Budget Process 2004-05
The first item on the agenda is further consideration of the 2004-05 budget process. The committee previously agreed to take evidence on the draft budget from independent commentators and I welcome Donald MacRae, who is chief economist with Lloyds TSB Scotland plc and Peter Wood, who is head of policy at DTZ Pieda Consulting Ltd. Both witnesses may make an opening statement if they want to, before we proceed to questions.
Donald MacRae (Lloyds TSB Scotland plc):
Good morning. I am honoured to have been asked to appear before the committee. This is the first time that I have been a committee witness, so I hope that you will bear with me if some of the points that I make are obvious and if I ask simple questions that have already been answered.
I am the strategy and finance director of Lloyds TSB Scotland and I am also the chief economist, so I publish regular information on the housing market, the economy in general and overall business conditions. I think that it is important to say that I am also a member of the Scottish Executive economics advisory group and the Scottish Executive economic statistics advisory group, I am a non-executive member of Scottish Homes, I have a visiting chair in business and economic development at the University of Abertay in Dundee, I am a trustee of the David Hume Institute and, finally, I am on the single survey steering group, which is the successor to the housing improvement task force. I should also say that the views that I express in my submission to the committee are personal and are not those of Lloyds TSB Scotland.
This is the first time that I have looked at the budget and I confess that I find its presentation hard to understand. It is not a budget as much as a collection of spending plans. A budget normally shows both income and expenditure, but the draft budget document really just reflects the current constitutional arrangements for raising and spending taxes.
Total spending in Scotland will increase substantially under the budget plans. The increase will bring public spending in Scotland to around 50 per cent of gross domestic product, which puts Scotland ahead of the United Kingdom and many other European countries. The budget will make Scotland's overall economy more dependent on the public sector.
I found little linkage in the budget between the expressed priorities and the planned expenditure totals. The document contains many references to opportunities, sustainability, closing gaps and so on. I found many references to outputs in the document, but outcomes are far more important than outputs. I recommend that fewer priorities should be set and that an attempt should be made to rank priorities. That would lead to better understanding. Indeed, I found a plethora of targets in the document—there should be fewer, and not more, such targets.
I believe that there is an inconsistency between the changes that are proposed for the enterprise and lifelong learning budget and the stated objective of concentrating on economic growth. I could not quite match up those two aspects.
I found it difficult to make inter-year comparisons, partly because of the use of different discount rates. The rate varied from 6 per cent to 3.5 per cent, to try to assess a degree of depreciation. It might be useful to consider restating previous years in a common format so that comparisons can be made. I cannot comment on one of the questions that the committee asked me to address—the balance between capital and revenue—because of that difficulty. I recommend that data are produced covering several years, so that we can see the impact of policies and how they change.
I found the change in the amounts raised under non-domestic rates significant. I had difficulty in seeing enough transparency in the yield from that important element of income.
Although a high percentage of school leavers go into further and higher education in Scotland, a higher percentage of pupils than in England leave with no qualifications. I wondered whether the relevant education priority was correctly expressed in the budget plans.
It is much easier to approve budget increases than it is to approve budget decreases. I do not want to get into particular areas, but it is clear to me that, given the overall macroeconomic environment at the UK level, increases of the same size as have been available over the past three years will not be available in forthcoming years and there may even be a need for a reduction. That puts a great focus on getting the priorities right and on making them more transparent than they currently are to me.
My recommendations are: data covering five years; fewer targets; ranking of priorities; reconsideration of the priorities relating to education and economic development; a common base for all the years; a little less end-year flexibility; a bit more transparency on the reserve, which seems to have increased substantially without a particular explanation; and a lot more clarity on the balance between capital and revenue.
Thank you. You raise a number of substantive issues and a number of process issues, which the committee has already discussed. It is useful to have received those comments. I ask Peter Wood to make an opening statement.
Peter Wood (DTZ Pieda Consulting Ltd):
Good morning. I thank the committee for asking me to appear before it. This is the third time that I have appeared before the committee, which is an event that I always face with some trepidation as well as excitement.
As I have said before, I am an economist by profession. I have been a consultant economist for about 20 years. Most of my professional work is involved with public policy issues, public expenditure and value for money in public expenditure. Although the greater part of my work has been in Scotland, I regularly work in Wales and Northern Ireland as well as in England. To some extent, I have tried to draw on that experience in examining the way in which devolved Assemblies are beginning to affect patterns of expenditure in their areas.
I have examined three main issues. The first is the overall structure of the budget. As I have said, I will try to illuminate that a little by making comparisons with what happens in the other devolved Administrations. The second is more of a process issue and relates to the way in which the priorities in the budget are expressed and the kind of objectives and targets that emerge in the budget document. The third issue is questions and observations on aspects of increased expenditure—the points that I will make on that relate back to objectives and targets.
The documentation that is produced in support of the budget is full and detailed. I hope that I am not doing a disservice to our colleagues elsewhere, but I would say that the documentation is more detailed than what comes out of the National Assembly for Wales or the ever-changing Northern Ireland Administration—I am never quite sure who I am dealing with in Northern Ireland. Both those Administrations produce documents to support their budgets, but the Scottish documents are particularly detailed and provide a wealth of information for those who are prepared to mine them.
I sometimes think that the big picture is not so easy to discern in all the detail, so I have tried to ask what major priorities emerge from the budget proposals. What do they say about Scottish priorities and can we make comparisons with other areas?
