European Structural Funds
The next item on the agenda is the inquiry into European structural funds. Minister, we are aware that you have given evidence to the European Committee, and you will be aware that the Chancellor of the Exchequer has declined to give evidence either to that committee or to this committee, and is not allowing a Treasury official to attend to give evidence. The committee has written to him again on that matter and has written to the Presiding Officer and the acting First Minister, because it is not satisfied with the situation. I have seen a letter from you to Hugh Henry, the convener of the European Committee, in which you stated that you were not in a position to comment on United Kingdom policy in this matter. Can you clarify that that is your position today?
I have been happy to answer questions in all committees in the past 12 months on how UK policies impact on our budgeting arrangements and any other areas that fall within my portfolio. I hesitate to try to explain the underlying rationale behind the UK policy developments of the current Government or any previous Government. I am happy to comment on their implications for our work, but that is different from explaining the background to policy decisions and deliberations and their implementation at UK level.
I am very interested in this point because it was my privilege yesterday to attend a meeting of the Scottish Grand Committee in London—I think that the Official Report of the meeting will be available tomorrow morning. In response to a comment by my colleague Mr Salmond, who was advancing the need for the chancellor or one of his officials to appear before this committee or the European Committee, the Secretary of State for Scotland said that the Minister for Finance is well able to deal with those issues.
Of course, I would always acknowledge that statement, but it does not seem to be a terribly good example of joined-up Government that the Minister for Finance—credibly—says that, as his responsibilities do not extend into UK policy, he is hesitant to question the background to UK policy, but when, under the devolution settlement, we present the argument to the Secretary of State for Scotland at the Scottish Grand Committee, he tells us the exact opposite. Where can the Finance Committee and the European Committee of the Scottish Parliament go, given that they receive, legitimately, no answers from the Minister for Finance and that they encounter obfuscation from the Secretary of State for Scotland?
I would not want what I said to be rewritten, convener. Mr Swinney said that I said that I could give no answers, but that is not what I said at all. I am very happy to answer questions on the implications of policies for the work for which I am currently responsible. I gave those answers at the European Committee and will do so again today. I think that I have answered more questions from committees over the past 12 months than has any other minister. It seems a regular occurrence to be in this room, and it is again a pleasure to be here.
I make it clear that I am here to answer for my specific ministerial responsibilities, and that the role of the committee, its relationship with people who are called before it and the way in which it conducts its inquiries are matters for the committee and the people with whom it is in correspondence rather than for the Executive. I think that Mr Wilson made that point at one of the most recent meetings of the committee, and I agree with him entirely about that.
It is not appropriate for you to comment on something that may have been said in another legislature yesterday. However, the matter has been important to this committee. I shall allow one more question specifically on this matter, before we move on.
At an executive level, we have joint committees working on different issues and away days at No 10 and No 11. Do you agree that it would be helpful, under the devolution settlement, for that kind of co-operation at an executive level to be replicated at a parliamentary level, so that we could work with, and gain full access to information from those who know about such matters, such as Treasury officials and the chancellor? Are you prepared to make that point to the chancellor?
As I said, I do not think that the relationship between committees of the Parliament and potential witnesses in their inquiries is a matter on which Executive ministers should comment. I have deliberately chosen not to do so, and I stand by that position.
I am happy to be as helpful as possible this morning. If there are outstanding issues that the committee wants to pursue, I am sure that it will pursue them. I have received copies of correspondence from the convener to UK ministers which pursue some of these points, and I am sure that the committee will carry out its duties in that way, as is right and proper. It should be clear that my position in front of this committee is to comment on my own remit and responsibilities.
Thank you. You have submitted a memorandum to the committee. Would you like to add anything to that before the questioning starts?
I would like to make a brief opening statement, if that is acceptable.
Certainly.
I welcome this opportunity to appear before the committee to answer questions about the implementation of structural funds in Scotland. I appreciate that the committee is interested primarily in the additionality of the funds and their relationship with the assigned budget and the Barnett formula, but we must also consider the workings of the structural funds in the wider context, at least initially.
I stress that Scotland has a positive record of implementing structural funds. The committee may be aware that the European Commission has commended our decentralised and flexible approach to programme implementation and management. Some people have even described it as a flagship performance. We have made good use of structural funds in the past, and we use the funds to promote economic and social cohesion. The funds play a key role in supporting areas of real need, and our overall aim is to ensure that structural funds are used effectively and efficiently to leave a lasting legacy for years to come.
Under the terms of the devolution settlement, the Scottish Executive is responsible for the implementation of the structural funds in Scotland. Although we work closely with the UK Government, we are able to develop our own approach to the management of the funds, which will best suit the circumstances in Scotland. The principle of partnership underpins the whole structural funds process. As members will be aware, in Scotland we use programme management executives for the day-to-day implementation of the programmes. The PMEs act on behalf of the various sectors, such as local authorities, enterprise bodies and the voluntary sector, which participate in the European partnerships. We are confident that that approach adds significant value to the implementation and management of the funds. That was confirmed by the report of the steering committee, which was published on 6 March, the recommendations of which were subsequently endorsed by the European Committee and me.
I hope that I can help to clarify the complex subject of additionality and provide any assurance that is needed to satisfy concerns. Although, on several occasions, the European Commission has confirmed that the UK has met, and continues to meet, the requirements of additionality, it is important to appreciate that additionality, as defined by European regulations, is only part of a greater equation. As the Commission has confirmed, spending on structural funds is clearly additional to other programmes within the assigned budget. Since 1993, structural funds have been identified separately within the Scottish block, which is now the assigned budget. I can confirm that they will continue to be identified in that way, providing the transparency that we require.
