Item 2 is to begin the evidence programme for our strategic budget scrutiny, focusing on the effects of recession on public sector budgets in Scotland, the immediate pressures on the 2010-11 budget and likely future trends. As the first of three panels of witnesses, I welcome to the committee Jo Armstrong and John McLaren from the Centre for Public Policy for Regions. They have produced a briefing that analyses public spending trends and prospects, drawing in part on the analysis of the Institute for Fiscal Studies. I invite Jo Armstrong and John McLaren to give us an opening statement, perhaps updating their briefing in the light of last week's United Kingdom budget.
Good afternoon. I think that you received our updated briefing only today, so I will take a few minutes to go through it in case you have not had time to take it on board fully. First, the good news is that the £6 billion cuts that were projected in some newspapers in the past few days are wrong; I think that some journalists had double, triple and quadruple counted the figures, which is somewhat difficult to believe, but it happened. That is the good news—but it is the end of the good news.
I will pick up on what our submission says on the possibility of structural change in Government, the aim of which would be to take account of and deal with the difficult times that lie ahead. We suggest that you need to have an independent budget office. I am acutely aware that at least two colleagues in the public gallery behind me work in the finance sector for the Scottish Government. Our suggestion of a budget office was made not to impugn their integrity, ability or capacity to challenge. When life gets tough, any organisation in which there are perceived conflicts of interest will experience difficulties when it comes to addressing the issues. There will always be areas in which the evidence is weak on whether to continue expenditure, and others that are sacred cows, in which cuts cannot be made. An independent budget office would be given the challenge of ensuring that the evidence was strong enough to support the continuation or extension of programmes.
Thank you. Your predictions are gloom, gloom and thrice gloom. That was a realistic but not very cheery start to our meeting. Your forecasts are now worse than your previous pessimistic forecasts, and you say that the situation will deteriorate further if interest rates rise. You also say that the situation could continue to 2014, if not beyond, particularly if the accompanying demographic crisis is taken into account. You have set out the problem; what is the answer?
At this early stage, I would hazard not an answer but a way forward. At present, there is not enough evidence and information gathering to say what would be the right thing to do. That is one reason for our suggestion of setting up a budget office. Whichever minister was put in charge would have a full-time role in looking at those things, and I assume that such an office would increase their capacity to collect all the information and decide on the right way forward.
I agree with John McLaren that what needs to be done is considerable. It needs to start with the objectives of the Government of the day or of the Parliament, whichever is the most appropriate. Each individual project, spending line and commitment that is currently being made must prove its worth in delivering the set of objectives that have been identified by the Government and the Parliament. That requires a long hard look to be taken at the Government's economic strategy. It was developed in a world that was quite different from the current situation, and it is worth investigating whether it still stands up to scrutiny. That is not to say that the strategy was wrong; it is just that the world that it looks forward into is different from the world in which it was first developed. You need to start from the objectives of your current spending commitments, and somebody must then stand up and say whether all the spending lines meet those objectives.
In looking forward, we are all looking through a glass darkly. The committee is interested in such a mechanism. Would the independent budget office that you talk about be within or outwith Government? What would it do and how would it be organised?
I think that it has to be within Government. We are an independent challenge function. We are small and have a limited resource. In all honesty, the ability to influence spending must come from within rather than from outside Government. An independent finance committee, ourselves or other think-tanks can keep challenging an independent office such as a budget office, but the resources are needed internally to have robust in-house debates about what will and will not work and about the evidence that supports the continuation of expenditure.
I am interested in how practical the idea is. In the past, I have heard about zero-based budgeting, but I have never seen it in practice. It is a theoretical concept. How practical would it be?
You are absolutely right. The ability to make substantial changes to budgets year on year is limited if there is not sufficient resource to challenge the experts, and the experts are the budget holders. Each individual department must have all the evidence to hand to say, "This is why we need the spending commitments that we are asking for." A budget office would need quite a bit of resource to take on that challenge. Over time, however, I believe that an independent budget office could make a substantial difference in challenging budget commitments. Yes, it is theoretical today, but it need not be theoretical from tomorrow onwards.
The budget office that is created must be the most important office in the Government. So far, under devolution, the finance department or office has not really held that role. It is imperative that, like the Treasury in London, it is seen as the department that decides who gets the money. That is why it should not have any spending decisions to make that pertain to its own budget. Every other department would have to explain itself to the budget office, and it would be the arbiter of what constituted best value for money and where the money would go. It would be the key department and would have the key ministerial position.
In a sense, Scotland is in a financial straitjacket, in that money is sent up to us. How would your idea fit into the UK spending system, which decides the amount that Scotland is allocated?
Do you mean the idea of a budget office?
Yes. How would it fit into the UK system?
To my mind, that role is already there, in the sense that the Treasury, as well as doing macroeconomic work, acts as an independent arbiter on whom the budgets should go to. So the Treasury already has that role, although there is an issue about whether its capacity might need to be beefed up in the current circumstances if it is truly to understand where the wisest cuts will be. The Treasury could learn from other countries on looking to the longer term a little more and using independent expertise.
Your paper is interesting and is, in some ways, a wake-up call—it is not particularly pleasant to consider the implications. If I read it correctly, you suggest that the landscape within which we deal with the devolved budget will be affected not just for the next few years, and not even just for the next decade, but possibly for the next several decades, at least in relation to reducing debt as a share of GDP. Given that, it is tempting for politicians to fasten on to efficiency savings, on the basis that no one will notice that cuts are being made and everyone will be happy. In your assessment, for your least and most pessimistic scenarios, what balance is achievable between efficiency savings and what we might classify as straightforward cuts, which involve difficult political decisions?
The numbers look bad, but it depends on where we start from. The figures that we give for 2013-14 would take us back to 2005-06 levels, and life was all right then. We delivered services and kept a level of employment that was acceptable to most people at the time. Clearly, structural change and some unemployment will come through in the short term, but we are not talking about a complete collapse of the budgets.
Page 6 of the CPPR report says:
Yes, the process started with the Treasury's report "Budget 2009: Building Britain's future". The IFS then analysed that and made some assumptions.
So, your assumptions are based on the IFS's assumptions on the Treasury model.
Yes.
Okey-dokey. What deflator did you use for inflation?
The GDP deflator.
Is the GDP deflator 2.7 per cent?
I think that the run is something like 1 per cent, 1.5 per cent, 2.5 per cent, 2.75 per cent and 2.75 per cent up to 2013-14.
Did you think about using the Treasury model as the starting point and then using other forecasts on the back of that? The Treasury is forecasting 0.7 per cent growth.
As the IFS does, we have used those growth forecasts, which is why we and the IFS say that it may be an optimistic scenario. Many analysts do not think that growth will return as quickly as the Treasury projects in its model. However, the public sector borrowing requirements and the GDP growth rates are as the Treasury predicted in the budget.
I have a question for Jo Armstrong on her Scottish Water model. Is it not the case that Scottish Water was massively inefficient before it became more efficient?
I think that people who worked in the industry would have said that it was not, but it is fair to say that bringing water services from local authority ownership, through three independent organisations into a monopoly, generated significant savings that were not a consequence of competition, economic regulation and the Water Industry Commission for Scotland. The model that was imposed on Scottish Water was about ministers being absolutely clear about the outputs that they wanted and Scottish Water being held to account on the efficiencies that it delivered compared to equivalent organisations. There is serious merit in using that model to call to account local authorities, national health service boards and quangos. If a body has no indication of what is possible, it is difficult for it to say whether it is as efficient as it might otherwise be. By virtue of Scottish Water's being in the public sector, there is no market price, which is usually used as an indicator of efficiency and effectiveness, so contestability across different providers is one key—
You were talking about incentivisation. The committee has considered public sector pay, particularly that of senior executives. The highest paid senior executive is the chief executive of Scottish Water, who also has the highest bonus rate.
Indeed.
Are you suggesting that we need a raft of quango bosses who are incentivised to make the savings that you think are necessary?
No—that is absolutely not what I said. I said that those who are in post need to prove that what they are doing is efficient and effective. One key way of doing that is to carry out appropriate benchmarking, which could happen within current organisational structures—for example, local authorities could use Accounts Commission information. There is a vast amount of information that would allow us to benchmark local authority provision of all sorts of services. I am not arguing for changing local authority pay structures—I am talking about effective incentives, which may not need to be monetary.