Public expenditure in Scotland is set to grow by approximately £1.6 billion in real terms over the next two years. More than half that expenditure—by my calculation, 52 per cent of the increase—will be accounted for by health, which currently takes about a third of the budget. A priority that screams out from the figures, but perhaps is not stated in the text, is that the Parliament or the Executive has decided that its number 1 priority is expenditure on health. I am not saying that that is wrong or that it is right, but it seems to be implicit in the figures. The reasons behind that have been discussed widely. The priorities in health are probably reasonably well understood.
It is notable that, although the sums of money involved are much smaller, there are large proportionate increases in tourism, sport and culture and in aspects of education. Some smallish areas of spending—although we are talking about tens of millions of pounds—show large increases, the reasons for which are perhaps not made clear in the document.
When we go down to a more detailed level, below the main headings, we can see that there is above-average growth and expenditure in higher education and lifelong learning but, interestingly, a cut in expenditure on economic development.
I found it difficult to make comparisons with Wales and Northern Ireland because of data problems. The data are not presented in the same way and the departmental headings are not the same. I spent a lot of time trying to disentangle spending and to put numbers back together again. Therefore, caveats attend any comments that I make.
What is striking is that, although there are variations in the pattern of spending—one of the main variations is that Scottish spending overall tends to be higher—there are some broad similarities in the pattern at the large scale. For example, spending on health ranges from about £1,400 per person per annum to £1,500 per person per annum across the three jurisdictions and spending on economic development is about £120 per person per annum in Scotland and Wales and a bit higher—£140 per person per annum—in Northern Ireland. The detailed figures do not matter, but the broad similarities exist.
Higher education spending is similar per person across the three jurisdictions, but a bit higher in Scotland than it is elsewhere. Conversely, lifelong learning spending per person is broadly similar, particularly in Scotland and Northern Ireland, but it is a bit higher in Wales. Local government subventions are higher in Scotland than in Wales—obviously that does not apply in Northern Ireland. Rural development spending is similar in Scotland and Wales, but it is a bit higher in Northern Ireland. Scottish expenditure on social housing is a bit lower than expenditure in the other two jurisdictions, although Scottish spending on it is rising while spending in the other two jurisdictions is being cut.
There are broad similarities in the relative sizes of spending categories among the areas and, although there are some differences, those differences are not profound. In all three areas, expenditure on health care, lifelong learning and higher education is tending to rise a bit above average. On balance, the similarities are greater than the differences.
One of the intriguing questions as we go forward with the devolved Administrations is whether devolution will give rise to divergence and different patterns of expenditure in different parts of the United Kingdom. One of the fundamental arguments for devolution, from the position of what is termed fiscal federalism, is that expenditure could be adjusted more to meet the aspirations and preferences of local populations. It is still not evident how the different Administrations will alter the distribution of public spending from what would have prevailed in pre-devolution days; the nature of that change is not yet evident. It is not yet clear to me what distinctive stamp, if I can put it that way, will be placed on public expenditure by the Scottish Parliament and by the will of the Scottish Parliament. That remains to be seen.
Some of what I have to say on objectives and targets will echo points that Donald MacRae has made. The budget statement and its supporting documents are very detailed. However, they contain many detailed priorities rather than discussion of the overall priorities. Below the level of detailed targets for increases, it is not clear why the big decisions have been made. Why is spending on health and transport being increased more than spending on higher education? Why is there such a large increase in expenditure on leisure, sport and culture? The targets are detailed, but, rather than telling us about high-level priorities, they are what I would call microtargets or, perhaps, middle-ranking targets.
If spending is being increased, what is the rationale for increases and for where those increases lie? What do we get from increased expenditure? Like many public sector budgets, the Scottish budget still lacks a clear sense of the relationship between inputs and outputs. In businesses, a budget is a statement of the resources that are required to produce certain outcomes. I look at the increased spending in the Scottish budget and ask whether that spending is intended to increase the quantity or quality of public services or whether it is about keeping pace with public sector cost inflation—increasing spending in real terms just to stand still. For all the detailed information that appears in the budget, it is hard to discern the answer to that question.
I offer members some examples—which are just examples. There is a large increase in central spending on teachers, which will rise from £16 million to £95 million. I am sure that there is a good reason for that, but it is not at all evident from the budget document. The sportscotland budget will triple in size, rising from £15 million to £45 million. It is suggested that the increase will come partly from money that was set aside for the Euro 2008 bid, which was, sadly, unsuccessful. However, that has the whiff of saying, "We have some money lying around, so let us spend it on something." The budget does not indicate why sportscotland has suddenly become a priority, when it was not previously. I am not saying that there is not a good reason for the increase, but it is not evident.
It would be beneficial if the budget statement gave a clearer view of why and where spending is being increased and of what that spending is buying. If the budget were to examine the difference between the growth in output in public services—for example, the numbers of patients treated and children taught—and the cost-per-unit output, that would provide us with a better understanding of what we get at the margin from increased spending. There are interesting issues in health. How many people will be treated for what types of illness? Are costs rising for drugs, equipment or staff? What are the impacts on the quality and quantity of care? I do not dispute the fact that those are challenging questions, but it would be intriguing to see the budget grapple with them.
I thank the committee for bearing with me. The Scottish budget is well ahead of those of other jurisdictions in the information supplied and the amount of consultation that is implicit in the process, but further progress could be made in understanding what we procure for the resources that we commit.
