Official Report 846KB pdf
The next item on our agenda is to take evidence on the Scottish Fiscal Commission’s “Fiscal Sustainability Report”, which was published on 8 April 2025, and which has a particular focus on health.
I welcome to the meeting, from the Scottish Fiscal Commission, Professor Graeme Roy, chair; Professor Francis Breedon, commissioner; Dr Caroline Carney, senior analyst; and Claire Murdoch, head of fiscal sustainability and public funding.
Before we move to questions, I invite Professor Roy to make a brief opening statement.
Good morning. Thank you for having us here today. Two years ago, we published our first fiscal sustainability report focusing on demographics. The report that we are looking at today extends that analysis, but with a particular focus on health.
Demographic change is still central to our projections. You will remember that, two years ago, we projected that Scotland’s population would decline. Because of the number of deaths exceeding the number of births, that is projected to continue. However, our updated analysis now includes a higher level of migration that is consistent with higher levels of net inflows of people into Scotland. As a result, Scotland’s overall population is now expected to grow slightly in the next 25 years, before it plateaus. Crucially, however, Scotland’s share of the UK population is projected to continue to decline, falling from 7.9 per cent in 2029-30 to 7.2 per cent in 2074-75.
What also matters for the public finances is how those projections look for different age groups. The population in Scotland aged 16 to 64—those who have traditionally been most likely to be working in the labour force—is projected to fall in the next 50 years. In contrast, we see an increase in the elderly population. As an example of that, the number of people aged over 85 is projected to double in the next 50 years. We see a similar trend of an ageing population across the UK, but Scotland’s population is projected to age earlier. Indeed, in the next 25 years, Scotland’s share of the UK’s over-75 and over-85 populations is projected to increase, even though our overall share of the UK population will fall.
All of that has implications for public finances. As we show in our report, demand for key public services, such as health and social care, typically increases with age. Other pressures, including the rising cost of service delivery, add additional pressures to health budgets over time. Assuming that policy remains unchanged and projecting devolved spending and funding based on demographic change and trends in health spending alongside society becoming wealthier over time, we see a gap opening up between funding and spending. In our analysis, we highlight how much of that gap emerges because of funding pressures at the UK level, but we also highlight how some of it is driven by pressures that are specific to Scotland, which, because of our demographic profile, will be more acute in the next 25 years.
We combine the trends that we have projected for Scottish funding and spending with an OBR scenario for returning UK debt to a more sustainable path. Under that scenario, Scottish spending will now exceed funding by an average of 11.1 per cent in the next 50 years. That gap starts relatively small but it grows over time.
Finally, we also took a look at health as the projected biggest and fastest growing area of Scottish Government spending. We produced two scenarios in our report to illustrate the potential links between the health of the population and public finances.
Our better health scenario shows that, if the Scottish population were healthier and if people in Scotland lived as long as their counterparts in England, that would help to mitigate some but not all of the projected annual budget gap. If the health of the Scottish population were to worsen, it would make the annual budget gap more negative. We concluded that the Scottish Government needs to plan to manage those pressures. We welcome its decision to publish the fiscal sustainability delivery plan at the end of next month, which we hope will set out plans to address those fiscal challenges.
Thank you for that very helpful opening statement. The comments next to the very first graph on page 3 of the report sum the situation up: although health spending stands at 36 per cent of the Scottish budget now, it could grow to around 40 per cent by 2029-30 and to an astonishing 55 per cent in 2074-75. There has to be real concern about that, and we have to look at how we can possibly change it.
I do not want to steal John Mason’s thunder, as he always comments on our ability to project things 50 years into the future when there are so many changes, but, in the last two years, the Scottish Fiscal Commission has changed its projections of the Scottish population by 15 per cent, which is pretty drastic. You now predict that there will be 800,000 more people in Scotland than you had predicted a couple of years ago. One is understandably concerned about how projections within such a short period can be so hugely different.
We rely on the Office for National Statistics’s population projections, so we use its updates to population numbers. Those updates happen on a regular basis. The population projections shown in the report will change marginally when the next iteration of population projections comes around. You may remember that, in one of our conversations, you thought that it would be useful for us to prepare more regular updates because the population projections could change and it would be useful to see how much the story might change with differences in the population.
It is important not to lose sight of the fact that the fundamental drivers of what is happening to our population—deaths exceeding births and population ageing—have not changed. It is the ONS’s assumptions about migration that have changed; crucially, it is much more optimistic about migration into the UK over the next few years, with Scotland essentially getting its share of that. That is the big change between the two projections. It is not really a massive change in the structure or ageing of the population but a change in migration. Although that number seems big, it is relatively marginal in terms of the overall story and what it means for public finances. That story is that our population is ageing and doing so earlier than in the UK. That will be a particularly acute issue over the next 25 years and will have big implications for public finances.
I do not know whether “optimistic” is the right word to use if you are talking about the UK population being projected to grow to around 82 million people—that is around 15 million more than it is already. Large chunks of England are already pretty much concreted over, so I am not convinced that people will necessarily welcome that. You are suggesting that, on average, a net 20,000 migrants a year will come to Scotland, in addition to 10,000 from other parts of the UK. Given that most political parties—certainly at Westminster—are trying to reduce migration levels, how confident are you that those figures will be maintained?
There is always a risk around that, which we set out in our assumptions. We rely on the assumptions of the ONS, which looks at recent trends and projects them forward, but those projections can change. In our “Scotland’s Economic and Fiscal Forecasts” report, back in December, we highlighted that there was a risk around the migration forecast—if migration falls across the UK and Scotland takes a similar share of it, that will potentially have an impact on the economy and on tax revenues. When we update the committee on this in two years’ time, we might say, “Well, actually, if you look at recent trends, there has been a cutback on migration to the UK, and the overall population projection for Scotland is now less positive—or rather, it is growing less than it was when we were sitting here two years ago.” The key point is that it would not change the underlying story, which is that Scotland’s share of the UK population is projected to decline and that its population is ageing. Those two factors are the biggest issues for public finances.
I was going to ask about that next, but you have answered my question. You say that
“Projected Scottish devolved public spending is unsustainable”
because
“it will exceed funding by 1.2 per cent on average over the projection. Accounting for a possible UK Government response to its fiscal sustainability pressures widens this gap to an average of 11.1 per cent.”
Could you talk us through that, because it is a fundamental issue that you touch on several times in the report?
There are a couple of things to say about that. We might come on to the issue of how robust our projections and forecasts over 50 years are, but the process is largely one of arithmetic. If we look at the cost of delivering public services across different age profiles—there is a good chart on page 54 of our report that looks at resource health spending by age—we can see that, on average, it increases as people get older. For people between the ages of 16 and 60, the average spend on health is, roughly, between £2,000 and £4,000 per person. Once we get to people in the 85-plus bracket, it is about £14,000 per person. Simple arithmetic tells us that, if we have more people above 75 and 85 in the future, more money will have to go on delivering exactly the same spending commitment. We might get into some of the implications of that for the economy more generally.
That demographic element is really important, but the key point is that it is not unique to Scotland. All high-income economies around the world face an ageing population. Before I forget, I should put this point on the record: the fact that we are ageing as a population is a really good thing. It reflects great progress in society, healthcare, the economy and so on, but it comes with a fiscal cost.
