I can give a technical answer and another type of answer. Health financing is different from that for other parts of the Executive, but I am content that I have officials who can keep a close eye on what goes on in the Health Department and on any accountability challenge there.
Like every other department, the Health Department will have to deal with the realignment of resources with priorities, value for money and obtaining efficiency. The Health Department is not surrounded by a fence with a sign that says that the department is not subject to the same rigours and requirements as other departments are.
You have been a wee bit unkind. Malcolm Chisholm might say to the Health Committee that the Health Department is arguably a leader on some of those matters. The department has centralised procurement more effectively and wants to provide back-office services more efficiently than others might do. The department is taking action with which I am fairly content. I am happy, but like every other Executive department, the Health Department is under close scrutiny and challenge from the centre.
We may discuss capital projects later.
I have asked parliamentary questions about the proportion of the budget that is for public sector pay, which can be the largest aspect of all departments' spending and on which it is difficult to have a good idea of the forecast spend. The Scottish budget has grown, but public sector pay has also grown. We have talked about health spending, and an answer to one of my parliamentary questions said that 60 per cent of health spending was on pay. How do we obtain a good idea of the forecast for public sector pay growth in the spending review period? Some contracts are still to have an impact on local health boards, more is to come on teachers' pay and other matters such as infection control are forthcoming. Those issues involve negotiations and deals that are probably not done in or—crucially—by your department, but which will have a massive impact.
There are two aspects to the matter. We cannot dislocate pay from performance agreements. We have tried and will continue to try to ensure that pay settlements are linked to performance.
I have sent out robust messages about the difficult choices that the Executive will face on pay. If more than 50 per cent of a budget is tied up in pay—the health budget figure is higher—it is critical that any pay settlements should be linked to modernisation, improvement and better outcomes and outputs.
I acknowledge Jeremy Purvis's point, which is fair. I understand the difficulty and the fact that I will have to keep pressure in the system on local authorities and other employing bodies in the public sector, because we will not let the situation run out of control. Every 1 per cent of a pay settlement that is above inflation costs a minimum of £100 million. That means that we cannot spend £100 million on other matters on which we want to spend it.
Absolute pay levels are important, but the other aspect is that—as the Parliament agreed—the Executive is delivering on the number of public service workers. We must consider the employees who are involved. The numbers of classroom assistants, nurses, doctors and teachers have increased. Most people agree with those increases as an intervention to ensure that our schools produce better-educated young people and that we have a healthier nation in which people are treated more effectively. We have a commonality of purpose on that, but that leads to a bigger pay bill. We need to examine closely the effect of extra public servants on the size of the public sector. Many of us around the committee table agree on those matters.
Are you in a position to tell us the proportion of each department's budget that has been spent on staff costs in each year since the Parliament's establishment and to forecast staff costs? That information would be extremely welcome. Staff costs will probably have the biggest impact in the spending review period. If you cannot provide that information, the committee will be unable to scrutinise how public sector pay is linked with everything else that the Executive does, which you have just talked about. Our job would be hampered.
I am happy to reflect on the effort that is required to provide those figures and on the information that we can deliver. I warn you about pure staff numbers and pure staff costs, because within them lie initiatives that we all want on the numbers of teachers, classroom assistants and others. I am happy to consider the matter.
The Executive's commitment to investment on page 3 of the AER is welcome. For the first time, the capital spend has been divided from other spends. Perhaps you can help me with the presentation that you gave at the start of the meeting. The slides do not have numbers, but the one that is headed "Putting that into money…" provides details of current and capital spending. I assume that that is on a UK basis.
Yes.
The proportion of overall UK Government spending that is capital spend is considerably higher than that for the Scottish Executive—it is nearly four times as high. Is that right?
I am not signing up to those exact numbers. The definition of capital spend does not include the arguably larger PPP spending, which represents a huge investment in the public sector education and health infrastructure. There are differences in the calculations: our infrastructure spend may not be reflected in the figures.
Behind your question may lie an interesting question about our infrastructure targets. It is not driven simply by the way in which we now do our accounts, but I am working with officials on agreeing what our targets should be to ensure that we invest appropriately in infrastructure. Linking targets to gross domestic product might be appropriate and I will be happy to hear the committee's views on that.