Thank you. I invite members to put questions to our witnesses.
My first question is for Donald MacRae. Like many members, I was concerned by the criticisms that you levelled at "Building a Better Scotland". Specifically, I note your observation that the budget will make the Scottish economy much more dependent on the public sector. By your estimate, last year Scottish public spending rose to about 50 per cent of gross domestic product. What does that say about the underlying state of the Scottish economy? Can you develop your concerns?
There are two elements to the issue. First, there is a risk that high public spending may crowd out private sector activity. Secondly, high public spending exaggerates the weakness of the private sector in Scotland. Both elements have contributed to the poor performance overall of the Scottish economy over the past few years. There is more innovation and there are higher productivity increases in the private sector than in the public sector. The Scottish economy is weak in that area, partly because of the strength of the public sector compared with the private sector.
I stress that I am not saying that the budget increases are wrong or that the public sector is too big. The problem is rather that the private sector is too small in comparison with the public sector. I am not against the planned increases in public spending, but they highlight the dependence of the Scottish economy on the public sector. The support that the public sector provides is not guaranteed, because the spending increases that have taken place in the past few years may not continue in coming years.
You draw attention to the fact that the figure of 50 per cent of GDP accounted for by public spending is considerably higher than that in many other European countries. Is that an historic feature of the structure of the Scottish economy? An increasing proportion of jobs seems to be provided in the public sector. What are the historical reasons for that?
In the past two years, there has been a substantial decline in the number of manufacturing jobs. Unemployment has been kept low by an increase in the number of jobs in the service sector, a large proportion of which are public sector jobs. The increase in public spending has performed the function of keeping unemployment as measured by claimant count and other methods low. That is good, but it again shows the dependence of the economy on the public sector. I could show the committee data derived from the Scottish Executive over a number of years that indicate that, in the longer term, the Scottish economy has been particularly dependent on public sector spending.
I want to pursue the issue of public sector jobs. We are grappling with statistics that suggest that almost 97 per cent of the budget has effectively already been allotted. We have flexibility to put pressure on the Executive to spend only a very small amount of money differently. In places where local authorities and health boards are the main providers of employment, what scope is there to rebalance the situation with jobs in the private sector? Will that be a long-term process? If the budget for the public sector is constricted over the next five years, that may cause major structural problems in Scotland.
There are about 20 questions wrapped into that one observation. Broadly, we need to think carefully about how to stimulate the private sector in Scotland, which is still by far the largest part of the economy. We need to think about changing some policies that are encapsulated in "A Smart, Successful Scotland". I do not disagree with those policies, but they do not go far enough. The changes that I suggest include fiscal changes, which would require a major alteration to the current settlement.
I want to take you to task slightly on the figure for public spending, which may be the result of the budget's failure to flag up the fact that a significant amount of spending—for example, in education—is assigned to schemes such as public-private partnerships. I do not want to start a political argument about that expenditure, about which there are different views. However, £2 billion of the education budget is allocated to public-private partnerships. Large-scale stock transfer of housing will stimulate the private sector, which will also benefit from spending on the central heating programme. Admittedly, that investment is not market led, but it is creating opportunity in the private sector. Are you arguing that such spending should be more visible in the budget, or are you not taking it into account in the 50 per cent figure?
I am delighted that you have drawn attention to that issue. If I have misread the budget, I apologise. You point out that a large part of the budget will be used on, or will stimulate, the private sector. Is that your point?
Yes. Some public spend not only goes on public sector jobs but is invested in and stimulates private sector jobs.
That point is fine, but the trend in the number of jobs in the public sector does not quite square with it. The number of people employed in the public sector has increased substantially.
I do not want to give the impression that I am anti-public sector—I want that to be clear and on the record. However, I am suggesting that the private sector is weaker than it might be and that the dominance of the public sector in certain areas of Scotland can crowd out some private sector activity.
I would like to make a final point on education. Dr Murray may have been suggesting that my point on education was wrong. I am very happy that lots of school leavers go into further and higher education, but I am not so happy about the fact that lots of our school leavers leave without any qualifications. My point was about balance.
I know, but my point was that much of the spend on school infrastructure will go through the private sector rather than directly through the public sector. The effect of that on jobs will not necessarily be visible now because we are in the early stages of the process.
There is all the more need, then, for a common base and some sort of comparative information over the years. That would allow us to see whether what you suggest will happen actually does happen in a year or two.
I have three questions but I will restrict myself to the first two at this point. The first is on the data and the second is on total spending levels.
On the data, I compliment the author of the paper that we have received by saying that his recommendations get to the heart of the matter. I wholeheartedly agree with them. Although they are tactfully expressed, they could be considered a pretty weighty indictment of the lack of transparency and comparability in the budget. Two matters arise in particular. One concerns the absence of time-series data, to which this committee has consistently drawn attention. The other, on infrastructure, is perhaps more damning in the long run. If current spending is investing in today's priorities, and capital spending is investing in tomorrow's priorities, I do not see how we can make progress if we cannot get a sense of the extent of capital spending in Scotland—irrespective of the method of financing used, be it through the private finance initiative or whatever. The witnesses may want to comment on whether other parts of the United Kingdom are more successful than we are in striking a balance between capital and revenue spending and in providing time-series data. This committee has raised that issue consistently but has made little progress. I am sure that that absence of progress would greatly distress those who sat on the financial issues advisory group.
