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I welcome back the press and members of the public to our meeting. Item 5 on our agenda is the budget process 2004-05. We will take evidence on the Scottish Executive's draft budget. I welcome Ross Finnie, the Minister for Environment and Rural Development, and David Dalgetty from the Scottish Executive Finance and Central Services Department. I invite the minister to make some opening remarks.
Thank you. I am very grateful to have this opportunity to speak to the committee during its consideration of the 2004 draft budget. The spending that the committee is considering is controlled by the Scottish Executive Environment and Rural Affairs Department and the Forestry Commission. It is important to point out that much of the service delivery is in the hands of external bodies such as Scottish Water, Scottish Natural Heritage, the Scottish Environment Protection Agency, the five Scottish agricultural and biological research institutes and—in the case of much of our spending, for example, on waste—the local authorities. As does much other Government expenditure, planned expenditure falls into two categories—DEL, the departmental expenditure limit, and AME, the annual managed expenditure.
Thank you very much.
The planned spending on water shows that there will be a significant reduction from current levels over the next couple of years. Why will spending on water drop so significantly?
Several factors come into play. The savings largely represent a reduction in the level of borrowings. The savings become available because of the delivery of significant efficiencies within the business. Historically, we have been the main provider of funding to the water companies. A balance must be struck between Scottish Water having a charging regime that is set in conjunction with the Executive and the water industry commissioner for Scotland, and the Executive—as the major shareholder—sharing some of the benefit from the efficiency targets that have been set. Those targets are set by the same trilogy of ourselves, the water industry commissioner and, by agreement, Scottish Water.
Nowhere in the objectives and targets for water are there targets for supplying new infrastructure for rural housing, which is a matter that the minister and I have discussed in the past. If that is not covered in the rural development budget, is there money in the housing budget to address the commitment to provide water and sewerage infrastructure for new rural housing?
When the drinking water quality standards review was being discussed, which slightly predated the creation of Scottish Water, all three water authorities came together to produce a figure that they saw as being their requirement for infrastructure improvement. The overwhelming requirement was to raise the quality and standards because of the risk to public health. I recognise that Maureen Macmillan is one of a number of MSPs who have taken an interest in the matter. We have asked Scottish Water to conduct a review of its original plan in relation to its ability to fund expansion, because it is absolutely clear that the vast and overwhelming proportion of the £1.8 billion that we have committed to Scottish Water will be taken up by bringing up water filtration plants, sewage disposal plants and the trunking mechanism to the standard required by the drinking water quality regulator and others on public health grounds. That is not what we originally thought—although that slightly predates even my time in the job. We thought that there was quite a lot of scope in the £1.8 billion.
So the extra money that will be needed for new infrastructure will not come from the Executive, but must come from Scottish Water.
That is still to be discussed. We need to know what the quantum is. The Executive is the principal shareholder and there will be discussions between us and Scottish Water. Scottish Water has a professional management and it will be for that management to identify and specify what is required.
We appear to be talking about trying to modernise the existing infrastructure. If we are trying to find means by which more people can live in remote and rural areas, it is possible to infer that it will be difficult to find cash to ensure that the water infrastructure in such areas is at a suitable level for this century.
No. That inference cannot be drawn. The facts should be known. All that I am saying is that the amount that was set aside for new releases at the previous review has not reflected demand. The Government and the Executive have fulsomely responded to meeting the need to bring the structure up to date. Elements within those improvements will undoubtedly contribute to permitting a larger number of consumers to use the network. However, I cannot guarantee that, where there are new developments that are slightly more remote from the existing structure, the current funding arrangement will be adequate. I am certainly not closing doors. It would not be correct or proper for the committee to infer that we are closing down prospects. We are going to proceed with proper evidence and we have asked Scottish Water to bring forward evidence, which is what it will do.
Rob Gibson mentioned remote areas, but the issue does not apply only to remote areas.