That is a challenge at the UK level. Crucially, the block grant is still the biggest element of the Scottish budget. Therefore, what happens at the UK level as regards how the UK Government responds to its ageing population has implications for future block grants. In the report, we say quite a bit about the driver of how the UK Government might respond to its ageing population and how that will have an impact on the block grant.
We also highlight the unique challenges in Scotland. There is an interesting demographic dynamic that we have tried to pull out to a greater extent than we have done previously. Over the next 25 years, our share of the elderly population in the UK is going to increase. That means that, over the next two to three sessions of the Parliament, the pressure on public spending will be more acute in Scotland than it is in England, simply because we will have a higher share of the elderly population.
Yes, but there is an element of rebalancing later on in the forecasts.
Exactly—the rest of the UK will catch up with Scotland’s population.
The issue is not only how long we live, but how long we live in good health. That is a major issue, certainly in the area that I represent, where the average age at which people go out of good health is as low as 56—in other words, people can live in ill health for 15 to 20 years. That is a major issue for the individuals concerned, never mind for budgetary considerations.
I am keen to look at what you say about the annual budget gaps. You say:
“We also assume the UK Government does not take action to address its own fiscal sustainability challenges.”
Why would it not do that?
We have two types of results here. To build up our analysis, we assume that Government policy will not change—in other words, we assume that it will continue to fund spending on health and social care, and so on, as normal. We then get the first assessment, which is the bit that is the unique challenge to Scotland: that budget gap. That gap would never exist, because the Government cannot borrow, so it has to adjust for that, but it is an illustration of where we think that funding will lag behind spending. We do that assessment assuming that Government policy does not change. That gives us our first set of results, where we talk about there being an average gap between funding and spending of about 1.2 per cent over the next 50 years. That obviously assumes that UK Government policy will not change, but that is not sustainable. The OBR has been very clear about the fact that the UK Government’s current trajectory on its fiscal policy is not sustainable over the long run.
11:00We then ask what the implications of the UK becoming sustainable might be and we take one of the OBR scenarios about coming back down to a certain debt level, and we assume that that adjustment is split between spending and revenue. That is where the additional budget gap comes from. Ultimately, the biggest driver of the budget gap over the next few decades is the fact that both the UK’s and Scotland’s populations are ageing. How the Governments respond to that will be their biggest pressure.
It is interesting that, in paragraph 29, you say that
“Under a scenario of worse population health, we project the annual budget gap to reach minus 4.0 per cent by the end of the projection”,
but if the gap
“is improved by better population health,”
it could be a “positive 6.2 per cent.”
Yes. That is one of the key points that we try to highlight in the report. To be clear, the comparisons are based on the unique Scotland element. There is still the additional bit on the UK, so at the end of the report we talk about how the overall budget gap will be impacted between the better and worse scenarios. That is why I was saying that a better scenario helps you to address that but it does not solve everything.
The better health scenario is interesting because it gets to your point about what happens if we improve healthy life expectancy. That would lead not just to less demand on public services but more participation in the labour market and a greater set of tax revenues flowing in. In a worst-case scenario, that potentially becomes worse: the spending goes up and the economy becomes more negative.
The key thing that we are trying to say in our report is that health does not follow the public finances: health is one of the big drivers of the public finances over the long run. If you can improve the health of Scotland’s population, that will be good for individuals and society, and it will save the Government significant money over the medium to long term.
It is worth emphasising that the fiscal gains are really coming from healthy life expectancy. Having people in good health for longer reduces your spend per head. If we were to put on only our fiscal hats, how to improve healthy life expectancy is the thing that we would focus on.
One of our concerns, when we see that potentially up to 55 per cent of the Scottish budget will be spent on health by 2075, all else being equal, is the fall in productivity in healthcare.
As you say in the report, productivity in manufacturing, for example, through technological innovation and so on, is a lot easier to increase than productivity in areas that are labour intensive, such as healthcare. We have seen a quite substantial reduction in the productivity of the health service across the UK since the pandemic. What impact has that had on your projections, and do you expect that reversal to be turned around over the next five or 10 years?
I would say a couple of things on that. There are two issues that it is important to separate out.
There are the unique elements of what has been happening since the pandemic, where we have seen a significant fall in UK productivity in the health service—I think that it is 10 per cent down relative to during the pandemic. That is causing significant challenges in terms of outcomes, which we see across all the key measures of health outcomes in Scotland.
On its own, that issue means that the challenge of addressing the budget gap, at least if the policy is to keep people’s outcomes neutral, will become more difficult over the long term. Essentially, in order to have the same quality of outcomes, if you cannot get productivity up, you will have to spend even more. That makes the challenge worse.
That is what is happening now. We are spending more on the NHS, but there are fewer operations than there were before the pandemic.
The second bit that is really important in health is covered in our report where we say that, even if we assume that you can address that first issue, there are other challenges around improving productivity in healthcare over the long run, which we know based on experience. That comes down to the things that you were talking to the Auditor General about—technological improvements, for example, can help a lot.
Ultimately, however, getting productivity gains in health is quite difficult, because it depends on caring and people being looked after, and on the high-quality delivery of that service. There is, therefore, an underlying challenge in health as an area of the public sector in that it is difficult to get productivity improvements at the same scale as in the wider economy. On top of that, there are the particular challenges that we have faced post-pandemic regarding the fall in productivity in the NHS.
What impact will that have on treatments? I chair the cross-party group on life sciences, and we had a presentation from the chief executive of Moderna, who came all the way from Texas for the meeting. He was talking about messenger RNA being used for individual cancer patients so that a cure is developed based on someone’s specific DNA, as opposed to anyone else’s. It costs an absolute fortune—although he did not put a price on it, of course, because it is still at the development stage. However, it looks very promising, particularly for people who have cancer that is at a very advanced stage.
We also have things such as Ozempic, which could have a cost benefit. It might cost £1,500 a year, but if it prevents heart attacks and strokes, it could potentially save a lot of money in the long run. How do we balance those types of developments through a cost benefit analysis? As another example, a new cure for sickle-cell anaemia has been developed out in Roslin—apparently it costs £1.6 million per patient.
Some treatments will be very cost beneficial, and there are also quality-of-life issues; we are talking about individual human beings. Nevertheless, from an economic point of view, when you are forecasting in an area that is as complex as health, how do you balance the costs and benefits of those different innovations?
I will have a first shot and then go to Caroline Carney and Claire Murdoch on the specifics. Francis Breedon may also want to come in with some general comments, because that aspect is important.
In our report, we rely a lot on the OBR’s analysis, partly because it has done a lot of work on that area and partly because we want to start with the same assumptions, so that we are not telling you something different and then, when you unpick it, you find that it is simply because we have used different assumptions from the OBR. We draw a lot on the evidence on historical trends with regard to productivity rates in the health service and the average technological cost increases.
You are right—some things might provide a cost saving, as there might be a relatively small cost for a drug or innovation that can then have lasting impacts over time, but against that there are things that can be really expensive and will generate more modest benefits, or which might be an improvement that could potentially lead to more expenditure further down the line. It may mean that we are able to catch things earlier, but there is then an increase in operations and demand and so on.
We look at all the evidence and we take an average of all of that. Again, we can play around with slightly different numbers, but we will say, “Look—there will be a cost in here that will grow over time, which is what we will have to account for and address.”
Caroline Carney may want to expand on what we do in that regard.
I do not have much to add, except to say that the approach that we take with the additional 1 per cent that you mentioned earlier includes the Baumol effect, technological advancements and long-term chronic disease. That is based on the long-term trend in the UK and in other countries. It is an approach that is used by other independent financial institutions that make these types of projections.