I note that the author of the paper sits on the Scottish Executive's economics advisory group and economics statistics group. It seems to me to be impossible for either of those groups to carry out their roles adequately if we have neither time-series data nor a true appreciation of the balance between capital and revenue spending in Scotland. This is really a plea to some of our expert advisers that in their various capacities they should raise such matters. Until we resolve them, it will not be possible to move the debate on and to discuss the priorities that we should be discussing. Do the witnesses believe that, through some of the expert forums, it will be possible to raise the data and presentation shortcomings?
I think you said that you had two points.
That was the first one.
It was tactfully expressed, so I guess that the next will be a real killer.
First, time-series data are very important. Coming fresh to this budget, I was surprised to find no real inter-year comparisons. Secondly, I defy anybody—including my colleague Peter Wood—to tell me the balance between capital and revenue spending. That balance is crucial and if I could achieve one thing by appearing here today, it would be getting that point across first, and the point on time-series data second. I now await the killer question.
I wish you luck in finding the answers, as we have failed on both counts so far. However, if pressure mounts from the various expert bodies, we might succeed by the end of the second session of the Parliament.
I want to ask about point 3 in your paper, which is on the budget, and point 4, which is on total spending. The committee has dwelt on the point that spending in Scotland has risen to 47 per cent—perhaps to 50 per cent—of gross domestic product. I would be grateful for guidance on this point. I want to consider comparability with the UK, although we do not yet have a finalised budget in Scotland. I take the point that, in so far as the Executive receives revenue from more than one source, it would be good if those sources of income were itemised separately in the budget. That seems to me to be the minimum step possible under the current constitutional settlement. We should itemise what comes from non-domestic rates, the Barnett formula and so on. In the UK context, when we talk about the scale of the public sector, we are usually talking about tax revenues—the total tax take—over GDP. The Government's reputation for prudence lies in that figure remaining below 40 per cent whereas, under the Conservatives, it was up to about 42 per cent. The measure is, in essence, tax revenue over GDP, and then we have to consider how much of that is current spending, debt or whatever.
The difficulty is that the figure that we are offered is spending in Scotland over Scottish GDP. It is therefore not directly comparable with the UK figure. In the UK, the debate is over whether the figure is 38, 39 or 40 per cent, and whether the figure was 42 per cent under the Tories. In Scotland, we have the opportunity to have two figures: the figure that has been presented to us, which is Scottish spending over GDP; and a figure that would usefully show the tax take in Scotland over GDP. I suggest that that figure would probably be lower than the UK figure, because, from the report "Government Expenditure and Revenue in Scotland" and elsewhere, it is possible to establish that, although we account for 10.5 per cent of UK spending, we account for only 8.5 per cent of UK tax revenue. If we are to understand fully the budget in Scotland, it might be useful to have both those figures. Will the expert witnesses comment on that? Could they encourage the use of both figures?
Wendy Alexander answered the question when she referred to the GERS report; the GERS data give us the answer. I know that aspects of GERS are contested by various people but the report provides the best estimate of the second magnitude—how much tax is raised in Scotland relative to Scottish GDP. Wendy Alexander is quite correct to say that the GERS data indicate that the level of tax raised in Scotland is less than in other parts of the UK. The reasons for that have been well debated.
Two issues arise. The reason why one would not find the tax figure in the Scottish budget is that the Scottish Parliament is not responsible for raising the taxes. A figure would therefore be included for information only, rather than as something that the Parliament was materially affecting. It is interesting to ask how much tax represents as a proportion of income, but the broader issue—how much of output is accounted for or controlled by public spending—is more interesting because we believe that it affects the shape and nature of our economy.
I mentioned that I do a lot of work in Northern Ireland. In recent decades, a major concern of the economic service in Northern Ireland has been the heavy dependency of the economy on public spending. There has been a feeling that a dynamic, outward looking and successful economy has to show a greater capability to generate its living, if you like, in the market and from the private sector. That is an issue to be debated. I do not wish to take a position on it, but how much of Scottish resources should be commanded or directed by public spending is a material question. Even if public spending creates business for private companies—of course it does; it does so all the time—the nature of the economy is changed if a large part of output is determined by public rather than market considerations.
There is a debate to be had about what the right level of public spending should be and what that implies for our economy. The simple and well-established fact is that public spending in Scotland, relative to population and GDP, is higher than in the UK as a whole and higher than in many other UK regions, even those that are relatively disadvantaged or peripheral. The question of whether that has shaped our economy and has had a good or bad effect on the dynamic in it needs to be addressed. Perhaps it should be addressed in the budgetary process. Is the process only about asking how much we spend on bedpans, blackboards and computers for schools, or is it also about asking about the place of the public sector and its command over resources in our economy? Both aspects need to be addressed.
It is important to realise that there is a difference between the total tax take and the actual total of Government spending, which was discussed. We must be clear about that difference, because the figures are not the same. I am sure that committee members are all aware that about 10 days ago, a document was published that assessed whether Scotland—and the UK—was a high-tax economy. There are lots of data to show business taxes as a percentage of GDP and various other measures. The upshot of all those studies is that there are some countries—the United States and Ireland—where the tax take on business is less than that in Scotland and the UK; there are many other countries in which it is higher.