I respect your question on the targets that we are setting ourselves to ensure that we do not degrade the public sector infrastructure and that we continue our investment. I am happy to work further with the committee on that. I would argue that the cold statistics do not reflect the position in Scotland. We have made huge investment through PPP, which counts as revenue.
We would be grateful for further clarification on that.
Other committee members have spoken about efficiency in the Finance and Central Services Department. Richard Dennis said that part of your job was to challenge other ministers. At our meeting in Motherwell in November last year, I asked questions of Richard Wilkins about the strategy unit, or the performance unit, which is at the centre of your work. I was struck by the answer that the unit was answerable directly to the permanent secretary. Would it not be better if the unit were answerable directly to you, minister?
I will let Richard Dennis talk about the figures before coming back to that final point.
The committee will be taking evidence from Andrew Goudie next week. I have arranged with the clerks that he will set out for the committee how all the different units at the centre fit together and to whom they report.
I was hoping to hear the minister's view in advance of my question to next week's witnesses.
I will give you my view in a moment.
As for the figures, I suspect that the committee's adviser knows the figures for capital as well as I do; I know that he has been writing a paper for the committee. Roughly, the slide shows that capital spending is about one eleventh or one twelfth of current spending. Executive spending for capital for 2005-06 is about £1.7 billion or £1.8 billion out of a total budget of £25 billion, which represents about one fourteenth. There is therefore not all that big a difference if we take PPP classifications into account.
We have to use clear language. I am responsible for driving through this work of the Executive. It may be that the performance and innovation unit reports to the permanent secretary, but, within the Scottish Executive, I am responsible for the unit's work and reporting.
I think that the equivalent unit at Westminster is answerable directly to the Prime Minister. It would be good if the unit here were directly responsible to a democratically elected minister.
I think that there is a language issue here. I share your philosophy, but the phrase "report to" is a loose one.
That can be looked into.
It has been interesting to listen to what has been said this morning. However, what worries me more than anything else is that economic growth in this country is declining. I reckon that, in my working lifetime, something like 80 per cent of production in industry has disappeared. You are swimming upstream, minister, to try to get things moving, but are you doing enough to try to regenerate economic growth? We read in newspapers that £750 million will go to France to build tramways for Edinburgh but this Parliament should be able to encourage industrial economic growth in this country.
I detected a touch of frustration that you are working on a handout from down south. Do you welcome the prospect of fiscal autonomy? That will come, and you would then become the chancellor for Scotland.
There were some big questions there. I will deal with the last point first, on the issue of the so-called handout. We receive our fair share of United Kingdom spending and the current system is good. If that fair-share process did not work through the Barnett formula, we would spend most of our time in committees discussing the argument that we should take to the Treasury. We would then argue for six months before settling on a figure that we could probably have agreed on at the start.
I do not regard the money that we receive as a handout. Scottish taxpayers pay their fair share and we receive a fair share back. I would argue that we benefit from the way in which the system works.
Fiscal autonomy means all things to all people. To one person, fiscal autonomy means a tax increase; to another, it means a tax decrease. There is not enough debate on fiscal autonomy and I would like to have more. We have to put the facts in context. We have to consider the huge benefits that we gain from our relationship with the UK Government in terms of, for example, stability for business, interest rates and employment levels.
Recent lectures have supported the view that people put the wrong emphasis on the impact that fiscal autonomy could have on the economy. This may not be the time to go through the arguments on fiscal autonomy, although I would be happy to debate them in future with the committee. However, not advocating fiscal autonomy does not, in my view, indicate a lack of ambition. I get very annoyed when people suggest that we lack ambition for Scotland. My ambition for Scotland, which is shared by the Executive partners, is to grow the economy, to have good, high-quality public services and to be part of the UK. If we consider reports from the Organisation for Economic Co-operation and Development, we see that our macroeconomic structure is the envy of our international competitors throughout the rest of the world. That is good. Throwing that away, to achieve the kind of fiscal freedoms that some would advocate, would be inappropriate and dangerous.
