Finance Committee, 16 Apr 2002

Meeting date: Tuesday, April 16, 2002

Official Report 174KB pdf

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Budget Process 2003-04

Agenda item 2 is a briefing from our standing adviser, Arthur Midwinter, on the Scottish budget process 2003-04. Professor Midwinter has produced a briefing paper for the committee, FI/02/7/2 and a background briefing note, FI/02/7/1. I invite him to speak to his paper.

First, I will bring the committee up to date with developments during the recess, when we had to issue supplementary guidance.

The Executive has failed to deliver the three changes that were agreed on the budgetary information: the distinction between baseline and new expenditure, which was to be provided for each department; the proportion, by portfolio, of the capital budget that is already committed; and the summaries in output terms, which had been agreed by Angus MacKay. We are still pursuing an explanation of why that is the case.

We have been advised that we will get the capital information shortly, by separate cover. The advice that I was given was that it should be easier to achieve that after the priority-based budgeting exercise that the Executive is going through. The situation is contrary to what was agreed in letters that were exchanged with the previous Minister for Finance and Local Government. Because of the urgency, we had to take action during the recess to advise the subject committees of the developments, as we had been briefing subject committees to expect the information to be in a certain form.

I understand that a meeting has been arranged with the Deputy Minister for Finance and Public Services. The committee might want to press the minister on whether he has received an explanation of why the information was not delivered. If the information is going to be available after the spending review process and the priority-based budgeting exercise, I suggest that we ask for it in September, to inform the second stage of the process in the proper way. We cannot really have a rational discussion about priorities without it.

I turn to the report. I should warn members that one of our advisers, when checking the figures, discovered that there are errors in the real-terms data. The real-terms figures for 2002-03 and 2003-04 have been deflated using the wrong deflator price base: they have been deflated using the 2000-01 price base, whereas the figures for 2001-02 are on the 2001-02 price base. That does not affect the trends that I identified for the committee in my paper, but if members wished to look back over the figures covering the past two years, the figures would be slightly inaccurate. I understand that we will get a complete set of accurate figures using a common price base for the two sets of figures.

Nothing in my paper is affected by that error, but if the committee wanted to examine the trends, figures with one price base would be required. The 2000-01 price base is the best one around at the moment; it is based on actuals and on outturn, and is empirically derived. The 2001-02 price base would represent only a prediction of what inflation might be over the next few years. We need to get a standard set of information in order to examine the trends, and we have been advised that that will be provided. As I said, that does not affect the thrust of the arguments. We have advised all committees of that matter in case members get confused by the figures.

In my summary, I examine some of the key issues that I think the Finance Committee, in its strategic role, is required to address. I have considered the planned changes from last year to next year and the Executive's changing priorities. The recent discussion about the extent of the priorities that the Executive now seems to have in the light of on-going cross-cutting reviews was fascinating. Basically, however, we are still on a growth trajectory.

I draw to members' attention the slight fall in capital spending. That is due to two things, the first of which is the stage that the new Parliament building has reached. Two years' expenditure are under the Parliament's belt, so that drop is not a cut in spending in any real sense. The other reason came across in evidence from the Scottish Parliamentary Corporate Body, which felt that it had sufficient funds available to reduce its bid on the public purse for this year.

A further growth in payments requires to be met. The cost of PFI contracts has now risen significantly—to £357 million—and I am not sure whether we can get an indication from the Minister for Finance and Public Services of whether and when that increase might become a problem. If the figure keeps growing year after year, it will soon account for a significant proportion of the budget.

I was not sure whether the Finance Committee or the Parliament had the power to suggest the use of the tax-varying power in either direction, but I felt that its existence ought to be drawn to members' attention. If members are unhappy about the planned total for the budget, is there any case for making use of the tax-varying power, either up or down? How does the committee feel about the balance of funding between programmes?

To help members with the second of those two questions, I listed five priorities. That was before we received the additional list of priorities today—I was already concerned about the number of priorities that seem to exist. The priorities seem to be changing between documents. As I have shown in paragraph 7 of my briefing note, there was a different list of priorities two years ago. It seems that there is now a supplementary, overarching list of cross-cutting priorities, which makes it difficult to assess sensibly whether those priorities are being met.

In table 2, under paragraph 8, I considered the percentage increases in the portfolios—or silos, as Mr Dennis called them. The figures suggest that only two of the five priorities have had above-average increases in their budget allocation. In one case—justice—the allocation seems to have fallen. There might well be technical explanations for that, and we ought to pursue that matter when we hear evidence from the Minister for Finance and Public Services. At first sight, it seems a little strange that some areas that were not identified among the top five priorities have bigger increases than those that were identified as priorities.