Absolutely not. I am sorry if I gave that impression.
In effect, Scottish Water has a veto on housing development in some areas of the country. It has a veto in areas around places such as Auchterarder and Muthill in my constituency, which can by no means be regarded as being particularly remote. Such vetoes on development will cause increasing difficulties if matters are not resolved in the near future. What is there in the budget and in the various objectives and targets for water that will allow brakes that exist only as a result of water and not as a result of planning considerations to be taken off?
I am sorry, but I was trying to explain, in respect of the £1.8 billion—I am talking about capital expenditure rather than revenue—that the capital expenditure allocation was drawn up in good faith on the basis of the water quality review. There is no question but that that allocation understated the amount of development constraint, even on just the anecdotal evidence from rural areas, such as Roseanna Cunningham's constituency and Maureen Macmillan's constituency, and from urban areas. I am not prepared to reach a bit of a fudge here, because it would not be right for me to tell Scottish Water to deal with one or two of the development constraints without bothering about meeting the quality standard. Roseanna Cunningham is not suggesting that, nor is Maureen Macmillan.
Do you have a time scale for completion of that work?
I am expecting Scottish Water to come back to me before the end of the year, which is getting quite close.
We will keep an active eye on that. Karen Gillon has a question on the same topic.
Communities will find it quite bizarre that Scottish Water is in the position that it is, and that we have allowed this to happen. There are areas of Scotland that are constantly being flooded because of problems with the sewer network—there is one such area in my constituency—even though capital expenditure funding is available. People do not understand why that money was handed back last year and why it seems to have been lost from this year's budget.
No capital expenditure has been lost, or cut from the budget. We are talking about revenue figures, not capital figures. There have been deferrals—there was quite a hiatus earlier in the year, which to some extent was welcome.
I think that we have finished all our questions on water. It was important to go through that, given the difference in the budget. Eleanor Scott will move us on to another topic.
I have a quick question on objective 4, which mentions tackling climate change. Neither of the targets under objective 4 refers directly to tackling climate change, nor is there any mention of any activity relating to that in the Environment and Rural Affairs Department's budget. That is perhaps inevitable, because any actions to tackle climate change would probably fall on other departments. However, as it is an objective under environment and rural development, I wonder whether the minister could outline briefly the arrangements that are in place to monitor the situation.
You have partly put your finger on the reason for that target's being listed where it is. If I had not mentioned it, it might have slipped off the page for the whole Executive. I was anxious for that not to happen.
I was not really referring to what your department should be doing, but to how your department is using its targets to keep an eye on what other departments are doing. If your department is not doing that, whose department is?
We have that responsibility. We take an overarching view and we are trying to get out of the various departmental silos through the Cabinet sub-committee on sustainable Scotland, which reconvenes next week. If the transport department is doing something to cut down emissions, or if it is doing something internal to the department, the responsibility for monitoring that rests with my department. We monitor and co-ordinate and we try to ensure that the wider cabinet buys into taking action through the Cabinet sub-committee.
That is a useful answer. When reading the objectives in the environment section of the budget I was struck that it talks about tackling climate change and that your two targets are about mitigating the impact of climate change. If the committee wanted to follow the objective of tackling climate change as set out in the budget, it would be useful if we could have a note on how the rest of the Executive will be implementing that through the budget.
We will provide that.
Minister, as you pointed out, one of the ironies about your department's spending is the huge lumps of money that come in and go out, but you have very little control over what happens with EU money and its distribution. In the rural development budget, the spending plans for the next three years indicate a substantial rise from £135 million to £162.78 million. Most of the schemes that show significant increases are schemes that are partly funded through modulation. Are the projections, particularly for the latter part of that three-year period, dependent on current or adjusted rates of modulation?
Those are current rates of modulation. We anticipate only the increase from 3.5 per cent to 4.5 per cent that is already provided within the national modulation scheme, which of course attracts match funding.