The convener made a point about the cost of £1.6 million for a sickle-cell anaemia cure gets to the point about technological advancements eventually coming down in price and being rolled out to more patients. That is the kind of thing—
The number of patients in that case is so small that that may not happen. It is not like the situation where a video recorder used to cost a thousand quid and, five years later, it was 20 quid. I am not convinced that that will always happen in certain areas where rare, or relatively rare, conditions are involved.
No, maybe not, but some of those advancements—we spoke about cataract surgery, for example—are rolled out to more people.
I go back to back to the way in which we project health spending, which we do on the UK side as well as the Scotland side. What is different for Scotland is the demographics and that is how we get the Scotland-specific risk. We approach those changes in the same way on the funding and the spending side.
Fundamentally, health productivity is a very slippery concept, so you are right to highlight the issue, convener. The measures that we use, such as how long people wait for operations, are straightforward, but there are other issues such as the value of a screening programme compared with the cost of later interventions. Working that out becomes harder because, although we can say how effective such things are, it is difficult not only economically but morally to get into the world of measuring how much money those things are worth. Normally, with health productivity, we compare health interventions and say which ones are worth doing compared with the ones that we already do. However, you are right that, more broadly, health productivity is a very slippery concept.
A couple of years ago, when I spoke to the chief executive of my local health board, they said that, prior to the pandemic, on average, four operations were carried out in a theatre per day, but the figure is now three. When I asked them why that is the case, they said that there is now a thorough deep clean in between operations, and I thought, “Did you not do that before?” That represents a 25 per cent reduction, which will be really impactful.
That is the interesting comparison to make. All the controls that had to be implemented during Covid saved a huge number of lives, so you could argue that those were incredibly productive interventions. A huge number of lives were saved as a result of people wearing masks or gloves, washing their hands carefully and so on. Those interventions had a pretty low cost, but they delivered a great outcome. However, officially, those interventions are measured as reductions in productivity, because the queues for operations lengthen. Such comparisons are always very complicated.
In relation to the funding overview, figure 3.1 in your report and the detail underneath it show that funding for the Scottish Parliament will grow in real terms from £65 billion in 2029-30 to £159 billion in 2074-75 but that its expenditure will grow from £65 billion to £160 billion, so there will be a difference of only £1 billion, even though expenditure will increase astronomically—it will more than double—during that time. You have spoken about people having higher expectations in relation to the quality of services, but how can we possibly deliver that massive increase in spending and revenue if we do not have productivity growth over the next 50 years?
I want to be clear about what we are talking about in relation to that funding. In part, we are saying that the huge increase in funding and expenditure that is needed is not sustainable. That is where we stray into the work that the OBR has done. If the country continues to do what it is doing at the moment, its debt levels will continue to increase—
To well over 270 per cent, according to—
Yes. If we want to get back to having a balance, we have to address some of those numbers. We end our report—and this is where we pass it over to the policy makers and politicians—by saying that improving health is about not just health but how we improve the public finances and make that structural change. That is fundamentally important. There is also an element about how we grow the economy and support the tax revenues that will, ultimately, deliver all of that.
At the end of the day, it comes down to a really difficult decision. Public services have been built on the basis of projections of the population including large numbers of people in the workforce, with a relatively small number of elderly people being supported through the tax system. Once that pyramid is flipped over, there are fundamental questions about how we prioritise public services, which public services we prioritise and how we fund them. As I said earlier, a lot of this involves arithmetic—if we want to continue to deliver the same level of service and if that costs more as we age, the level of spending to maintain that level of service will need to increase.
11:15
In paragraph 4.9 of your report, you say that
“There has been a decline in Scottish healthy life expectancy since 2014-16.”
That was based on the 2019 to 2021 figures, and Covid may have had an impact on those figures. Given that, for example, smoking has decreased and younger people are not the boozers that people in your generation were, Graeme, why is that happening? Think of the rubbish that we used to get fed in the 1960s and 1970s, compared with the quality food that we have now. The air is also cleaner, and all the rest of it. Is it because of mental health or other issues? Why is it that the healthy life expectancy has not continued to improve? Poverty is also lower than it was a few years ago.
We spent a bit of time speaking to public health academics and public health officials on that. I will give a quick answer, then Caroline and Claire might want to come in.
You are right that there were significant improvements in healthy life expectancy for a long period. A lot of that was from doing basic stuff—making improvements in the quality of housing, in air quality and in health treatment. That knowledge has helped to improve healthy life expectancy. Some people think that it was always going to tail off slightly and become more difficult to get additional improvements in life expectancy—a lot of work is now coming out on that. Some of it is related to the pandemic—it is clear that the pandemic has had an impact—but a lot of this stuff is arising in relation to so-called deaths of despair and the effects of that.
Again, this is not just a Scottish thing; it is also a broader UK thing. There is declining mental health and rising drug abuse, and the effects of poverty feed through to life expectancy. That is a big thing in the US, and we see those trends in the UK as well. We cite a couple of studies that are looking into that issue.
We are seeing a general decline in overall wellbeing in society, and people are beginning to say, “Hold on a minute—this is highly correlated with healthy life expectancy. Are those effects leading to one another?” That is the more interesting bit. We may come on to some of the stuff around increasing things such as disability payments. We are seeing a big inflow of that. Is that an early warning signal of things that might be coming further down the line in relation to healthy life expectancy?
Dr Carney, do you want to expand on the conversations that you have had with colleagues?
On healthy life expectancy, the measure is a combination of life expectancy and self-reported data from people on their health. We can see a trend in life expectancy, which has plateaued in recent years and had a small blip during Covid. Then there is how people report their own level of health, which has come down in Scotland in the past couple of years.
As you say, convener, there have been improvements in many health measures such as smoking, but other things, such as mental health and wellbeing and obesity, have got worse. That trend worsened with Covid, but it was there before that.
From our conversations, there is no consensus on exactly why that has happened, but there is a consensus on it being a real trend. As was mentioned, the trend is UK wide, and it is also happening outside the UK. There have been recent papers on a change in the level of wellbeing and happiness across countries. The stagnation in life expectancy is happening beyond the UK—not everywhere, but it is happening in other contexts, too.
Let us go back to the issue of productivity. Paragraph 4.34 talks about the increase in expenditure. It says:
“Despite increased funding and staffing levels and initiatives to improve productivity and outcomes for patients, these are not yet making progress.”
Is there progress in Scotland in any area? For example, health boards that are struggling could look to other health boards in Scotland or, indeed, those outwith Scotland to see what they are doing well and how they can exchange best practice and take things forward.
That is not something that we have done. It kind of strays out of our remit. You are right—
I was not sure whether that would be the case.
Part of what we are trying to do is say to people, “If we can improve health, that is a public finance saving.” You are right. It is a question of how we can improve productivity in the health service. How can we learn from other places? How can we learn from each other? How can we improve people’s healthy life expectancies for a relatively low cost? Some of that is about wellbeing and some of it is about improving obesity rates and other elements. For example, how can we tackle things like premature drug deaths? There is a whole host of things that have really important social, health and economic arguments for them. We are trying to say that those things have public finance implications as well. It is crucial to think about tackling them as an investment in long-term fiscal saving.