I end the briefing note with a list of questions for potential discussion among members and between the committee and the minister. It is clear from the second set of priorities that we have received that social justice is still a priority, although it does not feature in the list of five. I have difficulty in distinguishing between social justice and the social justice budget, which are separate things.

In addition to the table that shows those changes, I have produced a second paper, on consultation, with a view to strengthening the process of scrutiny of the budget process. I have suggested that, in addition to receiving evidence from the normal witnesses, as it were, who tend mainly to be finance and central services department officials and the ministers, the committee might wish to consider getting outside views on the national priorities from organisations or specialists. I have produced illustrative lists of potential witnesses and of questions that we might wish to ask them.

The first two questions repeat those that we have put to ourselves, and I think that the balance between capital and operational expenditure is also worth examining if there is to be growth. Capital bore the brunt of spending cuts in the 1980s and 1990s. It is worth considering whether increases should be targeted more on capital expenditure rather than on operational expenditure, and we could consider PFI in that context.

The people from whom I though we might wish to take evidence are listed on the paper on consultation. The list of three organisations is straightforward; the three people who are mentioned are people whom I know, who have some expertise in the field, and from whom it might be worth getting some evidence. Members will notice that none of them is a professor.

Not even an honorary one?

There might be a visiting professor—that is a bit like a knighthood.

A temporary knighthood.

Yes—it is a title.

Can I ask a stupid question? Could you explain the line for European Union structural funds in the final table of the briefing note? What is happening there?

The structural funds are determined by the EU. They include both the regional development fund and the social fund. As a result of the changes in your constituency, Mr Stone, in terms of—

Objective 1?

Yes. Those changes are reflected in a decline in the share of the funding, which is likely to continue as the qualification criteria are revised and as the number of countries in the EU increases. Such decisions are outwith the control of the Executive; they are passed on by the EU. The Executive's role lies in determining how to make best use of the funding.

If the trend for those figures was going the other way, it would nevertheless assist the Executive to have those live chunks of money in the budget. The issue may be local to the Highlands, but should one be further polishing up and re-presenting the arguments in order to get objective 1 funding and funding from other, similar budgets back into certain parts of Scotland?

You might wish to raise that point with the Minister for Finance and Public Services. I would be surprised if the Executive were not considering the matter already, but you might wish to get assurances from the minister that that is the case. Other areas of Scotland have benefited as the Highlands has been going into decline. I would be fairly confident that the Executive is looking for ways to maximise the Scottish share of EU funding.

A couple of weeks ago I heard about a report from a prominent person in the Highlands, saying that the Highlands is booming, with lots of jobs and so on.

That is not a very helpful comment.

Perhaps that applies only to Inverness.

The suggested questions about the social justice budget are perfectly valid, but can you give us some idea about the impact that the Glasgow housing stock transfer will have on that budget, particularly in the coming financial year? I would have thought that the transfer would be included in the figures, which would therefore be exceptional this year, and that if the transfer was taken out of the equation, the position of the social justice budget would be even worse than you suggest.

Or even better, perhaps. There is already provision within the social justice budget for the stock transfer, as there has been for a couple of years. Because of the delay in the stock transfer vote, there has been an underspend, which has been carried forward. I have not examined the detail of any budgets, because I am conscious of possible conflicts with other committees and their right to examine those matters. There is above-average growth in the social justice budget, despite the fact that social justice appeared not to be in the first list of priorities, which is why I noted it. My memory is that the social justice budget is rising.

By £64 million.

Yes, by 9 per cent. That will include—

My question was whether the delay in the Glasgow housing stock transfer resulted in a roll-forward this year and whether that is distorting everything. Alternatively, are there other underlying reasons why the social justice budget appears to be more generous than the latest priority list might indicate?

My understanding is that end-year flexibility should not affect the percentage increase from one year to the next, because it is retained within the budget for spending. Only the moneys announced in June—the reallocations—affect the budget.

So you think that there are other factors.

Yes, but I will happily examine the matter and send you a note on it, if you wish. I guess that other elements of the social justice budget are rising.

My recollection is that in the early stages of the budget last year there was a generous increase in the social justice budget, which disappeared when we got to the end of June. There were reallocations, which resulted in a substantial chop.

My information from last year is that large elements of the underspends were from capital programmes, so it is perfectly possible that the Executive reallocated some underspend in capital. However, the regulations state that 75 per cent of an underspend is kept automatically.