You and I know that there are political difficulties over promoting modulation in Scotland. Until now we have had the same rate of modulation in Scotland as in the rest of the United Kingdom. Do the changes proposed in the mid-term review give us the opportunity to have a different rate in Scotland from that which exists in other parts of the UK?
Yes they do.
Given our priorities, is it your view that modulation will have to be considered as one of the prime targets for change in the management of your budget in order to ensure that we continue to take full advantage of the matched funding that is available?
As members know, we start from a little bit of a disadvantage, in that the allocation in 2000 of pillar 2 rural development moneys to the UK and thus to Scotland—and to all other member states that, like Scotland, had not warmly embraced a wider agri-environment and rural development agenda—was rather perverse. The EU allocated moneys across Europe to those who had been more successful and not to those who needed a little bit of encouragement. The net effect of that was that we ended up with something like a 3.5 per cent share of those funds, but if you calculate it in terms of land mass, biodiversity and the other things that ought to be encouraged, our share really ought to be somewhere near 8.5 per cent.
Should the Scottish Executive, for whatever reason, choose not to modulate to the same extent as is the case south of the border, will that mean that we lose out on match funding that, in theory, has already been allocated in terms of expenditure by the UK Government?
That would be the case. If we postulate along the lines that Alex Johnstone is suggesting, then, for every 0.5 per cent that we are below the English rate, we would sacrifice that amount of match funding.
So there is a positive opportunity for us to identify priorities and objectives that run through the budget.
Yes, there is.
I draw the committee's attention to table 9.07 in the draft budget document.
The trick is to pursue an agenda whereby we get a better buy-in. We have been trying hard over the past two or three years to explain that things that are good for the environment can be, and are, good for farming too. That argument has to be won. The single point of resistance to the change comes from farmers who perhaps do not quite see the argument. We have quite a bit of work to do in making the argument that plans and proposals that fall within rural development regulations are good for both the environment and agriculture. If that argument can be won, then there is likely to be less resistance to having what farmers regard as their support modulated into pillar 2 for a wider purpose.
I note that a submission has been made to the EU to spend on two new schemes that you wish to develop. I am looking at table 9.07, which is headed "Categories of spending (level 3)", and especially at the figures for "Organic Aid Scheme" and "Rural Stewardship Scheme". I understand that the rural stewardship figure for 2005-06 covers the total funds that will be available should that EU support be obtained.
It is rather awkward: we cannot drop that figure off the page, as we have been provisionally allocated those funds. If we did not show them, someone might think that either Mr Dalgetty or I had been up to something—but no one would draw that conclusion, would they? We have to show that money somewhere—we are required under the budget process to show every figure. We have a provisional allocation from the Treasury, which would allow us to match fund, and the £20 million or so extra for the rural stewardship scheme in 2005-06 represents that provision. I hope that our note makes it clear that those funds are entirely conditional upon our setting a level of modulation that would attract that level of funding. Having set that level of modulation, we would have access to those funds. I reiterate that they have been provisionally allocated to us.
I think that we understand that. The question is more why all the funds are going into the rural stewardship scheme.
They are not. It did not seem to be sensible to show 12 categories of potential spend when I did not know whether I was going to have the money. Purely for convenience, we showed that allocation under a single figure. How the money will be spent will depend largely on the outcome of the CAP consultation process. If between now and 2005 we reach consensus about the combined rate of compulsory modulation and national modulation, and we can calculate more precisely what will be available under that heading, we will produce more detailed proposals about which of the prescriptions in the rural development regulation we wish to apply in Scotland.
Are notional figures not available for each scheme that has been submitted for approval?
No, because the rural development regulation is being extended, so 24 prescriptions will become available to us as a consequence of CAP reform. Many people have advanced arguments for different avenues of spending.
