Budget Process
The next item is stage 2 of the budget process.
As Angus MacKay is now the Minister for Finance and Local Government, he will remain in his seat. He is accompanied by Neil Rennick, the head of the local government finance expenditure branch, and Don MacDonald, of the finance co-ordination unit, whom we met less than an hour ago.
That is not Don MacDonald, it is Christie Smith.
I apologise to Christie Smith. I have new contact lenses and one of my eyes cannot see too well.
It was anticipated that we would take evidence from Jack McConnell today. However, there has been a reshuffle of the ministerial team that is responsible for local government and that brief has passed to Angus MacKay. Members will recall that, on previous occasions, Jack McConnell explained the process of review and modernisation that was taking place in relation to the distribution system in local government. We will listen to what Angus MacKay has to say and then ask questions, as is our normal practice.
I am genuinely pleased to have the opportunity to appear before the committee to discuss matters of interest that relate to the finance and local government brief. Members will understand that, given that this is only my second 24 hours in post, I am not necessarily as up to speed on all matters as one might wish. Members of the committee have had more face-to-face contact and meetings with my officials than I have. It will take me a day or two to get my feet fully under the table. Having said that, I am anxious to be of assistance to the committee. My officials will also be of assistance, where possible.
I know that the committee wishes to raise a number of specific issues, particularly in relation to the reform programme for local government finance. It may be helpful if, very briefly, I provide an update on the progress that has been made since May, when Jack McConnell previously appeared before the committee.
Excellent progress has been made, especially with the Convention of Scottish Local Authorities, in taking forward the reform agenda. Notable progress has been made on some specific arrangements: on the three-year budget settlements for local government revenue and capital; in the attempt to simplify distribution arrangements; in increasing the focus on service outcomes; and in reviewing the system of expenditure guidelines. Next month, I intend to meet COSLA to confirm the structure of the local government settlement for the next three years. I know that COSLA and individual councils have welcomed the significant increases to the aggregate local government figures that were announced last month, following the spending review. I understand that, for the first time, COSLA was actively involved in the spending review process. That is to be applauded by all sides.
We plan to announce in December the three-year settlement allocations for individual councils, prior to the local government finance order being debated early next year. As a former convener of finance in a Scottish local authority, I recognise the importance of that to local authorities' ability to get best value out of existing resources and to plan long-term service delivery in a more settled context.
The significant real-terms increases in revenue support and capital investment that have been announced and the programme of reforms provide a genuine opportunity to modernise local government and to make improvements across the range of services. This represents an exciting fresh start for local government.
I am happy to attempt to answer members' questions. When I cannot, I will defer to my officials.
I omitted earlier to congratulate the minister on his promotion. Apart from that, I welcome the change that brings local government into the portfolio of the minister who is responsible for finance. The financial relationship between the Executive and local government is crucial.
I accept that the minister is new to the brief and that he might not be able to give substantive answers to all my questions. However, I am keen to explore a number of aspects of the way in which the Executive currently views local government finance. The first issue that I would like to raise concerns guidelines. In any reform of the system, do you envisage the Executive putting more trust in local government and abolishing guidelines or relaxing them considerably?
My second question was helpfully suggested by Professor Arthur Midwinter, who gave evidence to the committee about half an hour before the minister. In the past, the Executive's policy has been that there should be convergence between actual budgets and grant-aided expenditure. Obviously over the next few years, it is likely—given the extra investment that there will be in local government—that local government will increase its expenditure on many services. On several of those services, councils are already spending well above GAE. Is the Executive reviewing its position on convergence?
Thirdly, within the Executive's spending plans, there is no specific target for council tax increases over the next few years, although I understand that the UK Government has set such a target in England and Wales. Does the Executive have figures in mind, or is it comfortable about leaving decisions on that to local government?
I think that all those questions are wrapped up in the set of reviews that are taking place. It is intended that we will bring those reviews to a culmination in December and make clear our thinking then. I will ask my officials to reply on the three points that Bristow Muldoon raised before I give my views on those matters.
The future of expenditure guidelines is one of the explicit remits that was given to the reform process this year. The working group that Jack McConnell and COSLA set up has produced a report on that, which the Executive and COSLA are considering. As I said, the minister hopes to reach agreement on that with COSLA in November and that will pave the way for the announcement of the settlement in December.