My final question is directed at Mr McLaren. Do your forecasts relate to economic growth rates rather to than spending growth rates?
Economic growth rates underpin the departmental spending growth rates. The headline figures that are published in the briefing note relate to Scottish budget departmental spending growth rates.
On a point of order, convener. Is it acceptable for people in the public gallery to pass notes with information to committee members?
The matter is subject to my discretion. I do not encourage the practice, but I do not object to it if it assists the committee's deliberations. It should not be a common practice.
I return to the figures that appear in table 1 of the CPPR's second briefing note, especially those for cash-terms and real-terms spending in 2008-09, 2009-10 and 2010-11. So many different sets of figures have been bandied around. I want to know what assumptions you have made and where your starting point is.
All the elements to which you referred are included. The different lines are given in table 1 on page 4 of the briefing note. There are different ways of interpreting them: one is a UK Government interpretation, and the other is a Scottish Government interpretation. The footnote to table 1 addresses most of the issues that Jackie Baillie raised and the other points are explained on the next page of the note. It is up to readers to decide which figures they want to use as the baseline. The fall in 2011-12 will not be £3.8 billion, as it will be in later years, in order to take account of the adjustment that has been made.
If the focus of our inquiry is long-term implications, would it be fair for a simple person like me to take the Treasury baseline, which is £27.5 billion for 2008-09, £28.4 billion for 2009-10 and £29.2 billion for 2010-11, as the accurate starting point, given that all the other funding that is quite properly included in the draft budget is short-term cushioning by the Government and relates to short-term initiatives that will not be carried forward?
The Scottish Government's and the Treasury's headline figures are not always in sync, because they take on board different things. It is right to say that the EYF that has been drawn down increases spending power in one year, but is a one-off that cannot be taken forward. The realignment means that there is a steeper decline the next year than there would have been under the UK figures.
I understand that—it reflects the scale of the task that we face. However, is it fair to say, based on the Treasury figures that we have outlined, that there is no cut in the baseline budget?
That depends on whether we look at the matter in cash terms or in real terms. The deflator has come down quite a lot, which means that there is a slight improvement in spending for 2010-11.
Okay. So from a simple person's perspective, there will be no impact on the baseline if one chooses to bring forward cash that one would otherwise spend later.
That will have no net impact over time, but it will have an impact on the baseline because cash will be moved between the two years. There will be an impact in trying to calculate whether that is up or down. However, there will be an offer from the UK Government and a choice for the Scottish Government about what to do. I am sorry to be so unclear.
We remain confused.
The matters that we are discussing are complex. If Mr McLaren wishes to add something to his answer to clarify it, he can do so in writing.
Excellent. That invites me to be difficult with the figures, but I will not be.
Jackie Baillie is absolutely right: there is a lot of information out there. When we considered the economic strategy, we said that we thought that a set of absolutely clear objectives was a good step forward, but we were less comfortable with the evidence to support the targets versus what was being done on the ground. The issue is not easy, but many senior civil servants are paid a lot of money to support ministers, so they ought to be forced to bring evidence to bear. They should say, "We want to deliver X, Y and Z policies. This is what we think the outcomes will be and this is the evidence that we are using to support what we think." On the challenge function, the budget office could be the key recipient of that information and could scrutinise it. Sometimes things have to be done on a wing and a prayer because no evidence exists—that is fair enough—but not everything should be done on a wing and a prayer. I assume that not everything is done in that way, but the evidence to support targets does not necessarily exist. In revisiting the strategy, evidence is required to support why people are aiming to develop or deliver policies.
The information is plentiful; the difficult bit is obtaining its meaning.
I have a couple of questions. Many of my constituents have probably been confused over the past few days, because journalists have double-counted or triple-counted or because of what has been understood as having been taken as a peak or a baseline. I think that Mr McLaren referred to using the peak of 2009-10 as the basis of comparisons. Most people take a slightly different view when money that was expected in the following budgets has already been spent.
No. I do not think that either of us was aware of any changes to the headline figures for the Scottish departmental expenditure limit that were made last October or November, but I am happy to take them on board. If there have been changes, they might change the profile a little bit over this year to next year, although they will obviously not have a huge impact on the general trend of how things are looking.
I understand what you say with regard to restraint and expenditure and the environment in which we now find ourselves, which is very different to that post-1999 with the Parliament having been established. Every scenario you use in your report—I do not think any of them could be accused of being Government scenarios, as you take two from the IFS and add your own scenario C—consider a DEL for 2013-14: in scenario A it is £28.4 billion, in scenario B it is £29.8 billion and in scenario C it is £30.3 billion. In all those scenarios the DEL is higher than the outturn for the 2007-08 DEL. That outturn of £27.2 billion is what we know, because it was in the budget and is clearly set out in the table as outturn of DEL. You have not indicated a figure in any year between now and 2014 that is less than the last known outturn of devolved government spend in Scotland with regard to DEL. Is that correct?
As you are talking in cash terms, that is correct. You are not talking in real terms.
The only comparison that you can make is on what you say with regard to cash. The same deflator as for 2007-08 is estimated for 2012-13 and 2013-14. There is a peak and a difference: there is a peak in growth in the budgets of the intervening period as well as a huge reduction and a deflator. If you want to use real terms, the only comparison is that it is the same deflator in 2007-08 with the outturn as it would be in 2013-14.
No, I do not think so. The use of the deflator is in order to get everything in terms of a specific year—to take any increase in prices out of the equation so that all the figures are on a comparable basis year by year. Considering cash figures only year by year is not sufficient. For example, £30 billion in 2013 will not buy you what £30 billion did in 2007-08, which is why you adjust for the deflator. So—
I am sorry for interrupting, but I am not sure why you take the Treasury's deflator but you take everyone else's assumptions with regard to the size of the budget. That is the first point.
The deflators work cumulatively: if you have 2 per cent deflation in one year, in two years you deflate by 4 per cent, in three years by 6 per cent and in four years by 8 per cent. It is not that you deflate the figure by just that year's deflator: it is a cumulative impact, which is why it has a large net impact the further forward you go.
The only figures that we can examine are the real-terms figures. The figures that you have projected are quite wide. You suggest a decline of between 7 and 13 per cent, which represents a cut of between £2.1 billion and £3.8 billion. These are stark figures, no matter where on that range you look. It is a lot of money to be coming out of the public sector budget. Have you done any analysis on the impact that such a massive cut would have in respect of threatening jobs?
No, we have not analysed that; it would depend on where the cuts were made, so it is very difficult to say. However, many countries have been concerned about how to ameliorate the impact on jobs, and two obvious routes have emerged. One involves job sharing or reducing people's hours. That would allow more people to stay in work, although they might not earn as much as before. The other involves reduced pay settlements, to ease the pressure on budgets. Everybody would be hit by that a little, but the negative psychological and skills effects that would be caused by people losing their jobs completely would be reduced, so most Governments are considering that option.
In Scotland, the public sector is more important to the economy than is the case in the rest of the UK. Are cuts therefore likely to hit Scotland harder in terms of jobs?
Things will be difficult in Scotland and in the rest of the UK. It will depend on where the two Governments decide to make cuts, and on what they prioritise in their budgets.
As an aide-mémoire, if we assume that 50 per cent of DEL spending is on wages—although that is probably an underestimate—a 1 per cent freeze on wages would save about £140 million or £150 million. For each 1 per cent freeze on wages, that is what you could save as you moved towards your £2 billion to £4 billion of cuts.
In the paper that you have presented to the committee, you present three different scenarios. Would you spell out for us the assumptions that lie behind each scenario?
The basic assumptions come from the Treasury's projections for public sector spending and borrowing requirements—especially spending. Back in January, the IFS did a green budget—as it does every year—in which it tried to look behind the overall spending figure that the Treasury publishes, and tried to see the implications for different budgets. The IFS broke the figure down to see what was left after consideration of issues such as debt interest payments and unemployment benefit payments. It was left with a figure for departmental spending, which it then applied to what has been happening in departmental spending in recent times. For example, health has been receiving real-terms increases, but other departments have been receiving cuts.