I stress that all the funds that are received from Europe are passed to individual projects. Under the 1994-99 programmes, projects worth more than £2.4 billion were assisted, which involved more than £1.3 billion of structural funds grant. That represented a take-up of more than 99 per cent of the programme value. There is little doubt that the funds are very much appreciated by local project sponsors and have added something that otherwise would not have been available. There is added value to the structural funds locally, where match funding is provided by the member state through project sponsors. Those elements are necessary to ensure that the structural funds deliver not only additional outcomes to those that are provided by national expenditure programmes, but good value for money by ensuring that the European funding is directed to the areas of most need and reflects local priorities. One of the great virtues of the current system is that it provides local benefits and commitment through local additionality and match funding from project sponsors. Without a local sense of ownership, it would be difficult to ensure good value.
In summary, European structural funds have been, and will remain, separately identified within the Scottish assigned budget and additional to our national expenditure programmes. Structural fund grants are additional to local programmes, and match funding is provided by project sponsors. Our system works: it meets regulations and delivers added value to Scotland. Members of this committee will realise that the effective management of structural funds is an important, although complex, subject. I hope that, by the end of your inquiry, you will have an even better appreciation of the many issues that are involved.
Thank you, minister. Let me kick off the questioning. The first sentence of your memorandum states:
"The Barnett formula has no role in the allocation of Structural Funds and nor should it have."
That seems at odds with some of the evidence that we have received hitherto in this inquiry. Can you expand on that? We understood that the way in which the funds are channelled from Europe via UK central funds was through the use of that formula. I understand what you say in the rest of the paragraph, but can you expand on that first sentence? That will be a major issue in our inquiry.
The allocation of structural funds in Scotland is decided by the various programme monitoring committees as a result of the programmes that we agree with the European Commission. The allocation of funds therefore does not relate either directly or indirectly to the Barnett formula.
The Barnett formula dictates the financial arrangements between the Scottish assigned budget and changes in national expenditure programmes at the UK level. It is calculated on a total basis at the UK level, adding up comparable programmes and giving us our appropriate share. Even at that level, however, the Barnett formula is not related to individual expenditure heads such as European structural funds. I explain that in more detail in the memorandum. For years, there has been an identified line separating the allocation of European structural funds in Scotland, from which we have benefited and will continue to benefit as a result of the arrangements that will be put in place for the next seven-year programme.
The convener's opening comments indicated that we will focus on this specific issue, and on whether the overall budget, rather than specific programmes within it, will benefit from structural funds and to what extent.
At the meeting of the European Committee on 30 May, you made a commitment to provide the documents that the Executive is required to provide to prove the additionality of the funding. When will those documents be supplied to both that committee and this committee?
If documents have been promised, they will be provided before the European Committee produces its final draft report, for consideration by that committee and as part of this committee's inquiry.
If we received them too, that would benefit our inquiry.
I am interested in the question of whether the structural funds are additional to the overall budget. You will be aware that that is the key question that we are considering. If the funds are not additional, or if additionality is not an issue, why did you say that
"any effort to ring-fence"
outwith that process
"would be a dangerous and silly move"?
If the funds are not in the budget, why would ring-fencing them be dangerous and silly?
With due respect, you are mixing up several issues. The structural funds are additional. Nobody in the European Commission, the UK Government or the Scottish Executive has ever said anything other than that. The structural funds are clearly identified and are additional to national and local expenditure programmes. The very first premise of your question is based on a wrong assumption.
You have missed out the key point, which is the regional or Scottish level. That is what we are interested in, not the local or UK level.
Sorry, convener. I should explain that, in this context, I used the word national to describe Scotland, which I regard as a nation.
I am sure that it is helpful to have that statement on the record.
Perhaps Mr Wilson can confirm whether he also regards Scotland as a nation. [Laughter.]
It is fair to say that I have been on the record with that statement longer than the minister.
We have received evidence from numerous academics and others on this question. Indeed, the Welsh Affairs Select Committee and the minister's colleagues in the Welsh Assembly seem to share the view that it would certainly be of benefit to ring-fence European funding outwith the block grant formula process. If everyone in those organisations thinks that it is a good idea, why, on 30 May, did you call it
"a dangerous and silly move for anybody to propose"—[Official Report, European Committee, 30 May 2000; c. 699-700.]?
Is it dangerous and silly for your colleagues in the Welsh Affairs Select Committee and in the Welsh Assembly to propose such a move?
As I indicated earlier on another subject, I respect the roles of colleagues in other institutions. If you have read the transcript of the European Committee as carefully as I think that you have, you will notice that I very carefully do not comment on the position taken by my Welsh colleagues. That is their business, and it is right and proper for them to have their own position on the matter.
However, as far as Scotland is concerned, it is quite clear that if European structural funds were ring-fenced from our other programmes, we would lose out financially over the next seven years. That is not in Scotland's best interests and is not something that I, as Minister for Finance, want to pursue. My job is to maximise the amount of money that, given obvious limitations and regulations, we can spend on public services in Scotland. How the budget is formulated is in the direct interest of the people of Scotland and we must defend the current arrangement for the next set of programmes.