I realise that I have been asking questions for quite a while now—I apologise to colleagues for that. I will ask one more and then I will let everyone else in. There is another really interesting but depressing statistic in paragraph 4.48 in the report:
“Disability prevalence has risen from 19 per cent of the UK population in 2002-03 to 27 per cent of the population by 2022-23.”
Do your projections expect that trend to continue, to stay the same or to reverse?
I will maybe hand over to Claire and Caroline to speak about what we do, particularly in our report. Broadly speaking, we take the prevalence at the moment and push it forward and change it by age. We do not make a judgment call, which is what we would normally do in our SEFF, where we think about whether the rate will increase or not over the next five years. We take the prevalence and then change the demographics. The disability rate will increase over time, because once it is embedded in the population, the number will rise. We do not make a judgment call about whether disability is going to get worse or whether the rate of self-reporting will get bigger or smaller. However, the disability rate will increase, because there will be a higher proportion in the population.
Thanks very much.
Thank you for all the excellent work that you do. I want to ask about the challenge of trying to measure the effect of putting more money into something to improve outcomes against measures that are not related to money. The reason I ask this is that, some years back—it was probably about 10 or 12 years ago—Reform Scotland did an interesting study on the considerable increase in the amount of money that had gone into education in Scotland in the context of declining outcomes in literacy, numeracy and some other issues.
Building on what the convener said, more and more money is being put into health—that is what has happened in Scotland. Some of the outcomes are not encouraging at all, while others are. How easy is it to get a handle on the effectiveness of measures that are financial—that is, measures that are down to more money being put in—against other measures that are having a positive effect but have nothing to do with money?
That is a great question. The answer is that it is very difficult. We have been talking about this for a long time. You mentioned Reform Scotland. The Christie commission talked about it—was it 12, 13 or 14 years ago?
It was more than that—it was about 15 or 16 years ago.
It was 2010 or 2011. We have been talking about effectiveness for a long time. Our work is trying to provide more evidence that that needs to happen. If we do not do it, we will not improve the budget gap that we have been talking about. We will instead have to cut spending or increase taxes, which will result in poorer outcomes. It has a real impact, and we need to address that.
This starts to stray from where we would have a significant role, but there is a broader comment to be made on what you were discussing earlier with the Auditor General, which is the value of things like the medium-term financial strategy or the long-term fiscal sustainability report, beyond simple trends. We can give evidence about the trends and what needs to happen. However, where is the evidence about the impact that the policies are having? Where is the policy evaluation? Where is the rigour in good policy making? There needs to be the courage to say, “We tried something but it has not had the impact that it might have done and we have the evidence for that. Where can we get the evidence that other policies will work?”
I would not underestimate how difficult that is, because things have long lags before effects come in. You are right that we could look at the value of regulation or guidance versus spending or taxation, and that is always quite tricky to do. The point is to have a robust framework for how you do that, so that you can start to evaluate, run pilots, test the effects, and look at how people’s behaviours change. Perhaps the bit that is missing is that hard-nosed edge of evidence informing policy.
That is helpful. The other side of the coin, but very much a related point, is the fact that there is an increasing imbalance between the working population and the dependent population, which is what you have been flagging up. If we are going to close some of the fiscal gap, the other part of the policy has to ensure that the working population is able and willing to work, apart from anything else, and that it is also able to widen the tax base and return the revenues that we need in order to fill some of the gap.
There is lots of discussion at the moment about the working population and how we attract more people back into the workforce. Again, I do not want you to comment on the policy, because I know that you will not do that, but how easy is it to measure the effectiveness of those policies for getting more people who can work and should work back into the labour market?
Again, that is challenging, but it is not impossible. What I would add is that it is not just about getting people into work but into high-quality jobs. It is not just about creating jobs, but creating high-value jobs that, under our fiscal framework, really matter for income tax. It is about thinking about the sectors that we are looking to attract and the investment that we want to get into them. It is entirely possible to do that sort of thing and look at how a policy might be evaluated.
In the work that I used to do when I was in the Fraser of Allander Institute, we evaluated the small business bonus, research and development grants from Scottish Enterprise and so on. You could look at whether you were actually getting the outcomes that you wanted for your spend. To be fair, that is generally where the UK—not just Scotland—is well behind the best countries in the world in doing rigorous policy evaluation and analysis of the best effects of the policy. Are you collecting the data from day one that can show whether the policy is having the desired impact and then evidence that? If it is working, you can put more money into it or incentivise it a bit more. If it is not, you can stop and move on to something else.
There is a potential political cost to evaluating a policy after it has been implemented. Policy evaluation before a policy is implemented is good practice, but evaluating it after it has been implemented is always slightly tricky. There is a tendency not to do as much as could be done.
The OECD’s recent analysis of the pre-pandemic and post-pandemic working population is also interesting, because it flags up that the UK does not come out of it very well and that we have not recovered to our pre-pandemic levels, either in the UK or in Scotland, whereas a lot of other countries have. Do you have any ideas about why that has happened?
That is something that we can look into; I do not think that we have looked into it specifically.
I am not dodging the question, but my one caveat is that I am always slightly nervous about the data that we have on the UK labour market at the moment. As you know, there have been on-going issues with the labour force survey and levels of inactivity, so we are slightly cautious about that. We can take that away and have a look at it.
It is just that it was quite striking that the OECD report showed that we are not doing very well in relation to other countries. There must be lessons in the fact that we are not getting enough people back into the workforce for whatever reason. We cannot set the policy until we know why people are not coming back into the labour market in the ways that we would like. Anyway, thank you for that.
11:30
Good morning, Professor Roy. I read your report at the weekend and it hardly cheered me up. I was not full of beans afterwards. The picture is quite depressing, not just for us but for quite a number of Western economies. How can we make the labour market more productive in Scotland? Also, how can we effectively increase productivity on a per capita basis?
In that respect, it strikes me that there are three or four different key triggers: lifelong learning; skills; and people working longer, both into their older age and in terms of hours. Indeed, there is a debate taking place in Scotland about the length of the working week, and we have heard the discussion about scaling the public sector working week back from five days to four. What potential impact could Scotland working fewer hours have on our productivity?
That is not something that we look at in our report, but I can give you some general thoughts on the matter.
There are two different views on what the effects could be. The first is that reducing the length of the working week, supporting greater flexibility and so on could have a positive impact on people’s productivity, because it could improve wellbeing, tackle presenteeism and absenteeism and make people more dynamic when in work. Therefore, it could have a positive impact. The other argument is “No, no—it might have a negative impact,” because it could reduce engagement with staff, impact on workload and have different, broader implications for the structure of the labour market. There is a positive and a negative in that respect.
For us, the key point, purely from an economic perspective, is that if we are pulling out labour input, we will need a pretty big increase in productivity to compensate for such an improvement. Even a small improvement in productivity will have to be significant in order to offset, say, a 20 per cent drop in labour input if we go from five days to four.
It is probably a really good example, because the answer to it will lie in trying it out, evaluating it and then seeing what the effect is. I can tell you a good story about it—indeed, I am sure that everyone here will have a great story to tell about its having a positive impact on the economy and its being good—but, really, we will not know until we evaluate it robustly.
The intriguing thing is that, in France and Germany, where people work fewer hours, there is much higher productivity per hour. Of course, that does not mean that the causality runs from fewer hours leading to greater productivity; it might run from there being greater productivity, so fewer hours are required. That is the question that it is important to establish.