In answer to David Whitton, you acknowledged the Treasury's forecast of growth in spending of 0.7 per cent from 2011-12. If that were delivered, what do you think would be the impact on jobs in Scotland?
I do not think that the Treasury has a forecast of unemployment in its budget report, which probably suggests that it is wary of projecting the impact on unemployment. I do not think that I am in a better place than the Treasury to comment on that. Obviously, things are going to get worse. The increase in unemployment benefit and the like implies that unemployment will worsen. I am not able to judge whether it will worsen to a more serious extent in Scotland than in the UK as a whole.
If we are experiencing growth—albeit slower growth than previously—in the budget, we would not expect the number of jobs to decrease.
Quite often, if there is a slowdown, unemployment can still rise. It depends how the slowdown comes around. The impact on employment is quite complicated, because such things as migration to Scotland—from eastern Europe, for example—and away from Scotland have to be considered. The net impact of all the influences is quite difficult to predict.
This discussion is all about the policy priorities that we want to set for the future. In mapping those, we want to look at some of the policies that have been followed to see whether they have been successful in delivering economic growth. One of the policies that have been implemented since 2007 is a freeze on council tax increases. Do you think that that policy has stimulated economic growth?
That is not something that I have looked at in much detail.
Regardless of whether the policy has stimulated economic growth, a year and a half is a short time in which to see the effect coming through. However, you are right to question what the policy was set up to deliver, how we would know whether it has delivered and when we will see the effect coming through. Those are the questions that have to be asked about each of the budget lines that are currently being spent.
I am quite interested in the idea of an independent budget office. I will be up front in saying that nobody expected the level of problems that we would have with the recession, but it has always been recognised that the grant coming from Westminster would reduce as the years went on and that there are commitments to meet such as private finance initiative payments. In your submission, you refer to the unsustainable boom years from 1999 onwards. Was there any discussion from 1999 through the boom years as to whether an independent budget office should be set up in preparation for reduced levels of income to the Scottish Parliament, or has the issue only now been put to the Government for discussion?
I think that both John McLaren and I have suggested for a considerable number of years that there is a need for an independent budget office—no doubt, he will have his own view on that. We have not suddenly come up with it as a new idea. Officials have also thought that it would be a good thing. In years of plenty, it is perhaps not seen as essential, but I suggest that it is now.
For a number of years, I have been saying both privately and as part of the CPPR that an important step forward would be to have a stronger finance department, with greater power and capacity to decide on the best ways of spending. I may have written that in published articles and so forth, but I do not recall being called in and asked for my opinion. Reform Scotland has also called for such a change and Tom McCabe suggested recently that it might be a good idea. We are the not the only voice to put forward the proposal.
Like other members, I am keen to ensure that everybody understands the terminology. There has been a lot of confusion as a result of the different terminology that has been used, not least in the chamber last week at First Minister's question time. I note that in your report you always refer to the departmental expenditure limit and not the total managed expenditure limit for your analysis of cuts and efficiencies. Is DEL the proper baseline for budget analysis?
One reason why we use the departmental spending line is that it is more difficult to project what total expenditure will be for Scotland, because that is determined year by year through things that go up and down annually. Also, by and large, DEL is what the Scottish Parliament has to spend; it is not imposed on it by other commitments. That is why we concentrate on that measure.
I seek further clarification on DEL—what the Scottish Parliament has to expend. Westminster is talking about £5 billion efficiency savings. Of course, that will mean a cut in the Scottish block grant. Do you accept that top-slicing a grant is in fact a cut and not an efficiency saving?
We are verging on the political. The CPPR is keen to be seen to be apolitical and focused on economics, rather than worrying about terminology.
Okay. My final question ties into what John McLaren said about an error in the press in reporting a figure of £6 billion. Did the reports in the weekend press make other errors? You were reported as commenting on the inefficient policies that had been put in place in the past two years. Will you say what inefficient policies were brought into place in the previous eight years?
I do not recall saying "inefficient policies". I may have talked about initiatives and policies that have been put in place over the past couple of years that may need to be reviewed, given the cuts that may have to be made. That may mean a review of policies of the past two years. I do not think that I said specifically that they were inefficient.
I may have picked that up incorrectly. Would it be worth while to review any policies from the previous eight years?
Everything post-devolution has to be looked at. Certain things that happened in the past are interesting, as can be seen in some of the evidence that the committee has heard. For example, all the submissions from NHS boards mention the need for political support if they are to make the sort of rationalisations that they have attempted in the past and will probably seek to implement in future. The point relates to the debate with the public. How do politicians persuade someone that moving a facility from their back yard is the right thing to do? Obviously, the school closures in Glasgow last week are an example of that. I assume that the closures are being made as an efficiency, but they are not a popular one. Examples like that will occur more and more in future.
I encourage objectivity, but that is not always obvious in the questions that are posed on either side.
I will try not to let you down, convener.
Scenario C represents our attempt to apply the Barnett formula to the IFS's estimates for other departments.
If I read across and look at the real-terms DEL in 2013-14 in the scenario in which you apply the Barnett formula, that figure—£27.3 billion—is still higher than the actual outturn for 2007-08. Do you have a comment on that? I do not seek to deny the reality of the present budget position, but that figure still stands. That is the real-terms figure, which has been brought across.
The figures are all in 2008-09 terms. When we look at the preceding year, 2007-08, we have to deflate rather than inflate the figures to provide a consistent picture.
That leads me to ask whether the devolved budget will be cut. Even if we take your 2008-09 figure of £27.9 billion as a base—we are still using Treasury and Scottish Government estimates at this stage; we will not know what the outturn figures are until they are published—that includes some accelerated expenditure, which was brought forward into 2008.
And some non-recurring EYF.
Indeed. If you strip out those elements, the figure is nearer £27.2 billion. It is not that there is a real-terms cut, even over the five-year period; it is just that the budget is not growing. That is not semantics. Joe FitzPatrick is laughing, but it is a significant matter if we as a Finance Committee send out the signal that there will be cuts across the board in all areas of Government expenditure, when what is happening is that the Scottish budget is not growing. Do you have any comments on that?
It is imperative that we are clear about what we are saying. When one uses the term "cuts", the picture looks slightly different, depending on whether one is talking about cuts in real terms or cuts in cash terms. We are saying that if we examine the real-term figures—in other words, if we strip out inflation to arrive at the Government's real spending power—and make a comparison with the peak year, which is this year, there will be between 7 and 13 per cent less money, in real terms, available to spend on services.
Forgive me, but I am trying to get the most accurate comparison.
To our mind, that is the most accurate comparison.
But you have not stripped out the accelerated capital from the peak period.
It is neither here nor there to people out on the street how the amount of money that is being spent is made up.
No, but any constituent of mine knows that if they buy a car now, they will not have the money to buy another car in six months' time. The real comparison is with where the budget stands if the accelerated capital is not included. We all know that money has been brought down from a future year. Every household knows that if they buy a new kitchen table now, that money has been spent. They will not be shocked to find, in six months' time, that they have no money to buy a kitchen table, because they will know that they have just bought one.
If one were to do the opposite of what we have done, one would say that the £0.5 billion or so that was drawn down from the Treasury this year or last year, and which has been spent, will not be available to spend next year. The true comparison is, as it were, what you got in your wage plus your bonus versus what you are going to get next year—if you are not getting a bonus, you will still have a reduction in how much money you will have to spend.
Yes, but my point is that you do not compare spending in five years' time with the situation after the accelerated spend is included—you compare it with the situation immediately before that. That is how you get an accurate trend for the Scottish budget. Taking a peak year, in which money was deliberately drawn down to be spent straight away in the knowledge that it could not be spent in the next budget, is an artificial basis on which to look at a trend.
I would agree with you if that one-off money were spent on a one-off project. However, if that one-off money were spent on, say, the NHS drugs bill, which would continue to require funding, that money would not be there in future years.
This is not accelerated revenue; this is accelerated capital, so we can say that the money was drawn down specifically into these—
That is fine. However, that has an implication for how much capital there will be to spend on bridges, roads and rail in the future. That is reflected in the figures here.
This is tending towards debate. Perspective is all. Derek Brownlee has a quick question.