Arthur Midwinter's point about GAE is important only in relation to expenditure controls. In any other sense, what does it matter whether councils spend above GAE? It matters only if the Executive has a policy view on what they should spend. The point about GAE is wrapped up with the issue of expenditure controls and the questions about whether there should be expenditure guidelines, how strong and how flexible they should be and so on.
One of the indirect effects of expenditure guidelines is that they will restrain council tax increases, which is tied to the matter of the Executive's view on local council tax increases. Expenditure guidelines, GAE convergence and council tax increases are wrapped up together. It is true that we will need to make a national council tax assumption for our calculation of the grant for each authority, but that does not necessarily have to become a guideline, a cap or any other kind of explicit control. That is what is up for grabs over the next few weeks in discussions between the minister and COSLA and so on.
I am anxious that we move as quickly as is practical and sensible, so that we can maximise the flexibility that is available to local authorities. Obviously, the overall level of funding is important—it is perhaps what local authorities regard as the most important factor. Equally important is the capacity of local authorities to be flexible within annual budgets and over the three-year budget projections.
In recent years, local authorities have been given greater flexibility and they have, broadly, responded extremely well to that. There are certainly issues of flexibility in relation to local accountability and democracy, which are fairly intimately entangled with the matters that we are discussing. I am anxious to support and foster such flexibility. I am a firm believer in local government and I want us to help it to do better. The best way of doing that is to encourage local government, where prudent, to be more flexible and to give local government the opportunity of being more flexible.
Although Colin Campbell still carries a torch for Frank McAveety, I congratulate Angus MacKay on his well-deserved promotion. I am sure that he will make a great leader of the Opposition one day.
I, too, have three questions. First, will a budget be set aside for the assassination of busking bagpipers? I am sure that the minister will appreciate that that is a priority at the moment.
My second question touches on Bristow Muldoon's mention of convergence. As Angus MacKay knows, his predecessor talked about convergence taking place over 15 years. That caused alarm in councils such as Glasgow City Council and Dundee City Council, whose budget expenditures are well over the GAE figures. Christie Smith asked whether it matters that councils spend more than the GAE figures. Can I take it that the 15-year plan to converge will be abandoned, or will GAE simply be altered to meet local authority budgets? If convergence takes place, what will be the implication for local government services in those authorities that are most exposed to convergence?
The short answer to one of your questions is that I cannot today announce the abandonment of or commitment to anything in particular. Those are precisely the issues that we will be debating with COSLA and others in the coming weeks. We need to get into the matters in some detail to see what kind of new settlement can be made.
On the general point about the impact of the financial settlement on local government, particularly with regard to McCrone—
COSLA said that more than half of the £3.024 billion would be taken up by McCrone if the recommendations were fully funded. Even without McCrone, an extra £1.5 billion in new burdens on local government is expected in the next three years. In itself, that will exceed the £1.2 billion that has been allocated.
It is too early to say what the burden of McCrone will be. That issue is a challenge that will face the new Minister for Education, Europe and External Affairs in the coming weeks and months. We have to look at the McCrone price tag in the context of what is ultimately agreed. At that point, we can take stock. Clearly, money has been earmarked to deal with the issues, but we will not know anything more about that until McCrone is settled.
I know that, at the time of the local government settlement, COSLA made clear what its view was. I think that the finance spokesperson, Craig Roberton, said that COSLA had reiterated that it believed that its fair share of the spending review was £1.2 billion over the next three years. He said that he was delighted to hear that that was what the share would be. COSLA took a positive view of the financial settlement that was made by the Scottish Executive in favour of Scottish local government.
I am aware that a range of pressures is involved and that some of them can arise from new burdens, some from new policy directions and some from difficulties that emerge annually from within local authorities' budgets. Each local authority will have its own views about the appropriate ways to manage those pressures. As Deputy Minister for Justice, I became familiar with those kinds of arguments in relation to police budgets.
At the end of the day, the comments that I made in my opening contribution ring true: local authorities can look forward to operating in a transformed environment with increased budgets in real terms. That will be a revelation to finance conveners who have been involved in local government in recent years. The operating environment has changed dramatically.
I am impressed that you have moved so quickly on the bagpiper issue.
I like to deliver, Kenny.