If one was being impartial—I suppose that I would like to be considered that—one would say that there is no evidence that Scotland or the UK is disadvantaged in business taxation as a percentage of GDP. However, if we were to consider the tax spend as a percentage of GDP, I could show you figures for many years that show that the Scottish economy has a higher dependence on the public sector and has higher public spending. That is a result of many years of change in the Scottish economy, the political settlement and the Barnett funding formula. I am not against a high level of public spending, but I would like a private sector that grows stronger and stronger, so that the percentage of the public sector appeared less. I could also show you figures relating to the weakish performance of the private sector in Scotland on innovation and research and development, which is sometimes crowded out by the level of research undertaken by universities—which are in the public sector—and Government.
Public spending as a percentage of the economy is an important indicator of not only the public sector's strength and influence but the private sector's weakness. I stress that I am not anti-public sector at all; I am suggesting only that the balance in Scotland is too high a dependence on the public sector and that the budget will increase that dependence. I am not saying that public spending should be reduced, but I would like private sector output to increase.
The issue is not only the balance between private and public sector spending, but whether the public sector can be rebalanced in such a way as to stimulate more growth or greater responsiveness in the private sector. What does your scrutiny of the budget tell you about that? What does it tell you about, for example, the increased spending on transport and health relative to that on economic development? Is that balance moving in the right or wrong direction? What emerges from your scrutiny?
My summary is that I am glad that some of the infrastructure barriers are being addressed in the budget. I notice that there are quite a lot of delays in spending some of the money, particularly on infrastructure, and I am concerned about that. I also point out that another measure of the economy—productivity—is particularly low in Scotland and the UK in comparison to other countries. Productivity applies equally to the public sector, and I did not see much mention of it in the draft budget.
I would need another meeting to answer the question on whether the balances are right. My personal view is that some change is needed. I would like more emphasis to be put on promoting and developing the private sector. In the longer term, that would produce a much more vibrant tax base and a higher tax take from which we could have higher public spending on health and other parts of the budget. That is a longer-term strategy. At the moment, we are in a short-term situation in which public spending is increasing rapidly in Scotland as a result of the Barnett formula but the private sector is fairly weak, which is creating the imbalance.
Are you saying that we need a more strategic and graduated view of how we take the economy forward?
Yes.
There are two dimensions to the budget. At one level, it is about procuring those services that need to be procured publicly rather than privately. There is general agreement about, broadly, what those services are, and the budget should be a way of procuring them in the most economical, efficient and effective manner. It should demonstrate value for money in the use of public money to procure services and goods for the public. The object of the exercise is not to spend money, but to deliver services to the public.
Whether the budget is supportive of economic development is a quite difficult question. Although I have drawn attention to some figures, the question does not reduce simply to asking, for example, "Spending on economic development has been cut back. Is that supportive or unsupportive of economic development?" That depends on whether the spending on economic development was useful in the first place, which is another question.
At the fundamental level, we might ask how public spending and the budget can contribute to the economy's success. It cannot do so primarily by providing a market for goods—the simple Keynesian approach. The economy's prosperity depends on productivity—the economy's supply capability. We become richer only by being more productive. The question really should be whether, in so far as the budget is directed towards economic activity or support to industry, it is directed in ways that will increase productivity—the ability of our people and businesses to produce. That argues for spending to be directed towards education—I mean education in the broadest sense: science, technology, research, development and so forth—rather than a subsidy culture or providing soft markets. Such an argument raises broad questions about economic development strategy, which are tackled to some degree in the budget documents. Public spending can make our economy more successful by making it more productive—that is, by encouraging the human investment, investment in knowledge and investment in capital that will make our businesses more successful.
I am fascinated by what is being covered. I will make a number of observations. I am interested in which macro targets and objectives you would set if you were masterminding the Scottish economy. I am also keen to get some feedback from you on how acceptable it is that we lack comparative data at present. I imagine that the bank would be pretty intolerant of clients who had a lack of comparative data over time or who confused capital and revenue expenditure. Those are the important and pressing issues.
My key point is that, as well as having meaningful targets, we should have a clear mechanism that will start to reverse the existing process and trends. What clear targets would you put in place and what mechanisms would you like to see to reverse the trends that we face at present?
Is that question aimed at me?
You can have first shot at answering it.
I will have to disappoint Jim Mather—I cannot produce a master plan with targets for the Scottish economy in a matter of seconds. However, I can say that the present plan has too many targets because I cannot decipher from them what is and what is not prioritised. I will pick out one target, although I ask people not to take any meaning from the fact that I have chosen this one. Target 8 under objective 6 on pages 59 and 60 of the draft budget is:
"By 2006, increase the number of Scots achieving success in key sports and events from the position in 2000."
I am an avid supporter of the Scotland football team, but I do not support that target. Does it mean that we must beat certain teams? That answers the question partly and by exception. To answer the second part of your question, the lack of inter-year comparisons is not acceptable and I argue strongly that such comparisons should be achieved. It should not be difficult to restate previous years' budgets using a suitable methodology.
In my day job, I use the balanced-scorecard approach to assess business areas within my business using no more than 12 to 20 measures, which are by no means all financial. The measures are robust and reflect short, medium and long-term issues, and we can ensure that the relevant information is collected. Targets are important, but behaviour changes when one starts to measure something—a certain amount of target chasing can be induced if the target is not set properly and is not long term enough.