Mr Swinburne mentioned manufacturing. Our economy is open to worldwide demands and pressures. However, work that we are doing in Dundee, Glasgow and Edinburgh has huge impact worldwide. We are selling services throughout the world. Sometimes we win and sometimes we lose in those areas, but we are exporting our skills and labour. Our manufacturing output has worldwide impact. We cannot defeat the openness of the economy, but we can ensure that we are smarter, quicker and more productive; that we have the infrastructure to transport goods and people; that the output from our schools and universities is of high quality; and that we support industry. Look at the statistics for the growth of the Scottish economy. There is confidence in the manufacturing sector and the whole of the economy. Without being complacent, I would suggest that we are in a healthy position. Businesses are telling us that they are confident. When they consider whether to employ, or whether their order books are growing, they see that all the indicators point upwards.
I do not know where the minister is starting from when he talks about industrial growth. I assure him that, in 2004, we are a much poorer nation because we are not producing as we did 40 years ago. We were a manufacturing nation for the world, but we no longer export goods that bring wealth into our country. The Executive should be promoting manufacturing as much as possible.
We are. Through the manufacturing steering group, we continue to support manufacturing as effectively as we can. However, we have to consider the upside. Work on biotechnics at the University of Abertay Dundee and work in the Edinburgh financial services sector—indeed, the Scottish financial services sector—are well recognised worldwide. The business impact around the world is massive.
I do not dispute that the economy of Scotland has changed. The world has moved on and global competition has a massive impact on what we can do in Scotland. However, let us talk up some of the successes of the Scottish economy and Scottish skills. We have some very successful industries.
But we do not—
We are beginning to drift away from the spending review, John. We should focus our attention on that.
I read the AER with considerable interest, and I read it in conjunction with a document from Robert Huggins Associates Ltd—the "European Competitiveness Index 2004"—which shows Scotland dropping down the competitiveness league table. The document shows, for GDP per capita, Scotland dropping from 36th place, in a league table of 87 countries, to 49th place by 2010. Given that economic growth is a function of competitiveness, how is current spending halting that slide and boosting Scotland's competitiveness?
It never ceases to amaze me how people manage to pick such reports out of the air. I will read the report—do not get me wrong—but I think that we should try to pick out other reports with forward projections for the Scottish economy that show positive aspects. We do too much talking down and not enough talking up. I will look at the report that Jim Mather mentioned and respond to him once I know its content.
The FEDS document—“The Way Forward: Framework for Economic Development in Scotland"—and "A Smart, Successful Scotland: Ambitions for the Enterprise Networks" have given us the right prescription for our enterprise agencies. Our support for those agencies is having an impact through the intermediary technology institutes, support for the business networks and support for business. We are making a huge investment in Scotland's infrastructure, the budget for which is rising to figures that were previously unheard of. We are promoting entrepreneurship in schools and funding our universities and colleges to produce good strong graduates.
All that stuff combined needs to be taken into account. As I said at the start of today's meeting—I am not sure whether Jim Mather was present—people should not read the budget for the Enterprise and Lifelong Learning Department as the Executive's contribution to growing the economy. Every Executive minister has a contribution to make to that. That is clearly the case for tourism, culture and sport and for education, but it is also the case for other aspects of our work.
I will look at the report that Jim Mather mentioned, but I return to the point that every economic indicator in the past quarter, if not the past six months, has pointed to an upward trend in the Scottish economy. We should mention that more often.
I am interested in the minister's response. Last week, the Irish academic John Bradley suggested that our cross-cutting reviews that pluck numbers from various different budgets are no substitute for a strategy. Let me return to the strategic issue. Some witnesses from whom we have heard, such as Donald MacRae, have made the critique that the Executive needs to set a smaller number of macro-targets on issues such as growth, population and productivity to which hard numbers should be allocated so that people can compare what the Executive planned or aspired to do with the outcome. How do you respond to that?
As I recall, John Bradley said that Scotland has many more benefits than a small country such as Ireland. He also said that the solution lies not in fiscal autonomy, as John Swinburne suggested, but in making use of the resources that we have and ensuring that we have the right instruments to make that change.