Just to get some clarity. Whichever of the scenarios you are talking about—I appreciate the uncertainties that exist—the range of £2.1 billion to £3.8 billion for the real-terms decline from 2009-10 to 2013-14 assumes that GDP growth and interest costs are as the Treasury has forecast. If the Treasury has erred on the side of pessimism, which is not what most people suggest, the scenario may not be quite so bleak. However, if it has erred on the side of optimism, if there are not further reductions in spending there will have to be slippage somewhere else, whether in total debt or in spending in non-devolved services.
Yes.
We will move from scenario C to scenario A if things do not turn out as well as the Treasury has predicted in the budget. That is correct.
I think that I stopped Jo Armstrong from completing her answer to the previous question. Do you wish to do so now?
My point is about the use and abuse of statistics. The purpose of our exercise here is to show the cash and real-terms cuts in what we are currently spending and what people are currently experiencing in the public sector. Jeremy Purvis is absolutely right. If you wanted to produce something else to show something else, you could use the numbers in a slightly different way. The purpose of our exercise was to show the cash effects and the changes that are likely to be experienced over the next five years—not worrying about the baseline.
I will draw this section to a close by referring back to the idea of an independent budget office. What would the public scrutiny process look like? Audit Scotland does a tremendous job after the event. It comes in, looks at the wreckage, cleans it up, cures it and sends it back to work for the public. That comes at the end of the process. However, surely, the independent budget office would assess projects before they commenced and would assess their delivery during the process. What size would the budget office have to be, and what range of skills would it require?
That is almost like asking, "How long is a piece of string?" It would depend on how far and how fast you wanted the office to go and what level of scrutiny you expected it to have. The work that a lot of people do currently within the organisation would continue to be done and it would not be a case of everybody being new. If they were in a separate office, however, they would have a slightly different mindset and a slightly different objective would be set for them. There would also be a different form of management for them.
It is just that the piece of string has to be staffed, paid for and given administration. It would be useful to get an idea of what the beast would look like. Nevertheless, I take your point.
This is a few years old now—I think that it dates back to 1999—but there is a publication by the National Institute of Economic and Social Research that looks at how different countries managed the process at both federal and national levels. It contains some interesting examples, which show that there are a number of different ways in which that can be done.
There are no further questions. I thank you for your written evidence and for your attendance here today, which has been very helpful to the committee. We will take a two-minute break.
Meeting suspended.
On resuming—
I welcome to the committee our second panel of witnesses: John Aldridge, former director of finance at the Scottish Executive; Stella Manzie, director general finance and corporate services at the Scottish Government; and Jenny Stewart, head of infrastructure and government with KPMG, who was also involved in the Howat report on public spending.
As introduced, I am the head of infrastructure and government for Scotland at KPMG, but I also have a wider role within our UK public sector leadership team. I was also a member of the Howat review, which, as you know, Tom McCabe commissioned and John Swinney subsequently published.
I welcome the opportunity to respond to the committee's questions on the Scottish Government's spending plans for 2010-11 in light of developments, including last week's budget, since plans were first published.
I thank the committee for the invitation to join you. As the convener said when he introduced me, I was finance director of the Scottish Executive until about four years ago. My knowledge of the workings in Government is a bit out of date, but in my time there budgets had to be balanced and difficult decisions had to be taken. One initiative that I played a part in was the development of the e-procurement system, which has shown how big changes can produce large efficiency savings. I understand that the system is now seen as a model throughout the world and is being adopted by other countries. That shows what can be done.
Self-challenging can be challenging.
It is important to say that it does not happen all the time. In recent times, project management issues in Government have increasingly come to the fore. Project and programme management have a far greater profile than they used to, in a range of Government circles, and much attention is being given to improving skills. Much work has been done on training and development and people are much more conscious of risk management. There is a much stronger focus on risk registers and on considering which projects and programmes are likely to attract greater risk. I hope that that greater focus will increase the efficiency and effectiveness of delivery.
I am still hurting from my time on the Scottish Parliamentary Corporate Body, when the Parliament building was being constructed. It seems that any leakage of money will badly affect everyone at a time when the budget is very tight.
In my experience of running infrastructure projects in the private sector, the essential element seems to be how the contract is structured and whether it allows the project to be delivered on time and on budget. The evidence from numerous studies suggests that the public sector has not traditionally been great at delivering on time and on budget. I have not read the most recent Audit Scotland report on the issue, which I think confirmed that although the situation has got a bit better it is still not great.
I am cheered up by the phrase
I echo what Jenny Stewart said. I agree that PFI and PPP arrangements have been controversial. Nevertheless, I was around when the concept was introduced, and an intention behind it was to bring more discipline into public sector contracting. The PFI process required that the public sector body that wanted the service or building should clearly specify what it wanted before the contract was signed, which had not always been the case in publicly procured contracts. That experience with PFI/PPP has spilled over into publicly financed projects, which is why the record on such projects is getting a bit better, although there is still a long way to go.
My first question is for Stella Manzie and is quite specific. We all understand that, whatever the risk to public spending over the next few years, a significant chunk of public spending is tied up in salaries and wages. Can you give us a specific departmental expenditure limit figure related to wages?
I can, but not immediately. We have a three-year pay settlement for central Government staff, although that does not include senior-level staff. The majority of public sector pay does not relate to the civil service—a large part relates to the NHS, local government and so on. Public sector pay is the major element of our expenditure. Funding is used to pay salaries, but those salaries are all about providing services. Generally, it is suggested that about 70 per cent of public spending relates to salaries.
Does the figure of roughly 70 per cent relate to salaries only or to salaries and other costs such as pensions and national insurance that we tend to think of as salary related?
It depends on how we define it. We must also take into consideration annually managed expenditure budgets, in which some of the costs are tied up.
I do not want to tie up matters too much today, but it would be helpful if greater detail on such spending were provided. As well as being a significant element of spending, it is politically sensitive and will raise some issues for us.
I will explain the original remit of the Howat review. We were asked to look at ministerial priorities and to assess the extent to which the Scottish Executive budget at the time was allocated to those priorities and whether there was scope to adjust spending.
At the moment, in addition to looking at the general contribution that the public sector makes, we must also be concerned about its contribution to the economy. At a time of economic downturn and potential redundancies, there is a difficult balance to be struck in relation to how public sector pay is looked at and how it can act as a force for good in stimulating the economy.
Absolutely. That is why we must look at alternative measures. Now is not the time for wholesale redundancies in the public sector. A bit of sharing of the pain across the public sector might be a way forward.
I have a question for Ms Manzie on something that she said. I think she said that, for the coming year, there will be a real-terms cut in the budget of 1 per cent. Is that correct?
For 2010-11, there will be a real-terms cut of 1 per cent.
Would there have been a real-terms cut if the Scottish Government had not accelerated capital expenditure?
If there had been no acceleration of capital expenditure, and if the £347 million had remained in the 2010-11 budget—with the applied GDP deflator and so on—there would have been a real-terms increase of 1.7 per cent.
My question was quite specific, regarding the acceleration of capital expenditure. I did not ask about the £380 million of efficiencies. I asked whether there would still be a real-terms cut if the Scottish Government had not accelerated the expenditure that it did.
I am sorry—the figure was £347 million of capital expenditure; I was not referring to efficiencies.
So if the Scottish Government had not accelerated the capital, there would not be a real-terms cut.
Let us be clear: if the capital within the 2010-11 budget had not been brought forward in the way that it has been, there would have been a 1.7 per cent increase.
I was interested to note how clear the First Minister was in his language last week. I will quote from the Official Report. He said:
Clearly, I would rather not get into an overtly political discussion.
I appreciate that.
That would be tricky. I re-emphasise—and I think that this was the figure that the First Minister quoted—that, in the circumstances that we are in now, with the accelerated capital expenditure that was made available by the UK Government but endorsed and taken up by the Scottish Government, the result is a 1 per cent real-terms cut in 2010-11.
I appreciate what you have said; that is why I was careful to ask about the official basis. The Scottish Government asked for the ability to accelerate the capital, and it made the decision to do so. I am not questioning the motives, but the terminology and the messages are important. You are on the record—which is very helpful—as saying that, if that capital had not been accelerated, there would have been real-terms growth in next year's budget.
We have had the answer. It is not fair to draw an official into these deeper waters. You have other ways of expressing the point.