I suspect that the convener is reaching for a point that is slightly different from the question about what may or may not happen with the £22 million that is parked in the rural stewardship scheme line for 2005-06, which is the 10 per cent modulation ring-fenced number. That point may be about a separate bit of parking that appears in the numbers for the countryside premium scheme, for which we are maintaining a line of spending of up to nearly £10 million in 2005-06. The countryside premium scheme is short-lived and will be replaced by the rural stewardship scheme.
I am trying to tease out what resources we seek from the EU in the approval for those schemes.
The answer depends on the discussions with the European Commission. We will make precise proposals when we present the budget for 2004-05 to the Parliament in January next year, but we expect organic aid spending to rise to about £8 million or £9 million a year and we expect the rural stewardship scheme baseline to rise to much the same level.
That is the ballpark figure that we are after and that is helpful. Roseanna Cunningham has a question on the issue.
I am trying to formulate my question. I will return to some of your comments about the need to persuade farmers that the environmental improvements that you want will be to their benefit in the longer term. I am curious about the budget figures as they apply to farmers' ability to get their product to the marketplace in a way that makes them feel that all the extra standards with which they comply now and might have to comply in the future, and which cost them money, will give them an adequate return.
Such money is not specified. A distinction is made with what we call the market support mechanism, which is where the vast majority of pillar 1 funding goes. The £600 million or £700 million that my department disburses to the agricultural community is market support. That substantial support is intended to assist agricultural producers in meeting conditions, whether for cereals or for the livestock sector. Over the years, that has become distilled into the idea that if someone grows X amount of barley or wheat, they receive X amount of support, or if they have X number of animals, they receive X amount of support. There is a slight reluctance to change that perception and recognise that the funding is not just for that purpose—it is meant to support all elements. As a result, table 9.07 represents pillar 2 funding. Given that 70 to 80 per cent of Scotland's landscape is given over to agriculture, it is clear that our farming community already has a very heavy responsibility that, by and large, it discharges effectively. However, because of various practices, commercial pressures and a whole range of other matters, we have lost habitats and species.
That does not deal with the problem of an end product going on to a shelf to compete with another product from elsewhere that does not necessarily have to comply with the same standards and is often marketed at a much lower price. Many complaints that I receive are about labelling and similar issues. Does any element in the budget tackle that end of things? I understand your comments about providing support because of the introduction of certain standards and all the rest of it.
We do not do a huge amount of that kind of work. We try to assist small schemes; after all, we are talking about a commercial enterprise. We have to make it sing. I think that we spend about £1 million on market development—
Where can we find that in the budget?
About two thirds of the way down table 9.07. We try to disburse that money in the form of very small marketing and processing grants and try to match funds to assist people who are putting up money to improve marketing. Further up the chain, we combine with Scottish Enterprise to ensure that we give the whole food processing industry as much support as we can.
Is the lowlands marketing scheme a similar thing?
Yes.
The Highlands and Islands marketing scheme that is mentioned at the foot of page 159 of the draft budget and the lowlands marketing scheme that is mentioned on page 160 are essentially the same thing. They perform the function that the minister outlined—they address processing activities that come further down stream and assist with the improved marketing of primary products.
So the three areas that we have been discussing relate to assistance at that end of things.
In that context, we should not forget support for the Scottish Agricultural Organisation Society, in which producer organisations encourage Scottish producers.
That is helpful.
We have a number of questions about land management contracts and some points about indicators and targets. I think that Rob Gibson was going to pick up those questions.
No. I was going to ask about the organic aid element of the budget.
Okay. We will take that topic first then move on to the other issues.
Organic farming should be supported. After all, we are talking about an important part of a large market that has great potential for people to get into. However, good factual evidence shows that, compared with Scotland, countries such as Finland provide greater support for the transition phase. Given that there should be more flexibility with modulation, are you going to increase the level of support for the move to organic farming?
I have just increased the level of support.
But to the extent that other countries have increased support?