Minister, if European funding were ring-fenced, we would receive our allocated amount as agreed with the European Commission. Your statement that we would lose out if we were to receive our allocated amount suggests that we are currently receiving more than our allocated amount of European structural funds from the EC. If that is the case, who is losing out?
That is not the case. The amount of ESF that we will receive over the next seven years will, on average, be less than the Scottish assigned budget currently provides. As a result, if European funding were ring-fenced and separated out from the Scottish assigned budget, instead of consistently receiving the current amount over the next seven years, Scotland would receive less, and the Scottish budget would have less money in it. As I said at the European Committee on 30 May, that would be a dangerous and silly road to travel down.
I will repeat my question. If that is the case, at whose expense are we receiving the extra funding? By definition, if we are receiving our allocated share, we are receiving no more and no less than our fair share. However, if we are receiving more than our allocated share, someone must be losing out.
The current arrangement will free up resources within the Scottish assigned budget for other programmes, because there will be less funding under the European structural funds heading than is currently available to us. Under the current arrangements, that money remains in our budget, which is a good deal for Scotland and should be defended by the Parliament and the Executive. Across the piece of the Scottish budget and the overall arrangements for the distribution of funds across the UK to all devolved bodies, there will be budget headings for all budgets that will allow people to examine how increases or decreases in funding over a specific period advantage or disadvantage particular areas at particular times.
The arrangements for adjusting that assigned budget year on year are currently the best arrangements for Scotland, and the Barnett formula is the best way for us to increase our budget year on year. We get a good deal from that. However, within that overall assigned budget, the amount of money for this purpose is currently more than we will need in seven years' time and defending that current budget is in the interests of the Parliament, the Executive and the people that we serve.
Are structural funding increases or decreases to the UK overall, and specifically to the English and Welsh pots, included in the Barnett formula calculation?
They are part of the comparable expenditure for that purpose.
In that case, why, at the start of your memorandum on ESF, do you unequivocally say:
"The Barnett formula has no role in the allocation of Structural Funds"?
As I explained to the convener, the way in which we allocate our structural funds in Scotland has no direct or indirect relationship to the Barnett formula. The overall allocation to Scotland through the Barnett formula is not based on specific programmes or outlined in detail as a result of such programmes.
You will agree, minister—
Convener, I think that it might be helpful if I could answer the question.
As I explain in the memorandum, the overall allocation that we receive as a result of comparable programmes is based on the total spend, and is not broken down into individual areas. There is no direct relationship with the Barnett formula when we allocate ESF in Scotland. Furthermore, our allocation from the Barnett formula is not used to distribute individual programme budgets across the UK. It is a total allocation, and it is up to us in Scotland how we spend it, which is only right and proper.
Convener, with your indulgence, I will follow up those comments, because I think that this is the key point of the inquiry.
Minister, your memorandum unequivocally states:
"The Barnett formula has no role in the allocation of Structural Funds".
In the light of your previous statement, does that sentence specifically mean the allocation of structural funds within the Scottish budget? As you said at the start of your evidence to the committee, you are well aware that we are interested in the allocation of structural funds to the overall Scottish budget from the Treasury. You have now said that those funds form a part of comparable programmes and are therefore taken into account in the Barnett formula calculation. How do you square that statement with the memorandum's opening statement, which can only be described as misleading or unsustainable, that
"The Barnett formula has no role in the allocation of Structural Funds"?
That is not the case at all. It is quite clear that, with regard to the allocation of structural funds within Scotland—
No one is discussing that issue in this inquiry.
Let the minister respond.
The allocation of structural funds is a devolved responsibility that I take seriously, and is not directly or indirectly related to the Barnett formula. At a UK level, the use of comparable programmes to distribute funding across the UK has resulted in a good deal for Scotland. Within the overall UK funding distribution, the structural funds money that the UK receives from the European Commission is, in our case, directly passed on through the Scottish Executive to the local projects that the funding is designed to support, and is additional to those programmes at UK, Scottish and local levels. There is no doubt about that, as every representative of the European Commission who has appeared before a parliamentary committee in Scotland and everything in writing from the commission have confirmed. Furthermore, our budget confirms that that is the case.
As Andrew Wilson has said, this is the most important point of this inquiry. However, it astonishes me that members of this Parliament wish to disadvantage Scotland financially in this way. Ring-fencing the budget would directly lead to Scotland losing money over the next seven years, and, as I have consistently made clear, it is wrong for any member of the Parliament to advocate such a course of action. It is my job as Minister for Finance to maximise our budget and its value for the projects in Scotland that we support.
I certainly hope that this inquiry will not find that we should give up part of our budget and somehow take a clear budget line that is identified as an additional expenditure line by the European Commission—never mind the UK Government—out of the budget and show it in a separate document or set of papers. I think that that would be wrong for Scotland and completely unnecessary. The current arrangement suits us financially, and it meets all the European regulations with which we are asked to comply because of our responsibility for the structural funds.
I do not wish to appear tedious—we have already had a long series of questions—but I would like to stay on the same topic, minister. Your first comment in reply to our written questions, that
"The Barnett formula has no role in the allocation of Structural Funds",
is a black-and-white statement. From what you are saying, it would appear—you could perhaps agree or disagree as we go along—that the programme management executives run the programmes once the money appears. That is not, I think, disputed by this committee.
You then said that the money comes in from Europe, presumably via the Treasury. Scotland's targeted funds appear to be spent in Scotland, eventually to be passed on to the PMEs with whatever additionality there is from various support bodies.