There is an issue about the impact of mainstreaming on the social justice budget. A lot of that budget consists of discrete items, whereby funding is allocated on the basis of challenge funding. When challenge funding comes to an end and programmes are mainstreamed, that may lead to budgetary distortion, because the money might go into a different budget head. We should ask the Scottish Executive about the mainstreaming of projects that appear under the social justice heading but that might appear elsewhere in the budget.

We have had an interesting three years in relation to the Executive's view on the treatment of the reserve, whether official or not. Have you picked up on any significant changes in thinking about the reserve? There have been no significant financial changes, but it is interesting that previous ministers have had different views on the reserve.

I have not picked up on anything about the reserve. As I understand it, the reserve is like a contingency fund that the Executive keeps in case of unforeseen events that require money to be spent. I am not sure whether any of it has been spent in the past year.

I have just had a quick look at the figures for social justice. The big increase is in the housing element of the budget. I will chase up the matter and send the committee a note. The increase is only £60 million, so it will not be due to the Glasgow stock transfer, which amounts to £300 million or £400 million a year.

There is an issue about the new role of what was Scottish Homes and the way in which it binds together housing regeneration expenditure.

At the end of your briefing note, you include a table on real growth in total managed expenditure from 2002-03 to 2003-04. I am particularly interested in the headings of children and central Government education, with a percentage change of –3.9 per cent, and justice, with a change of –1.7 per cent.

That is why I said that there are technical explanations. The decline in total managed expenditure on children and central Government education is a result of the transfer to local authorities of the former nursery care moneys.

When we quiz the Minister for Finance and Public Services on these issues, it would be useful to have a background note on the significant sources of variation.

When will the minister be here?

I cannot recall offhand.

I can do what you request in time for the meeting. I can examine the significant changes and find explanations for them.

The minister will be here to discuss PFI soon, but I am not sure when we will discuss the budget with him.

You said that figures will be reissued to take account of the different deflator. Will that apply to every table in the Executive's report?

Yes. The first set of figures, which are those for 2001-02, are the ones that will have to be revised to a 2000-01 price base. That will mean that the increase will be slightly bigger.

That will apply throughout the report.

Yes. The figures for 2002-03 and 2003-04 were done on the 2000-01 price base. The 2001-02 figures are current prices—the cash figure—so once the figures for 2001-02 are converted, you will be able to perform a precise comparison.

Will the Executive just issue a set of tables?

Yes, I expect the figures to be presented in a set of tables. A further briefing will be provided when the figures are issued. I do not expect the figures to be affected much, but the increases will be greater in real terms and in cash terms than the figures in the report show.

The table that you have produced on the total estimated payments under PFI contracts is interesting. We can incorporate it into our PFI inquiry. How were water PFIs, as opposed to health and education PFIs, treated? Were they included in the table?

The table shows the running cost subsidy for PFIs.

I presume that the running cost subsidy for water and waste water treatment plant PFIs will be met through the charges that will be paid.

If the costs are met through charges, they will not show in the table.

I just wanted to be clear about that.

The table shows the public money element. Anything that is funded through a charge will not appear in the report. The unit that handles such matters has an up-to-date list of every PFI project and its running costs, so if you want any particular figures, it is easy to get them.

No, I just wanted to check.

Charges will not be included in the table, however.

If we assess the total implications of PFI, you might want to do more work on the moneys that do not appear as charges in the table. In other words, there may not be a match between the table and the total number of PFIs.

The table does not provide the total cost of PFI. It gives the annual subsidy rate on PFI contracts—the extent to which the Executive steps in to provide a level playing field. The total cost of PFIs is not provided.

In other words, the sum total of local authority payments under PFIs will be much greater than the figure for central Government support.

The figure that is given is the annual subsidy.

Is it possible to obtain a figure for the total public contribution to PFI?

Yes, although that depends on how you define the total contribution. It is possible to obtain a figure for the total cost of all PFIs.

Is it possible to work out the total annual cost—the revenue budget cost—of PFIs?

No. Each project ends up with a total cost, which is in the public domain. We are talking about the annual revenue subsidy.

By examining the accounts of each council and health board, we must be able to work out what those bodies pay to PFI projects each year.

It would be impossible to look at every council and every health board.

That depends on how they construct their accounts.

I can have a chat with the people who run the PFI system, to identify what we can obtain.

We will have to obtain the total annual cost of PFIs in future. If we continue at the present rate, choices will be severely restricted for the Scottish Executive, let alone for individual local authorities or health boards. If such information is not available, people will not be able to make informed judgments. As PFI is one of the Executive's key methods of delivering services, the financial information must be available for us to be able to scrutinise PFI properly.