I would like to put down some markers. I do not expect to get a response today.
Minister, you will be aware that this committee has been keen on a thorough review of local government finance. Your predecessor did not support that, but I hope that we might revisit that issue and that we can get either co-operation from the Executive in our investigation or a full-blown royal commission.
Secondly, there was obviously a big shemozzle around the local government budget earlier this year. If, in the coming year, any councils were compelled to make cuts, as opposed to efficiency savings and genuine economies, there would be great unhappiness and disgust. I hope that the extra money will ensure that there are no cuts in road repairs, libraries, sports, education or social work and that, if possible, some of the cuts in these areas can be reversed.
Thirdly, some people have vociferously advocated not being unfair to councils that are losing their population and have problems of urban deprivation. Although it is correct for those councils to fight their corner, we should also remember that rural councils have felt that some previous settlements have been unfair to them and, furthermore, have the reverse problem of other councils in that they have growing populations. I hope that you will take account of those issues.
Finally, as the voluntary sector has been one of the main sufferers of 10 years of local government cuts, I hope that the minister will pay particular attention to the central funding of the voluntary sector and will give councils enough money to allow them to reverse cuts to these important local bodies that contribute to social inclusion and many other Government targets.
Those wide-ranging suggestions spring from Donald Gorrie's long and distinguished record in local government. I shall try to respond briefly to the issues that he has raised.
On the broader idea of a review of local government finance, my understanding 24 hours into the job is that our current job is essentially to take action in several different areas to revitalise the machinery surrounding local government. Once such action has been taken, it will be important to stop and take stock of our position and perhaps consider then whether a review of local government finance would be required. However, I do not want to prejudge the committee's work on this issue, which begins in January, I think. After the committee has concluded its investigations and made recommendations in its report, and once we have finished our overhaul perhaps some time in December, we will have a clearer picture of whether a review is still needed and, if so, what form that review should take.
Donald Gorrie mentioned the difference between real cuts and efficiency savings. There is a fine line between cuts and savings; however, his general point is that, with growing budgets for local authorities, all councils should be taking hard decisions about where to direct extra money instead of hard decisions about where and how to remove money or constrain expenditure. Although that is a fair point, I rest on my earlier comments about the more generous financial settlement that has been announced for the next three years, which I hope will have a positive effect.
On the differences between urban and rural authorities—and in particular, in the case of councils suffering depopulation or having other difficulties that affect their finances—the distribution formula perhaps requires to be reviewed. We will engage with that issue in the review that the department will undertake and will try to address Donald Gorrie's point through that formula and other mechanisms.
Given the issues under discussion, it is probably unfair to say that Donald Gorrie's final point is the most important point. However, with historically reducing budgets, voluntary sector organisations have very often been in the front line; they have been the first to receive cuts and the last to receive increases in funding. Of course, there are some sensitivities and difficulties around this issue; for example, if central Government tried to pick up the tab, there might be some dysfunction between an organisation's capacity to be sure of funding year to year and to be sensitive to what is required locally. Furthermore, there could be a threat to an organisation's charitable status. Some authorities have tried to pull together a compact with the voluntary sector to ensure a greater degree of continuity, and we should seek to spread the security of three-year budgeting for local authorities to partner organisations. I am happy to acknowledge that the sector is critical to the delivery of important services across a range of policy areas.
I add my congratulations to those of my colleagues, minister; unlike the SNP, I will try to work with you.
From what you have said today, the assumption is that the Executive's objective of promoting convergence between GAE and budgets is still continuing. It has been acknowledged that the authorities spend an average of 7 per cent above GAE and, to expand on what Donald Gorrie said, the greatest impact falls on the usual three, with cuts of 30 per cent for libraries, 31 per cent for leisure and 45 per cent for cleaning. Those are all major issues for the general public. Do you foresee that some of those matters will be addressed in your budget settlement, or will councils yet again have no choice because of ring fencing and hypothecation—your priorities—and therefore have to cut services?
From recollection of my brief, which I have been looking through over the past 24 hours, I think that I am right in saying that the vast majority of the money to be rolled out over the next three years, which we have been discussing, is unhypothecated. I recognise the constraints placed upon local authorities by hypothecated funds and the concerns expressed by councils' finance conveners and by others. We want local authorities, as far as practicably and sensibly possible, to take their own decisions about funding in their areas. That means that hard decisions will be faced about where to invest and where to pursue excellence—and where to step back a little to allow our priorities to develop.