Without seeking to repeat my earlier comments, I point out that we have at our disposal many levers that we can pull, push and use to the benefit of the Scottish economy. I do not know that I can add much to what I have said. I think that the smart, successful Scotland strategy has been endorsed by all the academics who have taken part in the Allander series lectures, the vast majority of whom rejected independence and fiscal freedom as the solution for the Scottish economy and suggested other mechanisms, which we continue to consider.
Jim Mather cannot have it both ways. He cannot extract just one aspect of what a commentator has said without reflecting the full content of that presentation.
With respect, my question was whether we should have a smaller number of firm, open and understandable macro-targets to show how we are doing.
I apologise for failing to address that.
Targets are set within the AER document. Jim Mather might be able to suggest other targets, but the targets need to be measures for which Executive ministers have control over the levers that allow us to make the targets work. That is how we are held accountable. There is no point in my setting targets for things over which I have no control or influence. I have said to the committee that I am always happy to discuss our targets, but it is difficult to set targets for population increase or decrease and for other aspects that are beyond our control; we play our part in such things, but we do not always have the direct levers of control. What happens in the American economy has a huge impact on Scotland, but I do not control the American economy. I am happy to sign up to targets for things for which we are responsible and should be accountable, but the targets must be on things over which we have responsibility and control.
Although I am tempted to address those wider issues, I will ask just two very narrow questions.
I share the minister's concern that, whatever financing arrangements we have for Scotland, we should avoid any annual bargaining round and all the controversy that goes with that. The minister mentioned in his presentation that we do not know what consequentials Scotland will receive from the spending review because it is not clear how departmental expenditure limits, as opposed to annually managed expenditure, will increase. When the DEL information is published as part of the spending review, will we have transparency on precisely how the budget consequentials have been calculated, department by department? What change has the Finance and Central Services Department seen in the level of that transparency over the past five years? That question might be for the officials.
Richard Dennis will respond.
The Treasury has always provided us with a detailed breakdown but, to date, it has requested that we keep that confidential. However, in its recent evidence to the Scottish Affairs Committee at Westminster, the Treasury published the departmental breakdown for the past two spending reviews.
My second technical question relates to Jeremy Purvis's point, which Andrew Goudie will address next week, about the confusion that surrounds who does what in the monitoring of how money is spent. At UK level, there is a high level of clarity about the respective roles of the departments, the Treasury and the Cabinet Office's performance and innovation unit and delivery unit. Given that we have a sense of the logic behind that split, it would be helpful to have a description of how those responsibilities are split in Scotland among the departments, the Finance and Central Services Department and the Office of the Permanent Secretary, which has now acquired a surrogate Cabinet Office function. Perhaps when Andrew Goudie gives his presentation next week he could account for any differences in how we deliver that agenda. Those differences might be due to scale.
That is fair and it will be done.
I am clear about where responsibilities lie. People always compare us with the UK, but we do things in Scotland that we think are right. Although the UK may provide a benchmark against which we can measure ourselves, we do not need to follow or copy others in areas in which we can do things better. In the interests of saving time, that question will be dealt with either by Andrew Goudie's contribution next week or by me in correspondence.
It would be helpful if we could also get a response on the health issues that I mentioned earlier. In particular, I am concerned about whether large capital projects are procured as effectively in health as they are in other areas.
Let me raise two other longstanding issues about which the Finance Committee has raised concerns. First, we have talked about the balance between capital expenditure and revenue expenditure. The minister justified the apparently lower percentage of capital expenditure by saying that the figures do not include PPP expenditure. However, PPP expenditure must be paid from future revenue expenditure. Both expert commentators and the committee have said consistently—we certainly made this point last year—that the balance between revenue expenditure and capital expenditure needs to be reconsidered. I hope that that will be considered in the spending review.
Over the past five years, it is arguable that we have had a relatively lax budgetary environment, in which there has been pressure to spend money on capital projects. However, the issue is not just the amount of expenditure, but the rate at which that money has been spent. One cause for concern has been the delay in committing capital for investment in transport, water and other areas. The committee would welcome comments and, indeed, action from the minister on that in the context of the spending review.