I would love to be able to provide a master plan for the Scottish economy today, but, obviously, I cannot. However, I can say that the draft budget contains too many targets and that the targets are unclear, which makes it difficult to tease out the priorities. Peter Wood pointed out that half of the overall increase in the budget was for health matters. However, he had to tease out that point; it did not jump out of the draft budget.
You asked me a huge question and I hope that my comments have been helpful. I would love to be able to contribute more to the answer at some point.
The issue might be that some information is in the wrong place. I understand why sportscotland might want a set of detailed targets because it has a wide range of activities to control and manage. However, the incorporation of those targets into the draft budget produces the effect that we have talked about—we are drowned in a sea of figures and indicators and it is not clear which are more important, which are less important, which are strategic or which are operational. The draft budget should focus more on major strategic priorities; it should make clear the top-level priorities and objectives. That is a comment on the way in which the data are presented, although it may seem churlish.
We did not quite finish with the point about the consistency of data over the years. It is difficult to follow the information. I sat down with the statements from Wales and Northern Ireland and with this draft budget and last year's one to try to produce nice, neat comparisons. I produced some figures, but it was a bit of a struggle and I am not absolutely sure that the figures are right. The data are presented inconsistently and different terminology is used. I appreciate that the figures change from year to year because outturn turns out to be different from what was planned, but the inconsistency makes the process complex and comparison difficult.
Detailed comparisons can be made, but they require a lot of work. I will mention a couple of brief examples. Last year, I carried out a study for the Northern Ireland Office to examine whether expenditure on social housing in Northern Ireland in the past 10 years had produced value for money. The study involved comparisons with England, Scotland and Wales. A great deal of work was required just to produce simple comparisons on mundane matters such as spend per house and cost per unit constructed. The difficulty arose because of a lack of consistency and clarity in the presentation of the data between jurisdictions within the UK and from year to year in the same areas.
Many years ago, we conducted a major exercise for a former Administration to compare local government spending in Scotland and England. That was phenomenally difficult and involved weeks of work to produce what seemed, at the end of the day, to be simple comparisons. A huge amount of work was required because we lacked consistent presentation of the data.
I agree with Donald MacRae's criticism: the presentation of the draft budget means that it is difficult to make year-to-year comparisons with confidence. The issue of capital spending versus revenue spending is another aspect, but only one. It would be good to be able to examine meaningful time series and to understand the trends with confidence.
The problem in which I am interested has not been mentioned. We have an aging population—a quarter of a million people of my generation live below the Government's poverty level—but nothing in the draft budget allows me to tell those people that things will improve. I assure members that, under the present set-up, the situation can only get worse because, as people retire in greater numbers, the pressure on the Executive to accommodate the increase will be tremendous. I am disappointed that, in the witnesses' interesting addresses to us, they did not mention that problem, which is increasing. I do not know how we will improve the situation.
I am delighted that you have mentioned the problem; I was going to do so, but I did not. Personally, I believe that Scotland has a demographic issue. The number of deaths every year in Scotland exceeds the number of births by about 3,000, which is not healthy. The population is getting greyer and older—as members can see from my head. My answer to the problem is simple: I do not intend to give up working at 60 or 65; instead I will carry on. I think that the demographic problem of aging has been exaggerated. It will be solved by people working harder and longer.
Professor Arthur Midwinter (Adviser):
I intend to go at 60. [Laughter.]
Humour apart, my suggestion is a serious contribution to the demographic problem. People will have to work for longer.
I do not have a solution to the more problematic population issues of the rates of births and deaths and of people leaving Scotland. I am delighted that the Scottish Executive has introduced its fresh talent initiative, but we must do more on that issue. It is hard to think of quick solutions, but my answer is that we will all have to work for longer.
The data inadequacies have had a thorough airing. It is encouraging that the discussion has moved on to what the priorities might be. I would like to encourage our witnesses to help us to strengthen the treasury function of the committee and the budget that it scrutinises. By that I mean that the overriding key to stimulating growth in the private sector is the supply capability of the economy—as has been alluded to. That is not the responsibility of any one ministry of the Executive but has implications for every spending budget. Therefore, by definition, it must be the committee's responsibility to scrutinise that matter. I notice reluctance among committee members and advisers to move into the territory of priorities, but the issue is not solely the property of the Enterprise and Culture Committee or any other committee. Similarly, if the objective in the public sector is to raise its productivity and perhaps strengthen its competitiveness, it seems to me that the budget should say more about the efficiency function of the 50 per cent of spending that the public sector accounts for.
To what extent do our witnesses think that the budget process should become more involved in priorities and have its treasury function strengthened to enable recommendations to be made about the supply capability of the economy and the efficiency function of the public sector?
Before our witnesses answer, I should say that we are considering having an inquiry into the economy and economic development, which might provide us with an opportunity to deal with some of those issues.
I agree with what Wendy Alexander says, but I think that we should be aware of some tensions that exist and ask what the budget is for. There is a tension between the suggestion that we should spend in ways that will stimulate and benefit the economy and the idea that we should procure services at best value. Moving away from Scottish areas of responsibility for a moment, the area of defence is a classic example of that tension. The military always wants to buy the cheapest aircraft, tank or boat that is available—which is probably made by the Americans—because that way, it will get more for its money. At the same time, the British Government wants the military to buy a British item, which might be 50 per cent more expensive, because that will be good for British industry. Is our budget process about procuring the goods and services required by the population at the best price—that is to say, is it a great purchasing department for the nation that buys things as cheaply as possible?—or is it a practical tool that affects the development of the economy?