The only thing in that which I want to correct is that when the European Commission pays the cheque, it does so directly to us, as the managing authority. It does not get paid to the Treasury to be passed on to us.
So the Treasury has no place in this?
The money from the European Commission goes directly to the Scottish Executive, and we pass it on to local projects.
So the Treasury has no role to play in what Scotland will qualify for?
A complex set of arrangements determine the total budget which we receive from the structural funds. There are roles at a UK level as well as at a Scottish level in negotiating with the Commission on how much each programme is worth to Scotland. The Treasury has a role in that, as do the Department of Trade and Industry and, in relation to social funds, the Department for Education and Employment.
We also have a role: we are directly involved in negotiations with Brussels on the Highlands and Islands programme and on the objective 3 programme. We and the UK departments have a role in resolving the total amount of money that could be spent in Scotland and in the programmes on which that money will be spent. As I said, when the money is actually paid, it is paid to us. We then pass it on to the local projects.
I accept the fact that the cheque comes directly to the Executive. What you have just explained is how the mechanism works for the negotiation with Europe.
Or how the programmes are put together at the start. Once the programmes are under way, our PMEs and programme monitoring committees agree the projects to which the money will be allocated and we then finance that: we get the money straight from Brussels and pass it on.
Can I suggest that the minister leaves the activities of the PMEs out of this: we accept what goes on when the money comes here. The question is how the money comes here and how it is calculated.
You went on to say, minister, that there could be a tailing-off of funds over the next seven years. At that stage, does the Barnett formula kick in because of the comparable spends across the UK?
The Barnett formula does not relate to the existing budget of the Scottish Executive; it relates to additions—and, I suppose, in theory, subtractions—to the overall expenditure allocated to the various constituent parts of the UK. The Barnett formula is not directly related to the budget we already have; the formula is about changes to that budget.
Precisely—that was the point I was making.
Just for the sake of argument, suppose that in seven years' time it works out that, after all the negotiations, Scotland does not qualify for any structural fund money, but other parts of the UK do. Would the Barnett formula then kick in because of the relative overall change and the relationship to the Scottish budget and to the rest of the UK?
If I get your meaning, Mr Davidson, I think that you are asking if we would automatically lose that amount of money—
No, that is not the question. If we suppose that, for some reason, we do not qualify for structural funding but other parts of the UK do, does the Barnett formula kick in on the basis that there has been additional spending one way or another in other parts of the UK and that we are looking to the Barnett formula to help address that shift in the balance?
At that point, European structural funds would be being spent elsewhere in the UK and we in Scotland would not have money coming from Brussels to finance the programmes that had previously been in place. A judgment would need to be made at that time about the position taken by the Scottish Executive in discussion with the Treasury. One of the options on the table would presumably be to argue that that budget at least should remain in Scotland, on the basis that we have pressing social and economic needs on which we should continue to spend that money, even if we do not fit within the overall European priorities.
The £170 million or so that is in the assigned budget for European structural funds would still be in the Scottish assigned budget. It would not automatically be taken out of the Scottish assigned budget; it would still be in it. A decision would be made by the Parliament and the Executive at the time as to whether they wanted to defend that money.
And that money would flow from the UK national Treasury?
That money is in the Scottish assigned budget, which we get from the UK national Treasury.
So the Barnett formula has nothing to do with that—it is a comparable mechanism, is it not? There would be a separate grant, over and above Barnett. Is that what you are suggesting?
The Barnett formula does not relate to the existing Scottish assigned budget; it is about changes to the assigned budget. My point is that at the end of the seven-year period, if there have not been any changes in the meantime—I recognise that some colleagues might want to ring-fence the budget and have money taken out of their budget, although I do not think that that will happen—we continue with a policy of having the assigned budget; that £170 million or so remains in the assigned budget.
Under Mr Davidson's scenario, at the end of the seven-year period we lose all access to structural funds. The assigned budget remains as it is at that stage, containing the £170 million. I imagine that colleagues elsewhere in the UK might say at that point, "Wait a minute, that was additional to the Scottish budget. We should perhaps have a look at that." Tactically, the Parliament and the Executive would have to decide at that stage whether that amount of money was worth fighting for in that time and in those circumstances, and to defend that as part of the existing assigned budget. That is not affected by the Barnett formula, which is about additions to the assigned budget. I am talking about the money that is in the assigned budget to start with.
Would it be correct that, regardless of whether the money comes labelled "from Europe" or comes through Westminster, the budget would remain intact? From what you are saying, it would not really matter whether the money came in labelled "ESF" or came in from Westminster as something else. I am just trying to get clarity on this from you, minister.
This does matter: we have to ensure—and we do, which is why we have all the written and verbal assurances from the European Commission on the record, saying that we provide for additionality—that the allocation of funding from the European structural funds is additional to the relevant national expenditure programmes. We cannot, should not and do not spend that money in ways which subtract, as it were, our contribution to the similar expenditure programmes elsewhere in our budget.
I do not argue that point. You are giving me the impression that you have no reason to argue against the fact that the money that comes clearly labelled "structural funds" simply has a label saying so and would be followed through the budget.
That is why we separately identify structural funding as a budget line. We have to account for every penny of it, and we do. I cannot overstate this: as recently as last Monday, we—Scotland—were held up at a major international conference attended by 550 delegates from all the countries of the European Union as the only example provided to delegates in the morning plenary session of a member state or nation or region within a member state that is distributing structural funds in a way that involves the regulations, partnership at a local level, match funding and additionality. We were the only people who were asked to give a presentation.