That is where we must be careful about making international comparisons. A number of bodies have said to me, "X spends almost twice as much as you do on this or that". I tried to put this matter into its proper perspective in my opening remarks. In this country, we start with a rate of modulation of 3.5 per cent, even though one would expect any calculation that took into account land mass, habitat and so on to give a rate of 8.5 per cent.
Will we come back to that?
I think that we will.
I want to ask about targets, but members might want to talk about land management contracts first.
We were interested in the fact that you intend to introduce a scheme for land management contracts by summer 2004. What resources will go into that and how extensive do you expect the application of land management contracts to be through the budget period?
The related documentation that I have issued in the context of the CAP review shows that we are back in the same trap. To make land management contracts sing—if that is not to mix my metaphors—we need more resources. It is evident to anyone who reads the budget that a vast proportion of the amounts in pillar 2 support are taken up with less favoured area support. We all recognise that there is not a great deal of flexibility in what we can do with that amount. If we are going to have a land management contract, which might try to combine a number of schemes and introduce a more holistic all-farm approach—there is wide support for such a move—it would be enormously helpful if it had additional resources.
The notion is being put forward in certain quarters that the appetite for modulation of funds might be greater among the farming community if farmers believed that there was a reasonable chance that the same money would be available to the same people, but for doing different things. Through adequate funding of the steps that are necessary to introduce farm management contracts, is there potential within the budget to make that possible?
That raises a fundamental issue, which the committee and I, and probably others, have to debate. If we take a small percentage of funding from current subsidy and spread it equally, or not equally, so that each person gets a proportion back—they get back that which we have already taken away—there is a clear argument that we will not make much difference. We will not really effect a serious improvement in an agri-environment sense. Some argue that we should not consider redistribution over a single year but that we should have a programme over five or even 10 years. The number of farmers who receive those funds over that period would be much greater and given that there are clear and focused objectives, we would achieve a substantial improvement to the environment.
Let us wind up the discussion on land management contracts. Do you think that the land management contract system will supersede the pillar 2 schemes that operate at present? How do the land management contracts potentially relate to the budget lines that we are looking at today?
We will have to stick to those lines—that is the constraint. There is no magic extra funding coming from Europe or anywhere else.
Okay. Maureen Macmillan wants to ask about indicators and targets.
I want to ask about reducing the opportunity gap. To me, that means dealing with rural poverty. Objective 6 in the summary document is to
I agree that the geographic descriptions are rather loose.
I want to tease out whether those 13,500 businesses are just hill farms. Some of those businesses do not have the lowest farm incomes—some of those farmers may be pretty well off. I feel that there is sleight of hand going on. Perhaps you can explain.
No. There is no question of our over-compensating those who are well off—that is not part of the deal.
What are the 13,500 businesses in target 9?
I can assure you that they do not include the businesses that you seem to be worried about, which are hill farmers in remote parts of the north of Scotland who are certainly not short of a bob or two. I have notes on the 13,500 businesses, but it would be better—again—if I wrote to the convener with that information. I am happy to do that in order to set out more clearly what the businesses are.
Will you also indicate how success in achieving the target will be measured?
Yes.
I am keen for the minister to follow up on that offer. The committee is keen to follow the process through from an objective to a target and then to outcomes.
I am happy to do that.
I would like you to talk to me more about closing the opportunity gap and how that will affect people who are not farmers in a constituency such as mine. How will your department help them? What targets will you use? What are you doing within your remit to close the opportunity gap specifically for people in rural communities who are not involved in agriculture?
We decided at the outset not to try to assemble a massive rural development department by taking people from, for example, the health, education or community departments because that would dissipate the Executive's knowledge and skill bases.
In relation to target 10, do you have any idea what those three or four joint initiatives a year with other Executive departments and agencies might be?
Those initiatives are part of the budget discussion. Some of those issues will become more finalised by reference to the matter that Maureen Macmillan raised, which is to do with coming to a clearer view about the ramifications of getting the indices for rural deprivation more clearly identified. Getting a better handle on that will allow us to work more closely with other departments, particularly with Margaret Curran and the Development Department.