We will be able to review the record of the answer that has been given. The point is about what is defined as the baseline from which the Scottish Government will take forward its plans and what it will say to the remainder of the public sector and others. As we proceed, it is important to have a clear basis.
As was the case in the previous session, the discussion about where we take our baseline from is always open to debate. Clearly, we are looking from the past—that is, 2008-09 onwards. The critical point for us is that our budgets are set for this year, 2009-10. The question is how we proceed into 2010-11. We have examined budgets overall between 2008-09 and 2010-11. We must now look beyond that period as we project forward. The harder information is going into 2010-11. Moving forward into 2011-12 and on to 2013-14 takes us further into areas of uncertainty.
When local authorities and colleges, for example, accelerate capital expenditure, what will they use as their baseline when they ask for funding from the Scottish Government? What will be used when the Scottish Government sets its budgets in future?
I assume that they will look at similar baselines to the one that I have discussed, in alignment with the Treasury red book and knowable amounts based on it. All the figures that I quoted in my opening statement and so on are based on the figures in the Treasury red book.
At the moment, as all bodies are setting their forward plans, the Scottish Government is taking its baseline as 2009-10. I think that you said that the on-going baseline for 2010-11 is below that envisaged in the original plans.
If I understand the direction of your question correctly, I should say that, clearly, in 2010-11 there will be a reduction in capital from the amount that is available in 2009-10, for the reasons that we have discussed. Any of the forward projections of those bodies in relation to capital will have to be based on their knowledge of the accelerated capital and on an understanding of the capital that is likely to come through in 2010-11. Obviously, although we can make projections, we cannot be absolutely certain about what will happen in subsequent years.
In the coming years, colleges, universities and councils across Scotland that have been specifically asked by the Scottish Government to accelerate capital expenditure—councils were asked to do so with regard to schools and houses in particular—will use 2009-10 as a baseline. They will be able to argue that their budgets have been cut considerably by the Scottish Government, and the Government will say, "No, you accelerated your spending; you knew that that money was coming out of your on-going budgets." That will be the case because, in your opening remarks, you told us that you are now taking 2009-10 as the peak.
I suggest that that is more a question for the minister.
I am just wondering what the remainder of the public services are going to be told by the Scottish Government at an official level.
You could ask the Scottish Government that question.
I can provide a general, non-political response.
At an official level, the Scottish Government has told the remainder of the public services not to baseline this accelerated money. Is that correct?
The issue is that we have been given the opportunity to accelerate the capital. What is not clear, from a Treasury point of view, is whether that capital will be, if you like, replaced in the system and from what baseline the Treasury will operate.
I asked whether the Scottish Government has told the remainder of the public services in Scotland—colleges, councils and so on—not to baseline the accelerated capital. Has it done that?
The Scottish Government has been perfectly open about the financial projections that are available and about the dynamics around the accelerated capital. It has made it clear that it is trying to boost the economy and wants to work with its partners across the public sector to do that. I do not think that anything is hidden in that regard.
I have a comment that is certainly not political and simply focuses on the numbers. The red book gave the capital expenditure figures for the Scottish Government as £3.3 billion for 2008-09, £3.7 billion for this year and £3.2 billion for 2010-11. My query is whether, if we are still in recession at the beginning of 2010-11, it will be right in effect to reduce capital spending at that time. In cash terms, going from £3.3 billion in 2008 to £3.2 billion in 2010-11 is clearly a real-terms reduction. If the economy does not bounce straight back out of recession, should politicians look again at the split between capital and revenue at that stage? The committee might want to return to that issue as economic circumstances develop.
I will add a little footnote, which is simply that the word "acceleration" indicates that the money is being moved from elsewhere and moved up the system. Eventually, later on in the plans, that will mean that the money is not available, because it has been moved forward.
If I heard Stella Manzie correctly, she said that there will be real-terms reductions in DEL spending from 2011-12 onwards. If that is the case, do you dispute the Treasury statement last week that there will be public spending growth of 0.7 per cent from 2011-12?
From our projections, and given the way in which we apply the GDP deflator, it seems as though there will be real-terms reductions in Scotland. The growth to which the Treasury referred relates to TME, rather than DEL. The projections for DEL are for figures of -3.3 per cent in 2011-12, the same again in 2012-13 and potentially -3 per cent in 2013-14.
We had a statement from the Treasury last week that there will be 0.7 per cent growth in real terms. Although that growth will be slower than the growth that we have experienced previously, it is real-terms growth. It does not seem a logical follow-on that there will be a reduction in spending.
The difficulty is that it depends on which figures are used and the extent to which the GDP deflator and the various components of the figures are applied. If the figure is calculated in a certain way, it will come to 0.7 per cent. However, we are clear that there will be a decrease rather than an increase in real terms, and that has been substantiated by people other than those in the Government.
My second question is for Jenny Stewart. In your submission, you express surprise that the Skills Development Scotland budget has been cut at a time of recession. Do you see that as a priority area and one that could stimulate future economic growth?
On what the Scottish Government can do to mitigate the effects of the recession in general, as has been discussed, there is acceleration in capital spend, which supports jobs. The other matter that is in the Scottish Government's control is the skills agenda. I do not know the details on Skills Development Scotland but, from looking through the budget lines, it seemed that, in the midst of a recession, the Scottish Government would want to put money into that. I know that the Scottish Further and Higher Education Funding Council has given extra funding to further education colleges for the skills agenda. I simply thought that that issue might be worth investigating further.
I reinforce what Jenny Stewart said. We are talking about three totals: total managed expenditure is a combination of annually managed expenditure and the departmental expenditure limit. The titles give the explanation. Annually managed expenditure is managed annually because it is very variable. It includes spending on matters such as social security and debt interest, at the UK level. Those totals will increase substantially in coming years, because of the recession. It appears that that will eat up the real-terms growth in public spending that the chancellor announced.
I encourage committee members to move on, because we have many topics to cover.
It is clear that one critical effect of the recession has been a slowing in the realisation of capital receipts, which have been a component of capital that has been available to a number of public sector organisations. That is a direct impact.
You asked about the effect of inflation reductions on services in the Government's programme. It is worth bearing it in mind that different services experience different levels of inflation. Historically, the health service has always experienced higher inflation to provide its service than some other public services have experienced. Although national inflation rates—the RPI and the CPI—have reduced a lot, that will not necessarily have the same effect on every service.
Will you give the committee an idea of the cost pressures that the Scottish Government faces currently or in the longer term?
Do you mean the overall cost pressures?
Yes. For example, are the increases in employers national insurance and the effect of public sector pay, minimum wage commitments and multiyear pay deals more substantial now than the fluctuations that normally have to be dealt with in any budget planning?
Most of those are part of the normal totals that we would consider at this time of year in preparation for advising ministers on the budget that they will publish later in the year. Clearly, we always have to assess profiles of expenditure from a variety of sources and, as the forthcoming budget approaches, it is likely that ministers will wish to consider the elements of the budget that are focused on the economy, because that is a major issue.
Could I be permitted to ask for your comments on the practicalities and implications of making cuts and savings and the different approaches that can be taken on that?
It is too early to comment much on that. We want to continue to focus on efficiencies. A great deal of good work has been done on those. For example, between 2005 and 2008, the Scottish public sector achieved efficiency savings of £1.74 billion against a target of £1.5 billion, going over the target by about 16 per cent. That is where we want to continue many of the drivers. We have identified that there will be significant problems beyond 2010-11, but that will clearly be a longer-term discussion. At this stage, a great deal of work is going on to consider the options, but it is too early to consider using the word "cuts". We will clearly need to make savings, but we would like to focus them on efficiencies as far as we possibly can.
I have a short question—a different question—for each witness, starting with Jenny Stewart. I found interesting the paragraph in her submission that concerned defining the role of the public sector differently. She proposes moving social care from councils to the private sector
There were several parts to your question. I will try to pick up on each one. On social care, the key point is how we define the public sector interest. It is possible to transfer services into the private sector while retaining strong public sector control over the definition and regulation of services. Glasgow City Council's model is interesting in that regard.
I asked whether mutualisation is a goer in the current climate.
The capital markets are pretty much seized up. Therefore, if Scottish Water suddenly looked to place a large bond in them in the current climate, that would not happen.