I cannot stress enough that the system that we use is held up as one of the best examples in Europe—because we clearly and separately identify the budget line for structural funds. We account for every penny we get; every penny is passed on to the local projects and the money is additional at that level. If a local project gets a grant from European structural funds and it is a local council, the section 94 consent is increased by the same amount, so the council can automatically spend it in addition to what it was originally planning to spend that year. It is additional money and it is clearly identified.
My point about the overall budget is that the amount of money that we are allowed to spend—the amount of money that we get from Brussels to pass on—is to decrease over the next seven years, but because that amount of money was all part of the assigned budget, or was at the date of devolution, money will be freed up inside our assigned budget. If we start on a bearing of seven years with £170 million of expenditure on European structural funds, we get to the end of the seven years and we can spend only about £135 million on European structural funds; £35 million remains in our assigned budget.
I have already said in public—I want to continue to press this case—that we should use that money to support economic and social development in Scotland, as the structural funds have done so well in Scotland over the past 20 years. Because of the shift in gross domestic product across Europe and the enlargement to the east, we are not necessarily going to have access in future.
Convener, can I—
No, I am sorry. We will have to move on. Two other members want to speak on this subject and we have other subjects to consider in this item as well as the other items on our agenda.
I seek clarification on what happens to the allocated budget for structural funds. Given that the funding will be allocated and paid in euros by the European Commission, what mechanism is there to take account of currency fluctuations? There have been huge fluctuations in the value of sterling against the euro. Is a compensating measure built into the agreement with Europe? If so, who does the compensating: Europe or the UK Government?
At the moment, when we agree to the provision of a grant, we guarantee the amount of money in pounds. Even if the relationship between the pound and the euro changes between the time of the decision to give the grant and the eventual payment of the grant by the Commission, which is obviously some way down the line, we guarantee the amount of money, which we say at the beginning we will pay in pounds sterling. That is our way of guaranteeing to local projects that they will get what was agreed in their name—although they will not necessarily get what they bid for.
That can work both ways. The current currency movement would almost certainly be good for local projects, which could get more pounds than they would get from the guarantee. It can work the other way, but organisations in Scotland at least get the guarantee of stability and know what they can expect, regardless of what might happen to the currency. We in the Scottish Executive give that guarantee and take the financial responsibility for it.
When we win with the guarantee, we keep the pounds, but we lose the pounds when we lose. Our hope is that, over a seven-year programme, it will even out. If, towards the end of a seven-year programme, the currency fluctuations had been such that we had over-committed ourselves, we would need to make some adjustments. Similarly, if we had under-committed because of currency changes in the other direction, we would need to introduce new projects towards the end of the seven-year programme to commit fully.
I cannot stress enough the record of commitment in Scotland: 99 per cent against the agreed levels is one of the highest rates in the whole European Union. That is a tribute not just to the PMEs but to the staff in the Scottish Executive who manage this process over a seven-year period and try to ensure that we spend every penny. Although we might overspend one year and underspend the next, we try to even everything out over the whole programme.
I want to raise a point of clarification.
Please do so briefly, because we are supposed to be discussing the Barnett formula. I did not realise that we had moved on to a different subject.
If a £240 million programme agreed over the seven years were hit by 30 per cent revaluation in sterling, who would make up the difference? Would the programme simply be reduced at the end of the period?
If such a trend became permanent, we would have to make some adjustments to the programme before the seven years were up. The assumption is that over a seven-year programme, currency will move up and down and experience has shown that it is possible to manage the budget in that way. However, any permanent shift as between the UK pound and the euro could affect the calculation of the amount of money coming from the European Commission into the UK and then to us. That is one of the factors that the UK Government takes into account when it considers currency levels and overall economic policy.
I know that Ken Macintosh is still on the Barnett formula.
At the risk of sounding like a broken record, I want to raise a point of clarification about the Barnett formula. You quite forcefully made the case that Scotland benefits from European structural funding, which is matched and additional. Furthermore, we will see even greater benefits over the next seven years because reduction in European structural funds will not be matched by similar reductions in the assigned budget. The committee's main concern is that Scotland might lose out. However, from the evidence that we have received, it is clear that we might lose out only if European structural funding increases substantially above the £170 million that is already additional to the money in the budget. If that were to happen—which is extremely unlikely—any additions above that £170 million would be affected by the Barnett formula at the margins. For example, a £50 million increase on that £170 million, which is a fairly extraordinary prospect, might mean that we lose out to the tune of £1 million or so. Although I know that that situation is hypothetical, it is the only one in which Scotland could lose out.
The first and most important point is that that is not going to happen. We know our share of programmes over the next seven years and that, at the end of that period, countries much poorer than ours will have joined the European Union. Unless the structural funds dramatically increase as part of the overall Commission budget and the rules change, we will almost certainly receive a smaller allocation because of our relative prosperity. We understand that and are trying to prepare for it in this programme. We know our position over the next seven years and can make a pretty good guess that, at the end of that period, Scotland will receive less structural funding because of its economic circumstances.
In response to your question, the first thing to point out is that there can be exceptional circumstances. For example, towards the end of the previous financial year there was a rush of applications ahead of time because the programme was ending. To help us cover that rush, we applied to the UK reserve for a temporary payment, which we will need to build back into the budget over the next two years. The statement of funding policy allows us to access the UK reserve in such exceptional circumstances.