When will you have a finalised—
As we approach January.
The additional provision is being made for the first time in 2004-05. By the time that ministers propose the budget for next year, we should have a clearer view that will focus on particular priorities for action using the new resources.
Can we return to this issue at that point?
Yes.
From reading the text relating to target 10, I understood that the 18 new rural development projects each year would be to do with service provision. However, objective 6 talks about promoting economic development. Is there funding for creation of jobs in rural areas as well as for service delivery?
Target 10 is to do with provision of services. I am bound to say that the prospect of people taking part in the general economic programmes is greatly improved if they have greater access to services. All of the survey work that we did leading up to the report on the inadequacies of service provision showed that lack of access to services acted as an impediment to economic progress and an incentive to migration from rural areas. There is a clear linkage between our trying to do something to redress the balance of access to provision and the opportunity for that to assist in economic regeneration.
Within that, is there a possibility of doing some economic regeneration? Roseanna Cunningham mentioned facilities for marketing and production, and it will not surprise you to hear that we consider rural slaughterhouses to be an example of such facilities.
We must remember two things. First, Roseanna Cunningham was also talking about costs. It is quite difficult to say that we are just going to get rid of some of the costs related to slaughterhouses, because we have raised the health standards in our slaughterhouses quite dramatically and the meat hygiene service has a key role to play in that. There are therefore economic considerations as to the points at which slaughterhouses are and are not viable. I understand the argument in terms of having access to a slaughterhouse, but in terms of creating a business for processing red meat, a commercial business must be able to function on its own. There must be sufficient volume and throughput, which is one of the slight problems that we have in remoter areas where volumes are not very high. For commercial enterprises, we must also be careful that the level of compensation does not get us into the trap of state aid support.
My question is about target 14 and your objective to progress the forward strategy for agriculture. Target 14 suggests that we will make use of newly enhanced flexibilities under the CAP to make Scottish agriculture more competitive and sustainable. If you cannot give us a short answer, will you write to us and tell us how you will measure competitiveness and sustainability with regard to that target?
Can we regard that as a matter that has been flagged up? I suspect that it would take the minister quite a while to answer that question, because we would all want to ask follow-up questions. It is a matter that the committee is keen to address in terms of the environmental and social targets that cut across the Executive's work. Perhaps we can leave that question on the table and ask our clerks to talk to your officials to explore that.
With respect, I suspect that there are two issues there with regard to some of the targets and objectives. Unless I misunderstood the question, I think that it raises the separate issues of discussing flexibilities within the CAP and the CAP reform. I know that you have a busy schedule but, given that we have just launched the consultation, we may have to devote a little longer than five or 10 minutes to that issue. However, I am happy to take up your suggestion that the clerks should explore the extension of the targets, and the other targets that exist, but the CAP issue is one that is now subject to a three-month consultation, so there is therefore the opportunity to explore and tease out some of the issues.
I am conscious of the fact that we still have the waste inquiry to deal with today.
Indeed.
Karen Gillon has flagged up a final question. I shall let her ask it and judge whether or not you can answer it swiftly, minister.
What are you doing with your end-year flexibility money?
That will be announced when all the end-year flexibility figures are announced in the first week of November.
In what direction are you generally leaning? What are your policy priorities for the next six months?
I am tempted to answer that, but I know that the convener is anxious to move on to the national waste inquiry.
That session was helpful. We have ploughed through the vast majority of issues that we wanted to discuss. Thank you, minister.
Meeting suspended.
On resuming—
Before we discuss the national waste plan, I seek members' agreement to discuss our draft budget report in private at our next meeting or as often as we need to meet until we have finalised the report. If members agree to that now, we can timetable our next meeting more effectively, without having to ask the public to come in and go out. Is that agreed?
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