Has the committee considered that issue as part of its PFI inquiry?

We have looked at such issues, but I am not sure that we have the same information that you have produced. I am anxious that we establish the revenue element of PFI expenditure that comes from central Government funding and the money that comes through other routes—in other words, the real revenue costs.

Local authority budgets contain elements—such as direct payments—that are additional to the figures in the table. Those payments are funded out of normal local authority budgets.

I would be grateful for more information on the projected cost of McCrone in relation to education budgets, which we have touched on before in the context of the expenditure report, and on the budgetary implication of care for the elderly, which will be coming on stream shortly. The Finance Committee would want to have information about the Executive's projection of the revenue costs of those measures and an indication of the impact of their implementation on the education, health and local government budgets.

There is no great difficulty about the costs of McCrone, which have been worked out pretty accurately. The Executive does not necessarily need to produce those costs in a document of this nature. I understand that the figures for McCrone are already accommodated within the budget, although I do not know what they are in detail. The authorities are disputing what their share of the money that has been set aside should be and they have requested additional Executive money so that they can all meet the costs of McCrone. The total amount of money is right. At issue is the formula that was chosen for the distribution of awards among authorities. There might be over-awards or under-awards depending on authorities' locations in Scotland.

There is also a dispute about the costs of care for the elderly. If the costs are greater than the figures that were given in the report that the Executive received, the Executive will have to revisit the budget. Whereas the figures for McCrone were worked out fairly precisely, the figures on care for the elderly represent the best guess of Professor Bell, who did some of the work on that. However, I know that figures that were produced last week in the Fraser of Allander Institute for Research on the Scottish Economy's "Quarterly Economic Commentary" suggest that the cost will be higher. Provision has been made to meet the official figures that were given in the review group's report.

As you say, the figures given for care for the elderly were a guesstimate. However, I presume that some of the assumptions that were made will be tested out as authorities provide more realistic projections of the costs.

I am not sure what will happen between the Executive and the local authorities this year. In the past, an expenditure committee considered such matters in detail. I do not think that those regular meetings are taking place, because of the three-year budgets. They will take place in the aftermath of the spending review when there is a picture of what new resources are available. At the moment, the regular monitoring that the Convention of Scottish Local Authorities and the Executive used to attempt to agree to is not happening, to my knowledge.

It would be useful to get some harder information on that as it becomes available.

I agree that the Executive has probably costed the McCrone settlement fairly tightly. However, it is in the nature of major structural changes, such as those in the McCrone settlement, that unanticipated consequential issues emerge and develop. I am interested in having a second look at those estimates as they begin to pan out as we move into year 2 of the settlement, if that is possible.

The other issue on which I picked up was pensions. Your table for real growth in total managed expenditure for 2002-03 to 2003-04 shows a significant percentage increase in expenditure for the Scottish Public Pensions Agency. I know that there are a number of pensions issues, particularly in the local authority sector.

The two big items of pensions expenditure are those for teachers and those for health service workers. I do not know the reason for the increase. Pensions are controlled within annually managed expenditure. I felt that Mr Dennis's answer to David Davidson's question about whether the Executive can bid for moneys outwith the Barnett consequentials system ignored the fact that we get around £2 billion a year outwith that system. The Executive has a right to open a case with the Treasury if it thinks that items of expenditure are exceptional and are not capable of being accommodated within Barnett consequentials. That is what I was trying to establish in the questioning. Last year, the Welsh received additional funding to meet their commitments under European social fund spending. We receive a fair bit of money outwith the Barnett formula. We did not really get an answer on that.

Mr Dennis specifically said that there is no mechanism for doing that. In the days of the Scottish Office, it was up to Secretaries of State for Scotland to negotiate with the Cabinet and Treasury, which they did with varying degrees of success over 30-odd years. Mr Dennis was obviously saying that there is no official mechanism for doing that. In other words, it presumably happens at the behest of the First Minister and/or the Secretary of State for Scotland.

A way of getting additional moneys must exist: we got money for the cost of the Lockerbie trial in the Netherlands outwith the Barnett system. I was trying to put across the idea that examining the portion of the budget that is outwith the Barnett system is a strategic opportunity, rather than just an ad hoc annual process. Perhaps we can clear that up with Peter Peacock as well.