Secondly, we have to manage the programme year on year. Because the payment of grants is dependent on the submission of final accounts for projects, there can be different year-on-year allocations. I am talking about the next seven years. The average expenditure will drop below £170 million and the expenditure at the end of the programme is likely to be less than that figure, but it is possible that expenditure will go up and down during the programme, depending on the size of projects that are claiming grants year on year. We have to manage that within the programme.
Over the next seven years, I will probably visit the committee regularly to get authority to spend because there has been a sudden rush of grant applications and we have to increase the budget temporarily. However, we will manage the decrease over the seven-year programme. There will not be the problem of the money increasing and therefore catching us in the trap that Ken Macintosh suggests.
Ken Macintosh's hypothesis is precisely what has happened in Wales: the considerable extension of objective 1 and the controversy surrounding the availability of additional matching funds. That suggests a link that you steadfastly deny, minister.
Those matters are currently the subject of discussions between the National Assembly for Wales and the UK Treasury.
I was not asking you to comment on the Welsh situation.
I wish them well in their discussions with the Treasury.
I would not want to encourage you to extend your empire to Wales, but it is clear that Ken Macintosh's hypothesis is similar to the situation in Wales, where additionality has come to the fore because of the UK Government's inability or unwillingness to match the money.
I do not think that the discussions between the National Assembly for Wales and the UK Treasury on that matter are finished—they continue as part of the current spending review, which will cover the early years of the new programme. The European Commission has not yet agreed the new programmes, so local projects are not yet kicking in. It would be presumptuous of anyone in the Scottish Executive—or, if I may say so, the Scottish Parliament—to assume that the National Assembly for Wales will not come to an appropriate agreement with the Treasury. The current arrangement suits us in Scotland. I hope that those who question the arrangements do not cause any difficulties on that front.
I would not want to be presumptuous, minister, just as I would not want to be categorised as wanting to disadvantage Scotland. What puzzles me is that we have a very simple concept of additionality, yet—as you say—it has produced a highly complex set of arrangements. Why can it not be simple all the way through? You have acknowledged that there is a lack of clarity and transparency, which is why we are holding this inquiry. However, you steadfastly maintain the position that it is a simple concept that has been bogged down in a complex set of arrangements. I must say that some of your answers have not helped—I say that in my normal friendly fashion.
You almost forgot, Mr Raffan.
Oh no.
You said that there is no direct relationship with the Barnett formula. Does that suggest that there is an indirect relationship? You said that there is clear definition of additionality, but that it is part of a bigger equation. The trouble is that the more you speak, the more confused and complex the arrangements appear to be. Could you clarify those two comments about the relationship with the Barnett formula and the bigger equation?
I think that the Official Report will show that I said that the way in which we allocate structural funds has no direct or indirect relationship to the Barnett formula. It is important that we recognise that.
The arrangements can be complex, but they could also be simpler. I know that Mr Davidson does not want me to mention the programme management executives again, but one of the reasons we had the review of the PMEs was to ensure that the identification of the money is as simple and transparent as it should be, all through the system.
The European Commission has been happy that we have delivered additionality, but I want to be sure that everybody in Scotland can see that for themselves. We allocate in our budget a specific line for European structural funds to show the amount of money that we get from the European Commission and how we spend it. As that money travels through the system, it is important to have consistency across the PMEs and some guidelines to the project sponsors on how the money should be identified at a local level.
It is clearly being spent as additional money at a local level and is being matched by the project sponsors. Greater consistency and clarity across the programme management executives would enable us to prove that at the flick of a switch rather than have in-depth inquiries. In an age of electronic technology, there is no reason why we could not improve the consistency.
I understand your point about ring-fencing. I do not want to go over that ground again, but I will say that I wish that your aversion to ring-fencing extended to local government as well.
Other countries monitor the process differently, to ensure clarity. We are both seeking clarity, but we do not have it just now because we are bogged down in what you have described as a highly complex set of arrangements. You are not coming forward with any measures to simplify the process and to make it clear to the ordinary man in the street.
I am not at all sure how much more we can do. We show that budget line absolutely clearly in numerous documents that were not produced before devolution and we show our budget in great detail. We show that the money exists and is separate from our other budgets. I would be happy to take on board suggestions about how much more often we could publish that piece of information or how much more attractively we could present it.
We get the cheques from Brussels and pass them on to local organisations. That process is accounted for nationally and locally. We should clarify the reporting arrangements at the local level, of course, but the way in which we account for the process at a national level is held up as one of the best examples in Europe. I do not accept at all the suggestion that other countries do it better.
I said that they do it differently.
Perhaps our way is better.
In the European Committee it was said that, in Belgium, the funds go directly to the devolved administration. Is that a possibility in the UK?
My point is that the funds go directly to the devolved administration in the UK. We get the funds directly from the EC.
The confusion arises from your laudable determination to ensure that the Scottish assigned budget, including the European element, does not change. As the European funds reduce over seven years, the Scottish budget will not reduce. That means that we will retain our ability to spend whatever we want to.
I am trying to grasp what the concept of additionality means in relation to a budget that does not change. The £170 million of European money that we will have at the start of the seven-year period will reduce to £135 million by the end. That will have an effect on the money that we apply to that. Our matching allocation—say that it is 100 per cent—also has to go down. That means that £35 million is released from PME projects. If we decide to spend the money on exactly the same thing, how does it remain additional? It is either additional to what we are doing or not.