Another issue is people working longer into their retirement. Anecdotally, people seem, post-Covid, to want to retire and scale back earlier. The graph of productivity by age is sort of humped, with those in the middle—say, those from 40 to 50—probably the most productive, because as you get older, you have skills obsolescence, a lack of reskilling and so on. What more can we do to ensure that those who are older maintain their productivity, so that, even if they are not working longer when they get into their 50s and 60s, they are perhaps still as productive as those in their 40s?
That is a really good question. Quite a bit of work is being done, particularly in the academic community, to look at the reforms that are needed to deal not with an ageing population but with a workforce that is potentially going to be longer in work. Part of it is thinking about policies—by which I mean not Government policies, but policies for businesses to support people to extend their working life.
Again, I am thinking about retraining opportunities, which might not be the norm for those in their late 50s or early 60s, as the presumption is that they have only a few more years before they retire. Perhaps businesses need to move towards thinking much more about skills and education—to come back to your point—through all the different aspects of the age profile.
Secondly—and I know that colleagues are looking at this, too—there is the question of how you support healthy ageing in a workforce that is getting older. How do you help businesses to put in place supportive structures to enable people of that age to remain in the labour market and work for them?
Ultimately, I guess that this is where flexibility kicks in. When you get into your late 60s or early 70s, you might not want to work five days a week, but you might be thinking about how you can continue to work flexibly in order to add value with regard to younger people as a result of your skills and experience. We need to think more about our labour market being much more dynamic and flexible as people get towards retirement age, rather than thinking that people hit retirement age and that is it.
That is correct. Most of the academic evidence, although it is early-stage evidence, is that there is huge potential benefit in the labour force from that group. However, that requires a change of mindset, so that we do not say, “This person is coming to the end of the line, so what is the point of training them or reassigning them?” All of that stuff that has not historically happened needs to start. There is evidence that it is starting to happen, and that we are starting to think of the labour force as something much more flexible that does not have a sell-by date that therefore restricts it. Although we are delivering a lot of bad news, there is a potential positive from using that longevity to raise productivity among higher age groups.
One critical driver of productivity on a per capita basis is encouraging innovation and entrepreneurship. We know that people who are involved in that are most impactful in terms of their productivity when they are around 45—I think that that is the average age. What more could we do through public policy, be that through tax or other incentives, to get people in that age bracket to start thinking that, rather than work for somebody, they should go out there, take risks and become the entrepreneurs who will drive economic growth?
Again, that is a great question, and it is one that we have come back to repeatedly. Ever since devolution, we have gone back to look at how we encourage entrepreneurship and innovation. We chat about that and have policy initiatives, but have we really turned the dial in a significant way? My general response would be: do we genuinely know the evidence? Have we evaluated? We have lots of schemes to encourage spin-outs from university or to encourage more people to set up their own business, but do we rigorously evaluate and take the time to look at what works over time?
There is a UK-wide initiative called the Productivity Institute, which looks at those sorts of things, and a lot of the evidence that it finds shows that it is actually more of the smaller-scale elements that are absolutely crucial. We think that there is a big lever that we can pull, but what tends to work are things such as mentorship, support for businesses starting out at the first scale and peer-to-peer learning. That is where, as the population ages, older people can provide real value. How can people who have set up and run their own businesses support new entrepreneurs coming through? How do we create an effective incubating structure that self-supports innovation and entrepreneurship? You are right that, ultimately, productivity is one of the key elements to help to tackle the situation.
I want to briefly raise two more issues before I close. Inward migration is often seen as a panacea, but the OECD has pointed out one fundamental flaw in that, which is that the migrant population is ageing. Also, in the countries from where we would draw skilled talent, wage growth means that wages are catching up with wages here. There is also the moral dimension as to whether we should be recruiting qualified doctors from developing countries where they are needed.
Migration might help to sustain us over a period, but, if we look forward a decade or so, there could then be a change in the underlying migration patterns. Are we leaning too heavily on migration as the solution to our structural demographic problem?
We do not comment on those specifics or go into that issue too much in the current fiscal sustainability report, but we did so in our previous one a couple of years ago. On the plus side, migration is potentially positive when it comes to things such as filling the skills gap and helping to boost productivity. However, with higher migration, there is higher public spending. From a fiscal perspective, there is that effect, too.
There is a subtle point. I will maybe not go into this, because we would be talking about it for the next 20 minutes, and I heard Michelle Thomson’s earlier point about explaining the fiscal framework. Interestingly, because of our fiscal framework and the net tax position, we are protected from weaker population growth—that is why we set up the indexed deduction per capita. Because the approach is based on tax per capita, we therefore do not get a massive gain if we have a higher population. We can have a big increase in the population, but what matters is taxation per capita. It is about the ratio of how our taxes grow relative to our population. Because of the fiscal framework, migration is not a panacea that will suddenly massively improve Scotland’s fiscal position.
Use of artificial intelligence, robotics and other technology can also drive productivity. Yesterday, when I was looking at a graph that showed countries that have significant demographic issues and ageing populations—I could not find Scotland or the UK on it—Korea was far up at the top in relation to its use of robotics, which is another way to generate economic growth. Where are Scotland and the UK with using that alternative route to prosperity by bringing in the robots?
You could get robots to do Fiscal Commission forecasts for you. [Laughter.]
I do not know the comparison, but we could look into how Scotland is doing in that regard.
I will provide a couple of caveats. On the broader point, you alluded to the fact that, although skills investment and working longer matter in relation to productivity, the sectors that we have are also important. We need to think carefully about high-quality growth sectors that can generate high-value jobs over time. For example, we know that the energy and financial services sectors are really important. Tech is another sector that can produce relatively high growth and higher returns from relatively limited human input, so there is a clear opportunity in that regard.
There are also ways that public services could be delivered much more efficiently through the use of digital technology and AI, although there is a big caveat in relation to the health sector. As we said earlier, many of the improvements in the health sector could lead to increases in demand, which would increase costs, so the health sector is not like some other public services or business services in which the introduction of AI or robotics would automatically lead to a significant reduction in costs—in many cases, it might actually lead to increased costs. That is not a bad thing, because outcomes would improve, but there would not be automatic savings for the public finances.
Thank you for joining us. I have only a few questions.
First, you observed that your spending projections are based on current policies and do not take account of an additional main challenge—climate change. It would be useful to understand why your projections do not include any consideration of mitigations or adaptations. I am sure that there are several very good reasons for that. What would need to happen in order for you to give at least some consideration of climate change mitigation, given the significant anticipated public sector spend in that area?
The first reason for that is that, last year, we produced a report that focused on climate change, including adaptations and mitigations, and we carefully considered the possible effects of the transition to net zero. Our reports highlight key themes. Last year, we focused on climate change; this year, we have focused on health; and we might look at another theme next year. Our decision to isolate key themes is tactical, so that we can be clear about specific points, and, regarding what Craig Hoy said, we do not want to make people’s weekend reading too negative, although we do want to highlight the issues.
Next, we might look at how the themes interact. In our report, we started to speculate—tactically, we have focused on climate change, health and demographics in isolation, but, when we start to think about it, we find that those themes are heavily connected. With a climate emergency or climate disaster, there could be many effects on the health sector and on demand for other public services. We have not looked at that in great detail, other than to start to speculate about where those channels would be. We probably need to do more work and get more evidence on that, so we might pick up that theme in the future.
That is very helpful. I totally appreciate the complexity. The issue is not just about trying not to make people depressed; your reports could easily become as long as “War and Peace”.