Those tensions exist and one has to be clear about them if one is not to get into an awful guddle. We need to separate our purposes in relation to the budget. Where we are concerned with buying things, we should buy them as cheaply as possible and where we are concerned with spending money to promote productivity and knowledge and increase the capability of the economy, we should be clear about that.
People say that the budget is a political process and is part of political decision making, but I think that we should say that we will limit our spending to a healthy level—say, 40 per cent or whatever of the national economic cake—and then decide how we can best deliver within that budget. There should be a more explicit statement of how much of the national economic cake will be spent on public services. We should be upfront about that rather than let the amount gradually grow without clarity.
Once a clear statement has been made about how much will be spent, there should be a clear statement about what we will procure with that expenditure. There should be high-level targets relating to what we intend to buy and the results that we hope to achieve.
Of course, there will be various views about how big the slice of cake that is spent on public services should be, but that is what political argument is about.
There is a lot of discussion about spending and percentages of GDP but it is important that members are clear about the fact that, when we talk about spending, we are talking not only about the Scottish budget but about all public spending in Scotland, of which about half is by the UK Government. The biggest part of the money that is spent by the UK Government in Scotland relates to social security spending. I do not think that this committee should get too hung up on the proportion of spending as a proportion of GDP because that is not something on which this committee can have a great degree of influence.
To bring the committee up to date, I should say that I have met officials and we hope that we will be able to come back to the committee with a timetable. The situation is more problematic than we imagined because there are three years of different resource account budgeting price bases plus one year of cash, all of which have to be calculated by hand. The officials have gone off to talk to their masters and I hope that we will come back to the committee with something that everyone can live with.
On the question of outputs, Donald MacRae said that it was more important to focus on outcomes than to focus on outputs and Peter Wood talked about the documentation in other devolved Administrations. In the previous session, the Finance Committee's report on its inquiry into measuring outcomes was fairly pessimistic about the scope for progress. I agree that the bulk of the micro-targets are output measures rather than outcomes, but I would like to know whether either of our witnesses knows of any model in which outcomes are used as targets. I do not know of one. If we are to make progress, we need to have something on which to hang our efforts. Could Peter Wood say whether the Northern Irish or Welsh targets are better than ours in terms of using outcomes rather than outputs?
The short answer is that they are not.
It is a fair response to criticism to say that if someone says that you should do better they should be able to say exactly how you should do better. When considering public spending, there is always difficulty in measuring outputs, to some degree, and outcomes, to an even greater degree. However, if we examine areas in which specific studies have been done on value for money—housing, for example—we can make some progress.
I do not want to carp about the measures that have been used in the document but I reiterate the point that there are too many targets and that they are too detailed. Even if we can express matters only in qualitative terms or talk simply about making progress towards an end, we should nevertheless try to focus on meaningful magnitudes and make the focus narrower. As I said, there are so many targets in the document that it is hard to tell what is important and what is not.
On particular levels of spending, I suggest that, if spending is being increased a lot, specific attention should be paid to that point in the document. I am not having a go at sportscotland, but its budget will be tripled, bringing it to five times what it was a few years ago—which I can well believe is a necessary increase—but the document does not tell us why that should be so or why it is important. Similarly, I cannot tell from the document why central spending on teachers is going to increase fivefold. I am sure that there is a good reason for that, but the document does not tell me what that might be.
At the very least, the document should inform the reader what such great increases in spending will be spent on and what that spending is expected to achieve. As a customer and a member of the public, I would like to know that information. At present, there is a plethora of targets relating to Gaelic-medium education, allowing people to stay in work and so on and not enough information on where the money is going and which areas of expenditure are going to increase.
I am not entirely in agreement with Professor Midwinter when he says that, because the Parliament is responsible for only roughly half of the public spending in Scotland, the committee should not get too hung up about public spending as a percentage of GDP. The fact that that is the situation under the current settlement should not detract from the importance of monitoring that area.
At the moment, the budget is a series of spending plans and does not take an investment view. It needs to avoid the silo approach, which is evident throughout the document, with everyone having their own set of targets.
I have been asked what I would do instead, but I do not have an immediate answer. I can tell members that there are too many targets and priorities and that fewer would be better.
In case anyone took exception to my singling out one particular indicator earlier, I should say that I would be absolutely delighted if Scotland qualified for the European championship. I have nothing against the thought behind the target that I mentioned, but I believe that it shows the difficulty of setting out good, reliable, robust and repeatable targets and measures.
I will try to draw the discussion to a conclusion in around five minutes.
I want to tease out more information about the quality of the information that is provided to us and about how a £22 billion budget would be managed from the perspective of the private sector.
We have been fairly critical of the information that is provided to us, but on schools, the draft budget document states in black and white that commitments are being taken on as a result of the agreement in "A Teaching Profession for the 21st Century". Those are included in the document.
Donald MacRae said that there are between 12 and 20 measures in each division for which he is responsible; there is an equivalent number for each Executive department or section in the budget. For example, in respect of communities, objective 1 has three targets:
"By 2006, increase the supply and quality of Scotland's housing stock by approving 18,000 new and improved homes for social rent and low-cost home ownership …reduce the number of houses with poor energy efficiency … Improve the quality of Scotland's housing, through the setting of a new Scottish Social Housing Standard by the end of 2003 and through measures to encourage owners, including private landlords, to ensure their properties are in good condition."