There might be additional things that we would want to do at that time.
I understand that.
In seven years' time, no matter how successful the current Government and devolution are in Scotland, there will still be economic and social problems in this country. My point is that, once it is freed up, we can use that money to deal with those problems. Of course, the money would be additional to existing budgets—that is a matter for the Administration at the time to address. The Scottish Executive might decide that the overall budget for Scottish Enterprise, further education, or whatever the money is additional to, needs to take account of the fact that that £35 million has been identified.
I understand that it will no longer have to be matched. The question is whether that can be called additional.
I was not suggesting that. At the end of the process, the £35 million will not be additional in the European sense, but it will be in our budget and will therefore be additional for us to spend. At the end of that seven-year period, if that figure amounts to £135 million of European structural funds in Scotland—and I am using figures just as examples—that £135 million remains additional. It is still additional to existing programmes.
The definition of additionality is based on the money coming from Europe and being used in addition to existing programmes. That money will be additional to existing national programmes, whether in Scotland or—as Mr Wilson may prefer—in the UK. We do not cut an existing budget and replace it with money from the European structural funds, and the Commission is very happy that we do not.
I would like to clarify the logic of your position. You are arguing that the money comes directly from Europe to the Scottish budget. You say that the cheque from the Commission comes directly to you. You also say, however, that the comparable programmes that are calculated using the Barnett formula include structural funds, so we are to assume that they are adjusted to accommodate changes in the European funding.
If the logic of your position is that we gain as European structural funds are reduced, do we lose as structural funds are increased?
I am sorry: could you please repeat the question?
The logic of your position is that, as our actual level of structural funds decreases, we gain from the way in which the structure currently allocates funding. Conversely, as the level of structural funds increases, we lose. Is that correct?
I have been trying to describe the position. The amount of funding that will be allocated to Scotland over the next seven years will gradually decline.
We know that. That is self-evident. However, if the funds increase, will we lose out?
They will not increase.
Structural funds have been in place since 1975. The Barnett formula has been in place since 1978. Every year since 1978, until the current programme, structural funding has increased. If you could clarify that point, that would be helpful.
You argue that, as the block is in position, the Barnett formula will allocate only changes. However, the allocated changes have been made in at least 21 of the 25 years of structural funds, unless—you are shaking your head—that assessment is incorrect.
I am describing the assigned budget, which has been in place only since last year, and I am attending this committee to talk about the devolved arrangements, which is what I am describing. The assigned budget includes the amount of money for structural funds, which, over the years, has been clearly identified in the Scottish Office estimates. Since last summer, we no longer have a Scottish block, but we have an assigned budget, which has been agreed. Because of an accident of history, the assigned budget contains an amount for structural funds that is more than we will be allocated by the European Commission over the next seven years. That is why resources will gradually be released.
No one can tell what the position would have been if the pre-devolution arrangements had still been in place and if we had a Scottish Office as a department of the UK Government rather than a devolved Administration. However, we have a devolved Administration with a clearly agreed budget. That budget is adjusted in relation to the Barnett formula as a whole—not in relation to individual programmes—but the assigned budget includes more money for the European structural funds than we will be allowed to spend by the European Commission over the next seven years. That will free up money within the assigned budget, and is a particular outcome of the devolution settlement.
I think that I made this point at the European Committee, so I am not giving away any great state secrets, but the process could easily work the other way in other areas. We have our assigned budget. There will be pros and cons and there will be some areas where the amount of money that happened to be in the assigned budget at a particular moment is slightly less than is needed to deal with a particular pressure in Scotland. We must accept responsibility for that but, at the same time, that assigned budget has been agreed, so the UK Treasury has accepted the responsibility for the amount of money that we have, in relation to structural funds, within that budget.
That is clear, but my point appears to have been ignored.
Devolution has not changed how the Scottish budget is financed, other than the fact that the block is now called the budget. Has the Barnett formula comparable expenditure included the rest of the UK's structural funds since its inception in 1978? If so, the only carry-on, or, to use your words, the only historical accident, is the inherited block of structural funds in 1978. Every other part of the total sum has been influenced by the Barnett formula.
I suggest that it would help the Finance Committee and, perhaps, your own understanding of the situation if we were able to see how that calculation has worked on an annual basis, since the inception of the Barnett formula. Then we would be able to see quite clearly whether your assertion is correct. Without that breakdown, we cannot make that judgment, as we do not know what the historical block has been from 1978, compared with what has been influenced by the Barnett formula in every year since then. It would make life much easier if you could make that commitment now.
I am sorry, but answers to those points have been provided in response to parliamentary questions and in other ways over recent months.
They have not.
Correct me if I am wrong, but the position was made perfectly clear in those answers.
The arrangements changed during the period that you mentioned. For example, the allocation for European structural funds came together into one amount, even under the old Scottish Office budget, only in recent years. Previously, it came in different amounts from different UK departments through the Scottish Office and into local programmes. In some cases, it went straight to local programmes and did not even go through the Scottish Office. Therefore, changes have taken place over that period—changes in the amounts, changes in the way in which the amounts were calculated, changes in the way in which payments were made and changes in the method of calculating the sharing out of moneys and the relative percentage of different programmes that Scotland has received. Those changes have influenced the amount of money available, year on year, over that period.