I have a question for John Aldridge. You are the only person who mentioned in their submission the possibility of using the Scottish variable rate.
Yes.
We have experience in the Parliament of policies that the Scottish Government has implemented and which have had an effect on our block grant income from the UK Government. I refer to the total managed expenditure that is not DEL. Have you seen anything in the Scotland Act 1998, or in any of the concordats that govern such matters, that suggests that if the Scottish variable rate is used to increase or decrease income tax, it could have any effect on the level of the block grant that is not DEL?
I understand that if the Scottish variable rate is used, the block grant will be either increased or decreased. As my submission says,
If the Scottish variable rate is used to increase income tax, could that reduce the block grant outwith DEL?
It should not do so. I cannot see any reason why it should.
It is nice to hear something positive.
I am a relative newcomer to the Scottish Government, so I do not have the historic memory to answer that. However, I will give some reflections on the matter, as I have experience of being involved with the Treasury in the south before I came here.
I will start with Mr Aldridge, now that he is a retired gamekeeper. He made a number of recommendations in his paper. If he were in the position that Ms Manzie is in, what would he say to the minister? Would he suggest targeted cuts, reductions in wages and pensions, increased user charges, the introduction of means testing on many universal benefits, or a combination of all of those?
Because of the position that we are in, I would advise the minister to consider all the options and not to rule anything out at this stage. Some things will be ruled out because, as I mentioned, there are contractual and legal commitments and not much can be done about that. Other items will have a high political profile and be very important to the Scottish Government so, perfectly correctly, for political reasons it will not want to touch those. Apart from that, as I said in my opening statement, at a time of particular difficulty there is an opportunity to challenge vested interests and sacred cows.
I think that it was Ms Stewart in her paper who spoke about wages in particular being tied into current agreements. Would you recommend, instead of tearing up the agreement, sitting down and renegotiating?
Possibly, and possibly doing the kind of thing that Jenny Stewart spoke about: considering encouraging people to change the terms of their employment so that they work shorter hours or job share—rather than the option of all or nothing, of either working full-time or being sacked.
But, as you said, nothing ruled in or out.
I would advise ruling nothing in or out.
Ms Manzie spoke about what the reduction in the budget would be. I think that you said that it would be £392 million plus the capital from the NHS. Am I right to say that the capital taken from the NHS is being replaced from elsewhere, so really the cut is only approximately £390 million?
The issue is that the negative consequentials for Scotland will be £392 million plus the £129 million capital reduction. That is then offset by approximately £25 million of additional money for Scotland. Therefore, the overall baseline is reduced by £496 million. The Department of Health capital reduction will affect us. It is not as if that capital is being replaced from elsewhere.
Has end-year flexibility money been put in there as well?
The end-year flexibility money is being drawn down in relation to 2009-10. We must look further at the implications of the Department of Health capital money.
You said earlier that you had managed to reduce expenditure by £1.7 billion from 2005 to 2008. Was that done through efficiency savings?
Yes, £1.74 billion.
What does that equate to in percentage terms?
In overall percentage terms we are focused on 2 per cent efficiency targets each year until 2010-11. Overall, the efficiency—
Is that over and above 2 per cent?
That was in the past, between 2005 and 2008. The 2 per cent that we are focused on is running through 2008-09 and 2009-10 and onward into 2010-11, by which time it will be 6 per cent.
Are you confident that you will hit that target?
Yes we are, because we exceeded the target over the previous years. The public service reform group, which I mentioned, monitors the position extremely closely.
You said that the targets have been comfortably exceeded. If a percentage point were added—or even three percentage points, to set a target of 5 per cent—could you exceed the new target comfortably, too?
It would be for ministers to decide whether that was an option. It is hard to comment overall. All areas of the public sector in Scotland, and certainly areas that are under the leadership of the Scottish Government, want to operate in a culture of continuous improvement, so efficiencies are constantly being sought, whether one is working in local government or the NHS—
I am sorry to interrupt. You said that you wanted the Scottish Government to be a leader on efficiency savings. You have told local authorities that you expect them to achieve 2 per cent savings—indeed, you have top-sliced local authorities' budgets. If the Scottish Government is to be a model, I expect that you would have no problem in meeting an increased target.
We would advise ministers on where it would be appropriate to increase targets, but it would be for ministers to decide whether a new target was appropriate.
Ms Stewart, you come from the private sector, so I was not surprised by elements in your submission. Should the Government consider privatising many services?
No, although the boundary between public and private sectors could be considered, on the margins. I mentioned Scottish Water and home care—
I am sorry to interrupt you, too. Scottish Water was formed when three water companies were merged. If efficiencies had not been made when that happened, people would not have been trying very hard. Are you suggesting that efficiency savings could be made by merging the 32 local authorities into 16 bodies, or are you saying that existing bodies should give more consideration to sharing services?
There are a couple of issues in that regard. One is the boundary between the public and the private sector. What sits formally in the public sector and what sits formally in the private sector? There is scope at the margins for putting out some public sector services to be delivered by the private sector.
Although I am encouraged by that contribution, I will take us back to figures so that I—simple person that I am—understand the situation. I direct my comments to Stella Manzie.
It depends how each of those increases was stripped out. Although I mentioned EYF in my opening statement, the figures that I have quoted in relation to the real-terms decrease of 1 per cent are based on not including EYF. If EYF is included, the real-terms reduction becomes 1.7 per cent. That factor is the most relevant to the question that you have asked. The difference between 2009-10 and 2010-11 would then increase.
So EYF is not included. Is the £100 million overcommitment included?
Yes.
And the reprofiling is also included.
Yes.
If I have picked this up correctly, you said earlier—it was a welcome clarification—that if the reprofiling was not included, there would be 1.7 per cent growth.
Yes, that is correct.
That is helpful to understand—language is everything in politics.
Yes, it was. I believe that it was because they wished to focus it clearly on economic recovery.
Absolutely; I understand that, but I was slightly worried about your language. It is clear that those decisions were actively taken by Scottish ministers.
Yes.
Do you agree with the CPPR view that the reprofiling has no impact on the Scottish budget or the DEL baseline in the long term? It is all in the same pot.
I have not looked closely at the CPPR report, so I would not want to commit to every syllable, but it is clear that, with regard to the fact that the money was in the programme, it has been accelerated, and therefore moved forward in that sense. I can see that it is possible to argue that it does not have an impact on the programme overall. I imagine that the UK and Scottish Governments wish to pull it forward because they believe that it will have a positive impact now.
Absolutely. I am not disputing their reasons for doing it; I am just trying to understand it in accounting terms. You have simply reprofiled the expenditure and brought some forward, but the overall pot of money remains the same.
Yes, although there may be some issues about the price base at different times depending on how we spend it.
Would it therefore be fair to say that, if you stripped away the capital reprofiling—ah, I see that Mr Brown is passing you another note; I make that seven so far—and had the increase of 1.7 per cent, we would be describing slower growth rather than a cut to the baseline?
No, I would not regard that as correct. When we consider the total DEL expenditure profile, we see a real-terms cut because of the way that the financial projections take place within the Treasury red book.
I asked you about the baseline DEL. Without the capital reprofiling, which we have just agreed is part of the same pot, the baseline DEL figures—let me share them with you—are £27.5 billion for 2008-09, £28.4 billion 2009-10 and £29.2 billion for 2010-11. Those figures are based on what we have just agreed in discussion, taking out the capital reprofiling. I am not a mathematician, but I can see that, year on year, there is an increase, although it is much smaller than we would all have anticipated. Would it be more accurate to describe that profile as growth, but much slower growth than was originally planned?
No. For 2009-10, there is slightly over £29 billion—£29.09 is the figure that I have—and for 2010-11, we have £29.2487 billion. The critical issue is that if we look at those two figures without the GDP deflator, there is an increase of about 0.5 per cent between them but, when we apply the GDP deflator, it becomes a real-terms reduction of 1 per cent.
Okay, but you just confirmed to me—I think that you said it first to Jeremy Purvis—that, if we stripped out the capital reprofiling, there would be growth of 1.7 per cent.
We have to deal with the reality, so I think that the information that I have given you is factually correct.
I beg to differ. I am asking you about the baseline with all the additional short-term commitments that the Scottish ministers have made stripped out because they are short term and we are interested in the long-term trend.