Exactly. It is about trying to isolate the big issues. We need to get people to think about the health of the population and the effect of that on public finances, and we need to think about climate change. When we have been chatting with the committee, we have spoken about other topics and themes that we might look at, such as child poverty or poverty and inequality. It will be useful to have further conversations about what themes we might pick up in our future fiscal sustainability reports.
11:45
I have a couple of little compliments for you, which I want you to enjoy, because it does not happen very often. I was pleased to note that you say that the annual budget gap
“can be thought of as the Scottish-specific fiscal sustainability challenge.”
That terminology is considerably more helpful. You will know that I have passed comment previously on some of the terminology used because it frames Scotland as part of the wider context, including some of the issues relating to the UK economy and fiscal sustainability.
My other observation is that the development of age-sex spending profiles will be really helpful for us in getting greater clarity. That is the nice bit over.
I want to pick up on fiscal sustainability generally in the light of the earlier conversation with the Auditor General, which you will have heard. I think that we all agree that we want more resolute forward planning via the MTFS. However, regarding the debt to gross domestic product ratio, the projection that debt will be 274 per cent of GDP by 2070 is utterly astounding and re-emphasises my point that the Scottish economy and the fiscal framework must be mindful of the position.
How on earth do you and the Government start to fairly reflect the significant implications of that position, which is clearly not sustainable? We will see the UK spending review, but if we are on a whole different trajectory—assuming all things are equal, with the same focus on economic policy, although that could change—I would appreciate your reflections on how on earth you will present that position with meaning to this committee at least, if not to the wider public.
That is a really important question. We can set up the issue, but it is then for the Parliament and the Government to pick up the ball and run with and push it, including through the committee’s inquiry. You are right that the position is not sustainable.
In our report, the key point is that the budget gap will not exist. It is not that there will be a gap of 11.1 per cent of spending; what will happen is that spending will be cut or taxes will rise, because the Government will have to balance its budget, and, before we know it, we will see outcomes being badly impacted.
It goes back to my point that, whatever scepticism we have about forecasts and projections, a large part of it is just arithmetic and involves saying, “This is what will happen as our population ages because of the costs that we have.” We need policy makers and politicians to front up to that by looking not at what will happen next year but at what will happen over the long term.
When you look at the chart that shows the effects on fiscal sustainability in the UK, you will note a subtle point—they start off small and build up, so the risk is that you keep kicking the can down the road, thinking that you will just balance the budget this year, do a spending review that will last for a couple of years and then adjust things at the end. However, in doing that, before you get to perhaps not the next parliamentary session but the one after that, health outcomes might start to look radically different, simply because things are unaffordable.
It goes back to my answer to Liz Smith’s question. We have been talking about this stuff for a long time, but the population is now ageing, which is already having an impact on public service demand.
I have a last wee question. The convener mentioned disability prevalence. Do you have any sense as to why there is that prevalence? The issue has come up in the committee previously, but the projected increase seems quite astounding.
Claire Murdoch or Caroline Carney might want to expand on my answer, but I will mention a couple of things. Caroline answered the earlier question really well—there is consensus that there is that trend, but there is a question about what is driving it. There are links to social media, and some countries are making more aggressive interventions on the use of social media by young people. The pandemic has also had an impact.
Part of the reason might be that there has been a decrease in stigma about people saying that they have a potential mental health issue and therefore accessing support, whereas, in the past, people would not have raised such issues.
There are quite a few areas of speculation, but Caroline or Claire might want to expand on what we track.
In our analysis, we show that there has been an increase in disability prevalence, partly because we have an ageing population and a lot of conditions worsen with age, so there will be more claims.
However, one of the changes is that, at the moment, there are higher prevalence levels among children and young people. We assume not that that will translate to a constantly increasing prevalence rate among young people, but that that cohort of young people will move into receiving working-age disability payments as they age. That slightly pushes up the prevalence.
It is very hard to say why that is happening. We can tell you only what we see and how we project that. However, from a public finance point of view, that is concerning. If the increase in prevalence is predominantly related to mental health and mental illness, we do not want to see that, as a society. If it is to do with a reduction in stigma, that is positive, but there are implications.
When I was watching the news this morning, I found out that I have a mental illness. It was said that hoarding is apparently some kind of mental illness. I have a huge library because I have been collecting books since I was at school, so does that mean that I am a hoarder? One wonders how realistic these definitions are. The definitions might be impactful for individuals, but we have to consider the wider societal impact of how we define some of these things.
Michelle Thomson mentioned debt. That seems to be a difference between the UK’s sustainability—or lack of it—and Scotland’s, because debt is not an issue for us; we have only to cut our spending.
The stark figures show that, at the moment, the UK’s public debt is 98 per cent of GDP and that it will potentially go up to 274 per cent. Is there a psychological level at which the UK Government will have to do something? I would have thought that 100 per cent of GDP would have quite a psychological impact and that getting to 100 per cent is quite a big deal. Can you forecast—or does the OBR forecast—that when we get to, say, 150 per cent, the UK will suddenly change direction? Is it a gradual thing?
The optimal level of debt is quite a controversial topic in the economics community. It is some people’s view that we could have a much higher level of debt, and some people would argue that we could not, because that would mean that we were paying debt interest, which would mean that we were taking money away from public services. Given that it is controversial, I will ask Francis to answer that question.
There are two things. First, economists do not have a number to put on it. We often talk about fiscal sustainability by simply asking, “Can I keep my debt stable?” but we do not say what number is required to keep it stable. We just say that, if you can keep it stable, you are sustainable.
However, you are right. It is a bit like thinking about a firm that is on the verge of bankruptcy, in that there is a point at which it gets into financial distress, its credit rating goes down and its best people leave because they are worried about the nature of the firm’s economy. Trouble does not kick in at once, but then, suddenly, we hit the moment. It is a very slow and steady progression.
That highlights why discussion of this sort is important, because this is the time to address the issue. It gets increasingly difficult to resolve the issue the longer it is left. The point is that it will gradually creep up on you. Financial distress will hit you, grow and grow, and then make the spiral even worse. Dealing with it early is always better.
It is clear from all your papers that if the UK makes a major change in the way that it is doing things—and borrows less, presumably—that will have a big impact on Scotland. I am picking up that you do not know when that might happen and that it is very difficult to predict when that might happen.
The way that the current UK Government thinks about it is that it says, “If we can get a bit more growth, that will solve the problem in the most painless way possible,” and I guess that that is true. If you can do it that way, that is the way to do it.
To illustrate that, one thing that we highlight in the report is the interaction between the UK Government and the Scottish Government and how the outlook for the Scottish Government depends on what happens at the UK level.
You are right that debt is one issue, because there is the question of what a future UK Government might do to consolidate debt. However, what matters is that it would then have a decision to make about whether to change—or at least make adjustments to—reserved areas or devolved areas. For example, if it decided to save a lot of money by reducing pensions, that would have an impact on people in Scotland but it would not have an impact on the Scottish Government’s budget. If, instead, the UK Government decided to keep pensions at a relatively high level but to cut health spending, that would have an impact on the Scottish budget. Similarly, there would be a balance in relation to whether the UK taxed more or whether the changes were more on the spending side. Our report is neutral and we provide a scenario that shows you that, under any plausible circumstances, whatever a future UK Government might do will have a big effect on the Scottish Government’s budget.