Let us discuss the issues that are identified at the end of Professor Midwinter's paper. It is not necessarily for the committee to make a decision on whether the tax-varying powers need to be used. That is a political decision that will be made by the political parties and ultimately by the electorate, I suppose, should anybody suggest that the powers be used. However, it might be interesting for us to carry out the technical exercise of trying to identify how much revenue would be generated or lost as a result of the use of those powers. That might be a useful calculation for us to ask Professor Midwinter to make.

I will have to do it again after tomorrow. At the moment, the figure is £280 million a penny either way, but that will differ from tomorrow if certain adjustments are made.

Is that £280 million the net or gross figure, and does it include administrative costs?

I understand that such costs are agreed with the Treasury. If the Parliament had decided in the past couple of years to use the tax-varying powers, that amount would be delivered.

So the Treasury will bear the administrative costs.

That is my understanding. The Treasury agreed a figure, which it put into the public domain. I think that that happened to help with budgeting. Because the amount could fluctuate from year to year, the Treasury was hoping to provide the Parliament with certainty.

Perhaps we could get a definite answer to the question.

Tom McCabe would be the man to ask.

I think that we are in a little danger here. Although it is sometimes enjoyable to ask academic or "what if?" questions, the committee is busy and the paper raises other important issues. If political parties decide that they want to run the issue past the electorate, the committee might wish to turn its attention to it. However, at the moment, we would be well advised to leave the matter and get on with discussing other more important issues.

That is Tom McCabe's view. However, it is legitimate to point out that we should be aware of the matter if we—or any committee—were to decide to recommend changes to the budget process that might mean a decrease or increase in expenditure. I just want to know the net figure and who would bear the administrative costs. As I said, the question is perfectly legitimate. We cannot assume that any change will mean a zero-sum budget. Unless we have certain information to hand, we will be as hamstrung as we have been over the first three years in providing alternative budgets. Indeed, some of Tom McCabe's colleagues have taken great pleasure in pointing out that so far no changes have been proposed to any of the budgets. If we do not have all the information before us, it is perfectly legitimate to ask questions including how much it is possible to raise and whether we will have to bear the administrative costs if we choose to take that route. Such questions are not just academic; even the previous convener of the committee suggested that it was a good idea to ask them.

Yes, but it is not up to the committee to make such recommendations, certainly not at this stage.

I agree totally that whether to raise the issue is a political decision. Indeed, this is the wrong part of the budget round in which to raise the matter. We have to help committees through the budget process and try to pull together their suggestions about priorities and how to allocate the predicted amount of the budget before the budget goes before Parliament. It is not our role to be up-front with the committees about how we can increase the budget.

I agree. That was my intention behind raising the matter at this stage. The Scottish Parliament has been given tax-varying powers and perhaps the time to reach any judgment on that matter is when the committee receives the budget reports from all the other committees. I am not urging the committee either way on the issue.

Okay. So the information at one level is available and can be adjusted.

Yes. I will chase the matter up after the budget.

As for the second issue that your paper raises, I would have thought that the committee would want to pursue the new Minister for Finance and Public Services to ensure that he honours his predecessor's commitment on changes in budgetary information. We could address the paper's remaining three points in the work that we carry out over the next two or three months.

It might be useful to give some context to the third issue that the paper raises, which is on the

"absence of social justice as a stated priority".

Without intending any disrespect—I know that professors can sometimes be sensitive—I think that we could get involved in a chattering-classes definition of social justice. As the previous presentation highlighted, the Executive has outlined a number of priorities such as health, jobs, transport, crime and education. If we took a cross-section of 500 Scots and asked them for a definition of social justice and to describe how it would improve their lives, we might get a blank stare. However, they might be more receptive if we asked them how policies on health, jobs, transport, crime and education would improve their lives. We have to keep that in mind before we start using phrases, as the paper does, such as a "radical change in … priorities". The five priorities that I have mentioned will achieve improved conditions in social justice for millions of people.

The priorities are suggested by ministers, who periodically tell us what their new priorities are or rebadge priorities. I do not know whether those priorities are new or are just massaged for a press release. However, if ministers open up a debate, we are entitled to participate in it.

I raised the issue because social justice was in the document two years ago. The definition is not an academic one. Indeed, I am not sure that academics could define accurately what the Executive means by the term "social justice". However, the term was in the document two years ago and it is not there now. We then had a second presentation that considered the issue to be an overarching priority. The committee ought to pursue clarification of all those points.

That is useful. We note Professor Midwinter's paper. Do members agree to his proposals on witnesses? There is a range of organisations and names. Perhaps members could give the clerk and Professor Midwinter some flexibility to add to those suggestions as appropriate.

Members indicated agreement.