It depends how you put those figures together. Ultimately, we are dealing with a 1 per cent real-terms reduction between 2009-10 and 2010-11.
I think that that is as far as that line of questioning will go.
I must record my disappointment, convener.
We are talking about a budget in which money was brought forward. My understanding is that there was no opposition in the Scottish Parliament to reprofiling the capital expenditure. Will Stella Manzie remind the committee why the Scottish Government decided to bring money forward and spend it now?
It is basically to support the Scottish Government's economic recovery programme, which, as is a matter of record, has a number of facets to it. Because of the impact of the economic situation on construction in the private sector, it was felt that it would be helpful to bring forward the capital expenditure partly to continue to support the rebuilding of Scotland's infrastructure and partly to support people and jobs in the current economic situation.
I will follow up on David Whitton's point about how the £129 million health cut would be funded. You indicated that end-year flexibility had been fully drawn down. However, there was a £42 million underspend in 2007-08, and I understand that, by the time that we got to budget discussions earlier this year, that had grown to something like £70 million. If that underspend continued through 2008-09 and 2009-10, it would reach or possibly even exceed £129 million. Therefore, funding from reserves that had not been accessed could be used to match the £129 million.
I cannot comment on underspending. As a point of clarification and as I think I indicated in my opening statement, the Treasury has indicated that it will allow us to use the accumulated end-year balances up to the end of 2009-10 to offset the impact of the Department of Health baseline reduction of £129 million. However, that is currently under review, because we need to consider the impact of that and how we might or might not wish to use that EYF.
In the crossfire from advisers, we are in esoteric and complex territory. If the witnesses wish to add to their answers in any way, they could certainly do so in writing. That would be of help to the committee.
Convener, I am sorry to interrupt, but I am conscious that I did not answer the question that Mr Brownlee asked me about whether now is the time for a Howat 2. After the debate on the budget, there was agreement for an all-party review of public spending. I do not know whether that is the forum in which to start a Howat 2 but, if that review is going ahead, it would be a good thing.
I thank our panel of witnesses. I will allow a moment or two for the next panel to come to the table.
Meeting suspended.
On resuming—
We now move to our third and final panel of witnesses. I welcome Russell Frith, the director of audit strategy, and Caroline Gardner, the deputy auditor general, from Audit Scotland; Stephen Humphrey, a chief actuary in the Government Actuary's Department; and Angela Scott, the head of the Chartered Institute of Public Finance and Accountancy in Scotland.
You have heard a lot this afternoon about the pressures on the resources that will be available to the Scottish Parliament and Scottish Government in future. It is clear that, after a period of sustained growth in resources, we are going to see much tighter financial conditions in future. That situation is made tougher by a few factors. One is that we know that there will be falling income from sources such as asset sales. Another factor is that there will be less income than is provided for in the assumptions about capital income that have been built into the budgets over the next few years. For example, income to local authorities from things such as planning is predicted to fall significantly this year and next, as is less significant income from other services that are charged for, such as car parking. Another element of the picture that we must not lose sight of is that the recession is likely to give rise to additional demand for some services, such as health and social care—not only are the demographics of the population changing with the result that we will have more older people, but the recession might lead to more people having to use the social work services and apply for social housing.
Will that apply across a wide spectrum of services?
Absolutely.
I have a question for Angela Scott. In your submission, you note some of the weaknesses of incremental budgeting, and one of the other submissions talks about priority-based budgeting. As we enter a period of recession, budgets will come under more pressure. What can we do in our approach to budgeting to get the greatest value out of the Scottish budget?
We were trying to draw attention to the approach to budgeting of all public sector organisations, not just the Scottish Government.
Picking up on what previous witnesses have said, I understand that people are now talking about the need to go through budgets in greater detail and challenge aspects of them a bit more than before. However, even if you get to a process that has a beefed-up challenge function, will the reality not simply be that the relative tightness of the money that is coming into a budget—be it the budget of a council, a public service, the Scottish Government or the UK Government as a whole—will be what decides how thorough the review is at an operational level?
That is an interesting question. The reception for accountants and auditors is certainly warmer when money is tight than it is when people are awash with money. It all comes back to professional leadership on our part. We have to facilitate the cultural change across all organisations, and that depends on leadership at the top.
I endorse everything that Angela Scott has said. A message from the Obama Administration has been never to let a crisis go to waste, and we have to focus on what is happening in the budgets of individual organisations. Stella Manzie talked about the continuing efficiency programme, which will still be important, but because of the scale of change we should not lose the opportunity to consider whole systems of public services more widely.
The written submission from the Scottish Environment Protection Agency refers to "Audit Scotland's ‘landscape reviews'". Will you explain further?
That is another example of the systemwide approach that I was talking about. In the health service and in local government, we now have quite a strong track record in reporting across the piece on how money is spent and in trying to link that to what we are getting for the money. Health and local government tend to cover about two thirds of the Scottish budget; that leaves a third for which we have not been able to take such an approach.
I turn to the application of international financial reporting standards. Are all the issues of budgetary cover resolved? Will the application of IFRS have any real effect on the budget choices that are available this year and in future? What is the state of play on IFRS?
I will bring in my colleague Russell Frith on that.
The public sector conversion to international financial reporting standards is going quite well. Opening balance sheets as at 31 March 2008 have been produced and reviewed by auditors. The core accounts for 2008-09 were produced on the current basis of the UK generally accepted accounting practice, but shadow accounts will be produced on the IFRS basis and subject to audit review. The first live year of IFRS-based accounts will be 2009-10.
As the accounting standards setter for local government, CIPFA is bringing in IFRS for local government. We are in discussion with the Scottish Government on regulation to mitigate the bottom line impact for budgets in all of that.
I have a couple of questions for the Government Actuary's Department, the first of which is about paragraph 6.2 of your submission. You mention the principal civil service pension scheme, which applies to 57,900 staff members. I was surprised to read that
The principal civil service pension scheme is a Great Britain-wide scheme. Separate schemes apply to many other public sector employees in Scotland—for example, the NHS scheme and those for teachers, police and the fire service—but the pension scheme for the civil service is GB-wide.
Perhaps you will come back to the committee on that.
If you could.
Yes.
I turn to the local government pension scheme, which I understand differs from those of the police and the fire service, both of which are what I would call cash-flow schemes and not funded schemes. The last triennial valuation of the LGPS was done as at 31 March 2008. Was any assessment made of the funds that were invested in the banking sector, for example in the Royal Bank of Scotland and HBOS? What assessment has the Government made of the valuation of those schemes? What impact has the banking situation had on local authority funds?
You are correct in saying that police and fire schemes are financed on a pay-as-you-go basis. The local government scheme is pretty much the largest funded scheme. It has a different model from other public sector arrangements.
It would be useful to bring in Caroline Gardner and Russell Frith.
We can help, because we audit the councils who make up and own the local government pension scheme. We published a report in 2006 that summarised the position across the public sector pension schemes, and we are about to kick off a refresh of that work that specifically examines the fund management aspects. I think that the triennial valuation that was carried out recently has not yet been made publicly available, but my colleague Russell Frith can give more information on what we know at this stage.
The triennial valuation was at 31 March 2008. Audit Scotland is one of the admitted bodies to the Lothian pension fund, which is one of the local government schemes. We have a copy of the actuarial valuation for that, which sets the minimum contributions from employers for the next three years, which are the current financial year and the years ending March 2011 and March 2012. The rates have been set by the actuary and, as far as I am aware, have been accepted by all the employers. Basically, there are increases in each of the years, as one might expect. In the first year, the increases are from 1 to 1.5 per cent up to about 20 per cent—the figure varies according to the employers' profiles—and in each of the next two years there will be increases of 0.6 and 0.7 per cent.
The local government scheme is a big one, with nearly a quarter of a million staff. The Strathclyde and Lothian pension funds have both recommended increases in employer contributions, and the written evidence from the Government Actuary's Department states:
That is the case. Given the council tax freeze, the additional contributions will have to be found from within those budgets. Because of the timing of the triennial revaluation, which was carried out at 31 March last year, the increases are smaller than they might have been had the revaluation been carried out later. We have certainty for the next three-year period. The question is what the implications are for the following revaluation and how that ties into other issues that affect the contributions. Those include recent changes to employee contributions, which have come into effect this month and, on the other side of the equation, changes in life expectancy that affect the pension liabilities and which will need to be managed. We know what the impact is for the next three years, but we do not yet know what the longer-term impact will be.