You outlined two or three areas which, along with the voluntary sector, perhaps bore the brunt of the requirement for savings in the past, in a different financial context. I hope that, as we move forward, shake out the current system, try to innovate and try to introduce flexibility to local authorities, we will increasingly leave the onus on the local authorities themselves to take decisions on funding, on the shaping of the delivery of services, on the services that they seek to deliver, on the kind of partnerships that they seek to build and on how they try to innovate in their own financial housekeeping.
I hope that that addresses the points that you raised, Mr Harding.
Thank you, minister. Down south, in England and Wales, a 14 per cent increase in council tax is being projected over the next three years. Does the Executive have no idea what impact that settlement will have?
I will have to defer to my officials on that.
The DETR makes an assumption of a national council tax increase in England of roughly 4.5 per cent a year. That is not a guideline, target or control; it is an assumption that the department must make for the purposes of grant calculations. We will also have to make such an assumption.
The question whether the reform process needs to go any further is up for grabs. In the same context, we have assumed increases of 5 per cent over the past three years. That has not, in fact, been the actual level of increase. It was 4.4 per cent this year; it was 2.7 per cent last year. Our assumption is not necessarily an indicator of how councils behave, which is dictated more by the amount of grant that they get. As the minister said earlier, there are substantial increases in grant.
Why can councils down south make an assumption, whereas you do not seem to be able to make one here?
We are able to make one here, but the spending review announcements were later here because of the timetable for the spending review. We are therefore now in the process of turning that announcement into detailed allocations. We will have done that by the time we announce the provisional settlement in December.
I also welcome the minister. Arthur Midwinter said earlier how pleased he was about the progress that has been made, and it has been good to hear the many positive things that you have already said, minister, even though you do not yet have your feet under the table.
Coming from Lanarkshire, I am aware that about a quarter of the vacant brownfield sites in Scotland are there, owing to the problems over the past couple of decades. There has been strong, continuous economic development in the area, but the Lanarkshire local authorities are concerned that that may not be progressing as well as it might because of the problem with capital receipts. Can you make any comment on progress towards allowing the flexibility required to cover such issues? You referred to that earlier.
It has been helpfully whispered in my ear that that is part of the review agenda. That seems to be a useful exercise, but it is also short code for, "I'll get back to you on that one."
I am not sure how aware committee members are of the intended breadth of the review. I am not sure what dialogue has taken place about that. It might be helpful for us to put something on paper, if we have not done so already, indicating to members what time scale we have in mind for such a review, the issues that we would touch on and the areas that might be affected. I would be more than happy to deal with specific questions from individual members in the context of that information.
That would be helpful.
I am sure that your heart will be gladdened by Keith Harding's overture, but I wonder if David McLetchie was consulted first.
I said that I would try to work with the minister; I did not say that I would work with him.
In recent months, we have grappled with the issue of section 94 consents, and I do not intend to repeat the comments that Jamie Stone made before you arrived, minister. However, COSLA's spending review 2000 document says that there should be
"consideration of the abolition of Section 94 consents. This would significantly assist local government in taking forward investment decisions on a best value basis."
However, your predecessor, Jack McConnell, said in a letter to the convener:
"If COSLA believes that it is possible in some way to enhance the spending power of either local government or the Assigned Budget as a whole through the abolition of section 94 or some other mechanism, then they are under a serious misapprehension."
That is a matter that I and my colleagues have raised in recent months with COSLA, with the minister and with officials. Despite the numerous meetings that appear to have taken place between the Executive and COSLA, both groups still seem to be holding firm to their positions on whether section 94 consents can unlock capital investment. Will you get round the table with COSLA and try to resolve the issue—because the matter seems to be running on and on—so that the Executive and COSLA are speaking with one voice?
I also want to ask about hypothecation. Committee members appreciate that it is important for the Executive to get its local government policies through, but there is obviously deep concern among committee members and in local government that decisions on new initiatives in local government are often taken without being fully funded from the centre. Will you review hypothecation? In particular, will you consider whether any hypothecated services will be fully funded by the Executive in future?