Secondly, to use the approach that Jim Mather often adopts, anyone who was running a business would look at the future commitments of that business, which arise from factors such as demographic pressures. I would have thought that, in the spending review, it would be appropriate to extrapolate unknown trends in, for example, health and education expenditure, work out likely forward commitments, and then make informed decisions. The committee would welcome any information that you can share with us on likely forward commitments and the trend data on which you base your calculations.
The committee's time is precious, so I will not spend too long on my answer.
First, I will develop further fiscal rules around how we do our job in Scotland in what I deem the important areas. We developed rules in the past—they were forwarded to the committee—for tracking the efficacy of spend and ensuring that value for money is obtained. I will develop that practice on the capital revenue side and that will come out in the spending review. We will publish the fiscal rules in due course.
Secondly, we are looking forward at budget pressures from future commitments and I will correspond with the committee, if that is appropriate, about how that work is done. However, we know largely what we will do in, for example, education, PPP, health, water and the transport infrastructure plan. For example, we can project what the impact of work-force requirements will be. Such work continues. I am not sure whether information about it can be given to the committee in a tidy wee box, but we will work on it to ensure that the committee gets a response that gives it an understanding of the matter.
Last, when I know what the budget pressures will be and I set aside a contingency fund for dealing with them, everybody criticises me for doing so.
I understand that. You can never win in politics. Arthur Midwinter has questions on technical aspects.
Professor Arthur Midwinter (Adviser):
First, I have a quick observation on the point that was made about Professor Bradley's comments. The professor attacked the Executive, but the document to which he referred was one of ours. It was a simple background paper on spending on economic development that two members of the Scottish Parliament information centre produced for the Finance Committee. The paper was not intended to be a strategy document.
I have questions for the minister on three issues. First, you described the budget growth as slower, but it is still significant. I have seen references in the media to statements from London that suggest that housing and transport will be priorities for the Westminster Government. However, no consequential figures have yet been attached to those priorities. Have you any information on that? If Whitehall is making the devolved areas of housing and transport its priorities, that would make the picture look good for Scotland compared with where we were a year ago.
Secondly, you referred to targets and the problem of local authority block grants. That area has been causing me problems during the past few weeks while I have been going round the Parliament's subject committees. For example, the Education Committee wants to look at grant-aided expenditure; it is right to want to do that, because GAE is the biggest funding source for education. When we raised the issue of targets with you last year, part of your answer was that you were developing outcome agreements with local authorities. Could those agreements become the targets? If the targets were about services, they would be much more useful to us than the current ones.
Thirdly, from a straight reading of the new statement of priorities document, am I being unfair in suggesting that it looks as if equality and the opportunity gap are now sub-themes of a major theme rather than being cross-cutting priorities in their own right? They seem to be grouped together as priorities under communities, in the same way that sustainable development is.
I will take your questions in reverse order. It is unfair to say that equality and the opportunity gap have been de-prioritised. Our experience of the previous spending review gave us sufficient understanding of the mainstreaming of those areas, so I expect them to be reported as part of each department's core business. They will usually be reported to the committee in the spending review document and through other work that we do, rather than separately. However, they remain mainstreamed activities and ministers continue to work on a cross-cutting basis through the Executive's work to ensure that that is the case. Again, the fact that something is a priority does not mean that we throw out everything else. Closing the opportunity gap and sustainable development remain part of our core business. What we learned from previous processes of getting those areas to work has been mainstreamed; that might be perceived externally as a downgrading but, in my view, it is not.
Progress on outcome agreements with local authorities has been, to be blunt, extremely slow; I cannot think of a better way of putting it. The way forward is for me to reinvigorate that work. We have done a little focus work, but we have done nothing that would answer Professor Midwinter's point. I am sure that I am partly responsible for the slow progress and I will try to deal with that.
On housing, we know what the chancellor said in his response to the Barker review, but we have not yet read into that anything significant that would reflect back to us. However, we continue to keep in contact on that as much as we can.
I take Professor Midwinter's point that slow growth is still significant growth. Scotland's budget has grown dramatically.
I thank the minister and his colleagues for their evidence. After we have dealt with our expert witnesses, we will take evidence again from the minister at the end of May. Therefore, we will be able to come back to many issues.