I have an additional question for Audit Scotland. You probably heard quite a few of the questions to and answers from the previous panel. As far as auditing best practice is concerned, how should the use of accelerated funds, capital in particular, be treated when it comes to the presentation of accounts or to taking a baseline figure? Is there a precedent in the work that Audit Scotland has done with other bodies that would allow it to comment on what the best practice should be in that regard, or on how that information should be presented?
I do not think that there is a precedent that we could usefully draw on. We can certainly say that moving capital expenditure forwards and backwards in time is a perfectly reasonable thing to do in response to any number of circumstances, including the economic circumstances that we find ourselves in. For us, the greater question would apply if we were looking to move revenue expenditure in time. Revenue expenditure obviously has continuing implications in a way that capital expenditure tends not to have. Without wanting to get drawn into the political considerations on either side of the matter, I would say that drawing forward capital expenditure does not seem to us to be a problem.
And you have no views about a situation in which capital is drawn forward and the year to which it is drawn forward is used as a baseline against further accounting or further presentation of information.
The clue to the answer is in the way that you have phrased your question: it depends what the purpose of the baseline is.
I do not quite understand what you mean by
If we are looking to be clear about what the continuing revenue demands on the Scottish budget are, the revenue budget would provide the better baseline; if we are considering the total resources that are available and that are coming into the Scottish Parliament, adding the two together might make more sense. I do not think that, as accountants, we can add very much to your understanding of that question—at this point in the afternoon.
It would be recorded for all to see.
That was a most impressive answer.
As ever.
I return to pensions. I will ask Mr Humphrey about some basic cost issues. Do you have an aggregate figure for all the pension-related costs that would fall to the Scottish Government DEL? I am thinking about not just the Scottish Government pension costs, but those of all the public sector bodies that it funds.
I do not have a figure with me that I can give you. Mostly, our advice is provided to the Scottish Public Pensions Agency, which is the best body to provide that sort of breakdown.
Excellent.
You would need to be more specific about which schemes you wanted to be included. The Scottish Government is exposed to costs in respect of direct employees and indirect employees, and lots of functions are sponsored through buying services from agencies. There are other areas of cost pressure with pensions; unfortunately, most of those cost pressures are going upwards these days. You might need to do some more specific research into particular areas. I do not have up my sleeve a long list of the relevant schemes that I could give you today, but you might wish to think about which areas you want information on, including the indirect ones.
I suspect that the information we would want would be on all the areas that the Scottish Government funds directly and indirectly. Future claims might be inflated by a rise in pension costs. I take the point—we will get the clerks to write to the SPPA.
There are different ways of expressing pension costs. One is through the benefit outgo—the actual pensions that are paid out each year. Some schemes are accounted for just by looking at that. Another way to account for them is to consider the employer-contribution rate. In non-technical language, that means the pensions overhead of employing people. Mixtures of approaches are used in the Scottish schemes, so you would need to ensure that you compare like with like. Sometimes it is a good idea to consider both approaches.
If you could send that to the committee, I suspect that it would be most interesting.
As long as the appropriate treatment is sorted out with the Treasury, it should not have an impact. In the past, when benefit outgo increased, that was taken into account in the overall police and fire authority budgets. The idea of the change is to take out that element and to put it into AME, so that a police authority's budget is about providing police authority current services, and not about pensions for retired police and fire personnel. As long as the structures are all put in place appropriately, the new system should not have an impact on how budgets are run.
In your submission, some of the employer contributions go up and others go down. I do not understand why they are different. If it is easy to explain, will you tell us? What is the total DEL cash impact?
Be gentle with us.
Most of those charges are what I call the pensions overhead of employing people—the employer's charge. The schemes that are listed do not have the same employee contribution rates or benefit structures. Valuations of the schemes have been done at different dates, so we cannot easily compare different benefit structures using those figures.
That would be helpful. Thank you.
It is worth putting the pensions discussion into context. Obviously, there are big numbers, and it is understandable that we would want to examine those numbers when we are considering where we can pull back. However, we have to put the discussion into the overall context of pensions provision. A debate is being played out across the media about the generous—or otherwise—nature of some public sector schemes when they are contrasted with pensions provision in the private sector.
For the sake of clarity, I say that that is not what I was seeking to do—I simply want to understand so that I can make informed decisions. Might I say that Angela Scott is too young to be worrying about her pension?
Enlightenment is always a desirable goal. Linda Fabiani has a question.
Why do you turn to me when you are talking about pensions?
Yes—and we have expressed concern at various levels. The Improvement Service recently published its proposed continuing professional development framework for elected members. CIPFA is normally quite a conservative organisation, but we were robust in saying that we thought that finance should feature as one of the core behaviours of elected members—and not only of elected members, but of non-executive members. We have made that point regularly.
I have another wee question for Angela Scott, but it would also be worth our while for Audit Scotland to comment. Some of your work in auditing organisations will have thrown up some of those issues.
Yes. As you would expect, such issues are right at the core of our auditing all 200 public bodies in Scotland every year. Their importance is heightened by the financial pressures that we are all facing at the moment.
Often, the boards of private bodies suffer from the same problems, as we have all seen lately.
Are you sure that you want to ask me that at 5.24 pm? I will try to give a brief answer, which I will be happy to follow up with a written submission—I am not trying to be flippant.
It would be good if you could be brief, and a written follow-up would be great.
The approach to the Icelandic banks offers a good example. The use of financial reporting standards that are consistent with the spirit of the IFRS has ensured transparency in everything that has happened in relation to those accounts. I will write to you about the benefits of the IFRS.
I suppose that PFI/PPP offers a good example, too.
Let us not get embroiled in that debate.
That is a shame.
An independent budget office has been mentioned. In a sense, Audit Scotland carries out some of the functions that such an organisation would have, because it holds public bodies to account for how they spend money. We will take evidence on whether there should be a Treasury scrutiny function. How would such a body work?
I hope that I did not suggest that we think that an independent budget office is the right model. For a long time, we have recommended that the Scottish Government ensure that its finance function focuses on the strategic issues that the Government faces—which is all the more important now. We have said that the Government should have the capacity to do the analysis, meet the challenge and present transparent information about what is spent and what we get for our money.
I support that. I had the benefit of doing my finance training in local government. The director of finance ruled us with a rod, and when we were in spending departments our role was to be his watchers. Financial management is based on financial stewardship. That is what our professional training is about and that is the role of the director of finance and the finance function. Instead of setting up a separate body, we should be enhancing the role of the director of finance and the finance function, and reminding organisations that that role is to challenge. We should be encouraging our finance functions to do what CPPR suggested should be done.
Are the waters muddied if the minister who has responsibility for the Government's finances is also in charge of a spending department? Would you separate the two functions?
No. Directors of finance throughout the land have small budgets for the finance function, but that does not prevent them from challenging other spending departments. It is about the director of finance's leadership and visibility, which is why CIPFA advocates that the role should sit in the management team.
My view on the minister's position probably differs slightly from that of Angela Scott. It is difficult for a minister to be responsible for challenging proposals from spending portfolios while having responsibility for a spending portfolio of his or her own. That is not to say that it cannot be done, but it is worth examining the alternatives. Those are issues for the Government and Parliament. There could be mileage in creating a bit more independence around the spending minister.
Would the structural differences between how local government and central Government operate play a major part in the decision on the configuration? Where is the equivalent of the director of finance in central Government?
There is now a director-general for finance and corporate services in the civil service, who reports directly to the permanent secretary, as local government directors of finance do. The challenge is to continue to develop that function's capacity, to ensure that it can carry out the analysis and reporting that is required and focus on strategic issues, rather than get dragged into the detail. The question is how that function is played into the political structure of Government, to ensure that spending proposals are robustly challenged before commitments are entered into.
Educating politicians is a formidable task. Please keep trying and thank you for the tutorial. The final panel of witnesses in a meeting must always be patient, and you were especially patient. We thank you for that and for your contribution to the committee's inquiry. We will take more evidence next week.
Meeting continued in private until 17:36.