In chapter 4 of the report, in the section on the determinants of health spending, you refer to demographics and other cost pressures. I was particularly interested in what you refer to as “the income effect”, which seems to say that, as people get wealthier, their expectations increase and therefore their demand for healthcare increases. You can tell me whether that is a correct summary. Earlier, we heard the idea, which would seem obvious, that, if people’s health improves, we will not need to spend so much on the health service. However, this seems to say the opposite—in other words, that, as people get better off, their health might improve in some ways, but, in other ways, we need to spend more money.
We talk about a number of effects. We focus on aspects such as productivity and health and the detail around that and technology and long-term conditions. On the point about income effects and how the economy changes the impacts on health, there are two important elements. First, there is a general trend that, as people become wealthier and economies grow, people value health as one of the most important aspects of a more prosperous economy. That naturally leads to health expenditure increasing, because people are willing to put some of that growth into health.
The second, more technical element is that we assume, as we do for a lot of public spending elements, that, as the economy grows, that puts pressure on wages in that sector to grow in order to maintain that level. If we did not do that, we would, in essence, have wages in the health service declining relative to every other wage that was going up. Therefore, we assume that we will have to have pay growth for doctors, nurses, health workers and so on, because we have a growing economy and in order to keep pace with every other worker who has to have increased pay, and that leads to a pressure on the health service. That is not an additional pressure, because the economy is, in essence, paying for it, but it is still something that we have to account for with regard to what might drive spending over time.
Being a little bit pessimistic, as I think that some of my colleagues are, too, today, it seems to me that, however well we do, however much we spend and however healthy the population becomes, the demand for health services will just grow and grow and grow. We will never be able to meet the demand; there will never be a time when supply equals demand. You can absolutely disagree with me. We have already mentioned mental health and obesity, which, when I was younger, were not talked about as much or were not there. Something else will turn up. If we sort obesity and mental health, it will be something else tomorrow, will it not?
In part, this is a trend. If you look over time, you will see that, in most high-income economies, more and more money is going into health, because that is the trend in healthcare. On the demographics, it goes back to my earlier point: in essence, you had a pyramid, with large numbers of people in the working-age population funding relatively expensive healthcare for a smaller or elderly population, particularly in Scotland. Over the next 25 years, the pyramid will look quite different, because you will have fewer people in the working-age population and a higher proportion of people who are demanding healthcare as they get older. That will open up conversations, because, if the demand for healthcare is going to increase and it is going to run ahead of funding, there will be questions about how to manage the increase. That is partly about healthy life expectancy, for example, but that will not be everything.
There are then questions about taxation and whether we need more funding going into the health service, which involves potentially difficult choices about what elements we would have to spend less on.
Without going into detail, we take account of the need to have a balance. We are not just saying that, because of demographics, spending always increases. For example, we think that demographic issues will cause spending on education to fall, so there will be some savings in that context.
12:00
I just think that spending on health will keep going up.
The concept of healthy life expectancy points to potential savings in health spending. This might sound a bit morbid but, if people are healthy longer and have only a very short period of illness at the end of their lives, that would reduce health spending significantly, because it is those long periods of illness that are costly to the health service.
I imagine that the Health, Social Care and Sport Committee looks at that issue, so I will leave that there just now.
What can we learn from other countries? There is some uncertainty about why life expectancy has not kept increasing here but, as you said, has increased in Japan. From an article that I read recently, it seems that Poland has an even worse problem than we do with regard to its ageing population and the fact that people are leaving the country, and it will not have enough people for its army. The situation is similar in Germany and Russia. Where are we in the whole scheme of things, and are there lessons that we should be learning from other countries, such as Japan?
That is a great question. I do not know whether the Health, Social Care and Sport Committee and others have conducted significant inquiries into how Scotland compares with other countries, but I think that we make it quite clear at the start of our report that all high-income economies are facing the issue of an ageing population and that there are some countries that face an even more significant problem in that regard than we do. We mention South Korea as an example of that. One of the reasons why South Korea is so heavily into technology and artificial intelligence is that its population is projected to decline quite rapidly over the next few years and decades. It is ahead of us, in a way, in the scheme of things.
In the European context, you are right to say that Poland and other countries also have an ageing population, so the issue is not unique to Scotland. Those countries are in the same boat, and we should think about what we can learn from how other countries are dealing with that. We can look, for example, at what happened three or four years ago in France, when the Government’s plans to increase the pension age led to protests, with the result that those plans had to be rolled back.
Of course, the fact that the issue is not unique to Scotland does not make our situation any easier. We are still faced with the problem.
Would I be right in saying that, despite financial incentives, no country has succeeded in increasing the birth rate?
I do not know. We can perhaps look into that for you.
I think that Finland tried to give people an incentive—
It is very difficult to increase the birth rate, given the demographics of the population.
There are two aspects to the issue of the ageing population. One involves the big bulge of baby boomers, such as myself, who will inevitably raise the average age as we travel through the system. The other aspect concerns the birth and death rates of the population in general, which will change the population structure. However, the key issue that is driving the ageing population at the moment is the baby-boomer bulge.
I want to touch on one final area. I do not see much in the report about preventative spend. In one sense, all health spending is preventative, because spending on health improves people’s health, which prevents illness. However, is there an issue with how we spend the health money? If we put more into general practice and primary care and cut the money going to hospitals a bit, would that have a benefit in the long run? Have you considered that sort of issue?
We do not go into the detail of that, other than to say that certain things could be done. That is where the issue is more in the hands of Government, and I know that it has plans to do much more over the summer with regard to its long-term strategy around health. However, your question comes back to the point that we made about evaluating what works and what does not work, and the fact that, if you can prove that doing something improves healthy life expectancy, that has a public finance implication.
One subtle point that might be useful for your thinking is that a lot of what we talk about with regard to prevention involves investment at a very early age. Our report notes that, over the next 25 years, that is an acute issue for Scotland. However, alongside the issue of investing in prevention at an early age, there is also a question about what we can do with the population that is already in the workforce to make sure that they improve their healthy life expectancy. We need to improve the healthy life expectancy of 20-year-olds, 30-year-olds and 40-year-olds because, on the current projections, they will be the ones who will be demanding more healthcare.
You are talking about things like alcohol, tobacco and all of that.
Yes.
Natalist policies have increased the birth rate in Denmark, but not to replacement level. The only developed countries with birth rates above replacement level are the Faroes and Israel, as far as I am aware. Incidentally, Hungary has said that any woman who has two children before the age of 30 will not have to pay tax for the rest of her life. Who knows whether that will have an impact?
I have a few questions that have not been covered, although the first one is on disability prevalence, which goes back to our earlier discussion. I understand entirely the difficulty with making presumptions about changes. However, as the convener pointed out, we have already seen a significant increase in disability in the past two decades or so. To what extent have you looked into what is underlying that? Have more people been disabled?
Covid would be the obvious reason. As a result of the pandemic, more people are now disabled because of long Covid. The other story, which we have touched on, is mental health. A lot of people were disabled but had not been diagnosed or recognised. Depending on which of those it is, that has a significant economic effect, particularly on productivity. A lot of people in the workforce were disabled but were not diagnosed or recognised and therefore were not receiving support, so they were probably less productive than they otherwise would have been.
There are two potentials there. If the rate continues to increase because we are diagnosing existing disabilities, we could increase productivity by providing people with the support that they need. Alternatively, if people are becoming more disabled than they were previously, productivity could go in the opposite direction. Have you looked into what the underlying data suggests about the past 20 years?