You have raised two interesting points. The issue of section 94 consents will, not surprisingly, be up for grabs in the review and we will be considering that. I will seek an early meeting with COSLA. It would be astonishing if I did not do so, and I am sure that that is one of the issues that COSLA would like to put on the agenda. I want to discuss that issue and a number of others.
We hope to announce three-year non-housing capital allocations, and we are examining whether longer-term consideration should be given to reviewing the whole system of section 94 capital controls. It may be the case that doing so will have implications for the revenue settlement, as it is through the revenue settlement that support is provided for councils' debt-servicing costs. We shall certainly examine that.
On hypothecation, I understand that the department and COSLA are already undertaking an initial pilot exercise on the possibility of replacing the current approach to expressing joint service priorities with a more thematic approach that would be linked to the objectives set out in the programme for government and in other policy documents. If that is achieved, it could improve transparency in aligning the expectations from resources allocated to local government with our own policy priorities and commitments. If that is successful, it could allow scope to consider reducing hypothecation and ring fencing.
I think that that is the nub of Mr Gibson's question. I should stress that hypothecation and ring fencing account for a relatively small proportion of total grant support to local government. None the less, they are something about which local authorities are highly exercised and I recognise their interest in the issue. I hope that we can make progress in that area as well.
Arthur Midwinter presented a paper to the committee, paragraph 4 of which says that
"the resources available for service development will still be less than for the Scottish programme as a whole."
Can you tell me why that will be the case?
I cannot tell you that, but I can tell you that I met Arthur Midwinter just before the start of the committee meeting and I shall try to arrange a meeting with him as soon as possible to discuss a range of issues. I am sure that he will want to discuss some of the points that he raises in his paper and I hope that I will be better placed to address them when I next appear before the committee.
In our experience, efficiency savings is another way of saying cuts. In the private sector, nobody who is drawing up a budget for a business would include a proviso for cuts if they did not know that the cuts were going to take place. Will you take a more enlightened view of efficiency savings, making them real rather than imaginary, so that we do not face the same situation that we have had this year, when people have been making cuts and making the excuse that they are efficiency savings?
One of the problems facing local government is trying to retain the confidence of its customer base—the people who live and work within a local authority boundary. Over a long period, local government budgets have come to be shaped not by the requirement to deliver services or by the local population's need to use those services, but by the total size of the budgetary cake and how that has changed year on year. A process may start out at a given point with a range of services but, over a 10 or 15-year period, those services may change shape, shrink or evolve, often exclusively in relation to budget reductions. If that happens every year for a 10-year period, the result can be a set of services that do not make any sense.
When it comes to efficiency savings, my experience in local government, short though it was, tells me that it is possible for local authorities to change what they do and how they do it. Ideally, that change should take place in the context of the local authority seeking to reinvent itself and the way in which it delivers services. The worst possible way for that to happen is for the local authority to seek to achieve efficiency savings in the context of shrinking its expenditure, purely as an accounting exercise.
I would like to foster a climate in which local authorities are encouraged to be innovative about what they do and how they do it. If they make efficiency savings—and there are efficiency savings that genuinely can be made—to reinvest the money that is released into other areas or to improve service quality, that is to be applauded and encouraged. What I want to see less of and move away from is the situation in which local authorities shape services purely in response to the requirement to shrink budgets. That often results in a range of services that are no longer in tune with what people require, do not offer best value and reflect the wrong end of an evolutionary process that can be 10 or 20 years old.
Thank you. Finally, I add my congratulations on your new appointment, minister.
Thank you, minister. I hope that you do not feel that you have had a baptism of fire. We asked some wide-ranging questions and you have given us a flavour of your position on voluntary organisations, council tax assumptions, distribution, brownfield sites, section 94 consents and hypothecation among other things. There are some questions that you could not answer today, and we understand that, but we hope to get some answers either in writing or when you come back to the committee in person.
Thank you.
Right, comrades, stay where you are. Our meeting is not finished yet. We have to report our views to the Finance Committee by 10 November. There will be an opportunity to consider a draft of that report at next week's meeting, but it would help the clerks if members could tell them what they want to include in the report, based on our discussions today. To consider the draft report, we must go into private session. I know that members would not want the Executive to know what we are discussing, and I shall keep it a secret.
Meeting continued in private until 17:10.