I am not here to answer for previous Administrations. I am on the record as saying that previous Administrations and the European Commission said consistently that, in each case, that money was additional. Prior to the early 1990s, I was involved in a row, through the Convention of Scottish Local Authorities and as a council leader. We argued with the Government about the additionality of section 94 consents at a local level. That row was resolved to the satisfaction of the European Commission; with that exception, the situation has been described consistently by UK Governments as one that delivered additionality, and that approach has been approved by the Commission. Apart from the fact that the position, which the Commission verified, was made clear on the record, I am not in a position to say much more about previous Administrations.
I can talk about the situation in which I find myself, as Minister for Finance, and in which we, as the Scottish Executive, find ourselves. We have an assigned budget that includes that amount of money, which we can—and do—deliver to the projects at a local level.
You have been good with the length and detail of the answers that we have had to go through today so far.
For my final question, I will repeat what I have just asked for. To sustain with evidence the argument that you have put today—which, I accept, is a reasonable argument to assert—we require to see the actual calculation within the allocation of the Scottish block, which became the Scottish budget, since the Barnett formula began. That calculation should accommodate the share of comparable expenditure accounted for by structural funds in the rest of the UK, and such information should be available to you, minister, if accounts have been kept going back over time. In order to sustain your argument, you would have to have that information at your disposal.
Will you undertake to provide to the Finance Committee information about the historical accident that you referred to, or the overhang that was in the block from before the Barnett formula—in other words, the structural funds that were directly allocated? Will you also provide the actual Barnett share of the overall structural funds that were allocated to the UK in each year since 1978, 1979 or whenever the Barnett formula influenced that area of the budget? That is the only way in which you can sustain your argument.
I apologise if my answer was not clear enough when we discussed the topic earlier. My understanding is that comparable programmes are calculated as a totality. The appropriate percentage is then passed on to Scotland.
European structural funds have occasionally come in different ways—from different departments and at different times. In recent years, they have come as part of a single block. The information that I think Mr Wilson requires is not readily calculable or available. What is important is the amount of money that has been spent, and Mr Wilson already has that figure in an answer to a parliamentary question. Also important is whether that money is additional to existing Scottish programmes. The answer is yes. The European Commission has verified that. I am not here to speak for previous Administrations, but I can go by what is on the record from the European Commission and from those previous Administrations, which have said, both jointly and separately, that that money was additional at that time.
We have gone into this matter in considerable depth. David Davidson has a question on another subject.
I would like to hear the minister's views on match funding. If, through the assigned budget, the minister makes a grant to local authorities, and if those authorities get involved in schemes through the PMEs and then find themselves a bit short of money, but still cough up the money for the schemes by cutting money from other services, how can that be additional spending? Is the spending on the PME project totally additional or not?
There are two elements, and it is important to differentiate between them. There is match funding and there is additionality. They are two completely separate things—well, they are not completely separate, because the money ends up being spent on the same projects, but they are separate issues.
Local authorities have to show additionality at a local level. For example, if authorities get projects agreed and obtain grants through the Executive from the European Commission, that money has to be additional to the authorities' existing expenditure programmes. That is why we automatically increase their spending consents by the amount of money of the grant, so that the money is additional to their local spending. As a result of the grant from the European Commission through us, they would not have to cut any existing local programmes in order to spend that money, because the spending consents that they have at a local level would automatically increase.
In match funding, there has to be a local contribution to the project that the grant is going towards. There is a grant from the European Commission and then a matching contribution towards the project from local public or private agencies. Authorities will find that money from their existing budgets. There is, as I said, a very important reason for that: there has to be a local commitment. The project sponsors cannot just think up projects that they think might be nice; they have to have priority projects that they want to carry through. One way of ensuring that they show commitment is by asking them to make a contribution from their own budgets. As well as ensuring that there is commitment, we have to ensure that the project represents value for money. The best way to achieve that is to ensure that anyone who is making a contribution to the project is doing so from their existing budgets and is not simply getting funding that will be added in. The match funding comes from existing budgets.
When budgets are allocated across Scotland—whether to enterprise companies, colleges or local authorities, or to the many other bodies that help to fund European projects at a local level—the fact that they need particular developments in their area is taken into account and funds are made available accordingly. For example, Highlands and Islands Enterprise has historically had a higher funding figure per head than Scottish Enterprise, and I am sure that that has been partly influenced by the economic and social circumstances of the area, projects for which have had to be match-funded at a local level. That is not a bureaucratic tool which has been invented to please accountants; it is a tool to deliver projects at a local level, which will have an impact in the areas of Scotland that need those projects the most.
I will take Aberdeenshire, where I live, as an example. I am not arguing the case for Aberdeenshire; I am just using it as an example. If, for one reason or another in its budget management process, the council ends up short of funds, will you give it the permission to borrow over and above its current limits in order that it can provide match funding, so that projects go ahead?
No; I am sorry. If an authority is successful in applying for European structural funds for local projects, it will automatically get consent to spend the money that it gets. The match funding is the authority's own money—the contribution that it makes to the project must come out of its existing budget. Therefore, when it makes the application for the project, it should have allowed for a contribution to the project in its budget. The two bits of funding come together—hence the term match funding.
Thank you. That was helpful.
I am sure that questions on this subject could go on longer, as there are other matters that we could have considered. However, I would like to thank the minister for his comprehensive responses. The questions have been on matters at the core of this inquiry, which is why we spent so much time on them.
Meeting adjourned.
On resuming—