Claire will explain a bit about what we did, and then I will come in with a general comment.
How we project that is based largely on what we see right now, rather than historical trends. The trends of the past 20 years are partly also to do with the ageing population that we have seen in the past 20 years, which, to a large extent, is a UK-wide phenomenon. The OBR has published numerous reports on the effect on disability payments of the welfare reforms that the UK Government has introduced. Those reforms have usually resulted in increases in spending on disability payments, but there is a consistent upward trajectory across the UK in the prevalence of disability benefits and payments. What the reason is for that is a very good question, and I do not think that we can say with any certainty whether it is either of those two reasons.
It is worth saying that, because the phenomenon is widespread, it is hard to say that it is related to policies in a single country. It feels as though there is something more underlying it.
The general comment that I would make comes back to the point about evidence gathering and evaluation. You are right to question whether we are improving the ability to access the right payments, so that people can access them easily, and so on, and whether that can have an impact on productivity in the long term. We need to know that, because it is important and Governments should be able to evaluate it.
Similarly, we know that there is at least potentially a logical argument that investing in tackling child poverty might lead to improved economic, health and social outcomes in the long term. It is a logical argument that I might say makes sense, but does it? What is the scale of it and what is the relative pay-off? Having an evidence base to make that case is really important.
It is particularly relevant at the moment, given that the UK Government has framed the changes and cuts to the personal independence payment as being about getting people back into work, when that payment is not premised on people being out of work. Indeed, a lot of people who have PIP are already in work; it cannot get people into work if they are already there. If they are not there, it is not necessarily for reasons related to that payment. That UK Government decision has an effect on Scotland’s public finance decisions on social security, as you say.
It does, yes. As we have spoken about recently, the first few years of social security were always about the Scottish Government essentially doing a bit more to add to the block grant adjustments from Westminster. However, if the UK Government is going to seek to decrease expenditure or change things such as PIP and things like that—we saw that with winter fuel payments—that will have a direct impact on Scotland’s public finances via the fiscal framework.
My final question is about the extent to which you looked into the urban-rural divide, because I did not see that issue coming out in the report as much as I expected it to come out. We have talked about depopulation, which is a much sharper issue in rural parts of Scotland. It is also more of a west coast issue, so it affects some urban communities on the west coast—Inverclyde is probably the area that is worst affected—but, in general, depopulation is a much sharper issue in rural areas than it is in urban areas.
The provision of health and social care in rural areas is already more expensive. Depopulation makes the situation harder, because it is generally working-age people who are leaving, so it becomes harder to provide social care packages and so on. However, we are probably heading towards a tipping point at which depopulation in rural areas will also start to involve older people, because they will simply have to move to get the care that they need. We should not be getting to that point—it is not a good thing. How much does that issue factor into your thinking?
At the moment, depopulation is pushing up the cost of health and social care provision in rural areas, because working-age people are leaving. However, if we reach the tipping point at which older people, who are more in need of those services, are forced to leave—I am not saying that that will be a good thing, because it will not—that will bring down the cost of provision, because people will have to move to urban areas where provision exists.
You are right that we have not gone into detail on the urban-rural split. However, we have done some analysis of population trends that might impact health boards and of where the effects might be. Given that we look at the national picture, we do not delve into that issue in detail.
I do not disagree that the things that you have said could be really important, because you are right that some savings might be made in some areas because of a lower population, but it is not a like-for-like situation, because there are not the economies of scale. The situation is similar with education. If there is a small decline in a rural population but people still want to keep the school open, that will have a potential impact. However, we have not delved into those issues.
I will broaden out the question by mentioning social care, which is quite an interesting element that we highlight in the report, although we do not go into much detail. We focus on health, but it is interesting to consider exactly those issues in relation to social care. We assume that the policy will stay the same as it is at the moment, so we implicitly assume that, as the population ages, the same proportion of people will provide informal care or care outside the system. That is quite a big assumption to make, but we make it for transparency when we focus on health. What would happen if things started to change? What would happen if there were not a latent labour market that could support such care, particularly in rural areas? That would be another fiscal risk that we would have to explore.
If there were interest in that issue, we could consider whether to explore it when we think about what we should do next.
Thank you.
Ross Greer makes a good point. For example, 37 per cent of universal credit recipients are in work, which is perhaps not talked about as much as it should be.
Earlier, Professor Breedon and Professor Roy talked about the importance of debt and whether the 98 per cent of GDP level could go up to 150 per cent. We can think about the impact on debt interest, because the UK already pays six times more in debt interest than it spends on the NHS in Scotland in a year. Obviously, if debt goes up, interest payments go up, and it is likely that the level of interest will go up because our rating will decline. That is quite an important point.
I have a final question. Michelle Thomson touched on climate change, but your report states:
“This report does not integrate the effects of climate change or the Scottish Government’s climate change response into our projections because the data is currently unavailable.
Climate change has been deemed the most important health threat of the century.”
It goes on to talk about the impact on society and individuals of
“wetter winters, hotter, drier summers ... temperature extremes ... and frequent flooding”
and about the effects on health and wellbeing.
What discussions have you had with the Scottish Government and, perhaps through the OBR, with the UK Government to try to secure that data? In the presentation that you gave last year, you said that it would cost £186 billion, at last year’s prices, in combined funding from the public and private sectors, to deal with the climate crisis. That figure has stuck in my mind. Where are you with all of that?
There are a couple of things to say. First, we have asked for data on climate change, because we need specific information from the Government about its climate change plans, what is in the budget and so on, and my understanding is that that work is on-going. We have sent a data request to the Government. When we review our data request, we will see how much evidence has been provided on that. At the moment, the information that we have is not detailed enough to enable to us to comment on the progress that is being made towards achieving net zero.
12:15We have also highlighted the adaptation piece and the risk piece. To be fair to the Government, that is a much broader question, which will involve collecting and understanding the data in a different way. That is another area in which improvement is necessary. The issue is partly about our existing data ask and partly about the need to obtain a detailed understanding of where climate risks might impact on health. The evidence base on that is slightly less clear. That is not just a Scotland thing—it is a wider issue.
Despite that, there seems to be less focus on that issue than there has been in recent years.
Are there any further issues that we have not covered that you want to emphasise?
No, I do not think so. The committee pushed us quite hard to deliver fiscal sustainability reports, and it wanted an update on demographics. In many ways, that has been helpful. I hope that the report will help to move the discussion on a bit.
We will be in touch with the committee on what we do next. It will be important, not just for next year but as we look to the future, to think about what more we can do to provide more information and greater clarity on fiscal sustainability.
The Scottish Government has given a commitment to hold an annual fiscal sustainability debate, and I am sure that your report will make a significant contribution to our deliberations. Thank you for your evidence. You certainly came mob-handed.
I will wind up the session with a wee advert for tomorrow morning’s event on the report, which has been organised by the Scottish Parliament information centre. It will start at half past 8 in the Holyrood room. Everyone is welcome. Apparently, it will be chaired by a young, dynamic and outrageously handsome MSP, so it will be worth attending for that alone. Bacon rolls will also be provided, which I know is always a big draw. I realise that some members of the committee—Liz Smith is one—will not be able to come along, as they have other committee meetings tomorrow, but I hope that those of you who can, will do so. There will be an opportunity to ask further questions about what is a really important report.
We will have a two-minute break to allow broadcasting and official report staff to leave.
12:17 Meeting suspended.Previous
Scottish Budget Process in Practice