Those targets are straightforward. The table in the budget document shows an increase in real terms and we can chase the money so that the Government can be held to account for it.
I do not understand the difficulty. If the number of targets in the document is reduced, the committee's job of holding the Executive to account on productivity in the public sector will be much harder. What would the private sector do differently? How would it present such a document?
Donald MacRae and I are not arguing against having targets. I have not said that there are no good targets in the document—some targets relating to housing, for example, are clearer than targets in other areas.
You have drawn attention to a couple of quantitative targets. However, further down the page, there is an objective to
"reduce the number of households becoming homeless more than once in a year."
By how much should the number of households becoming homeless be reduced? The targets are not equally well expressed—some are well expressed, but some are not as well expressed. On the point about education, I did not understand what the words meant—perhaps that was my problem.
We are not arguing against targets; we are saying that targets are needed, but we are concerned that the document has so many of them that it is hard to know which things are truly important and which targets the Executive will be judged by. When one gets down to running an individual department—a department of state or a non-departmental public body—of course more detailed targets are needed. I have been involved in target setting for public sector projects and there is always an element of cascading. Certain matters are discussed at a high level, but there will be a different set of targets down at a team or project level. One does not make one's overall strategic target simply the arithmetic aggregation of all the targets of individual teams, but the document tends to lean in that direction. I am not suggesting that every target in the document is poor or is poorly expressed. Some targets are clear, but I am afraid that other targets are much less clear.
Two members want to ask questions. The witnesses should answer one question each.
We are repeatedly told about the difficulty of producing meaningful targets and comparative data, but in the business world, most businesses and boards seem to be able to manage pretty tightly with numbers that are targets and that can be benchmarks—they manage with numbers relating to turnover, market share, net profits and share prices, for example. Are you surprised that the Government cannot manage on a similar macro level? Firm targets for growth could be compared with targets in comparable countries and in other parts of the UK. Population movements and life expectancy are key measurements. Perhaps Government could drill down by income group and simply stop at that point. Effectiveness is measured by those key measurements.
The committee should be indebted to Peter Wood for identifying differentials in areas of spending by scrutinising the overall budget. I was intrigued to learn that around £1,400 or £1,500 per person in Scotland goes on health, which is an issue that we are obviously concerned about. Health spending is a considerable priority. However, as Peter Wood pointed out, more than 52 per cent of the increase in spending that the budget identifies is going towards health at a time when we are all saying that we are extremely concerned about the state of the Scottish economy and some £120 per person in Scotland is being spent on economic development. If I picked Mr Wood up correctly, that amount is less than is being spent in Wales and Ireland. Does that represent a failure by the Executive to recognise the deep-seated problems of the Scottish economy?
It would be useful if, in responding, each witness raised any final points that they want to make.
I will be evasive and not judge whether the spending is right. I have tried to show how the public spending cake is divided up, which is useful. What is a lot of money spent on? What is less money spent on? Is the balance right? We should ask ourselves such questions.
Everybody is in favour of spending on health. All of us fear that we will need health services, but that they will not be there. In Scotland, there is a relatively high level of spending on health care—such spending is higher than in other parts of the UK. By some measures, we are almost at the famous European levels to which Mr Blair referred some years ago. That is where the bulk of our further spending will be put. I am not making a judgment about whether that is the right decision, but a question needs to be asked: is it the major priority?
The budget should recognise that we do not have unlimited resources. There should be a decision about whether spending can be increased by a certain amount or that there will be a certain resource budget and a decision about what that budget will go on. I will not answer the question that I have been asked by saying that the balance is wrong and that a little should be shaved off health and more should be given to economic development. I am merely saying that questions should be asked and that they require investigation and should be debated.
There should be no assumption that the structure of spending is right. Should more be spent in areas in which a lot is spent? Are there areas in which much less is being spent than in other areas and in which more could beneficially be spent? The budget should provide a forum to debate and determine the answers to such questions.
I will be brief. I apologise if I have appeared too critical in my written and oral evidence, but I have concentrated on areas in which I think there must be change. It goes without saying that I have not felt the need to comment on many other areas on which I would congratulate the authors of the budget document. The committee will understand why I have concentrated on areas in which I think changes are needed.
On what Jim Mather and Jeremy Purvis have said, my business might have 12 to 20 indicators for one business area, but there might be 12 to 20 indicators for the whole business. It is a matter of horses for courses. At a certain level in part of the Government's spend, there might be a raft of indicators, but it is important to get an overall view, which is missing from the draft budget.
On what Ted Brocklebank said, there should be more emphasis on economic development. The document is a spending document rather than a plan for Scotland's future that outlines investment in the medium and long term, which is what I would like to see. It might not be necessary to spend more on something to achieve a result—something could be taxed less. I am aware that there has been work on a report in England and Wales on the possibility of a local income tax. The private sector could be encouraged not by spending more on it, but through less taxation. There are two ways to look at the matter.
I thank the committee for the opportunity to comment, but ask it not to think that my views are all negative. I have concentrated on areas in which I think change is required.
I think that all members of the committee found the evidence from both of you useful. We hope to incorporate some of your ideas in our consideration of the budget. They have also given us food for thought on the broader agenda that the committee might want to pursue in its future inquiries. I thank the witnesses for attending the meeting.