Official Report 841KB pdf
Budget (Scotland) Act 2025 Amendment Regulations 2025 [Draft]
Good morning and welcome to the 30th meeting in 2025 of the Finance and Public Administration Committee. The first item on our agenda is an evidence session with the Minister for Public Finance on the Budget (Scotland) Act 2025 Amendment Regulations 2025. The minister is joined by Scottish Government officials Claire Hughes, head of corporate reporting, and Craig Maidment, senior finance manager. I welcome our witnesses to the meeting and invite the minister to make a short opening statement.
Good morning. The Scottish Government is once again on track to balance its budget despite continuing to face a challenging financial situation. Persistent high inflation, lower economic growth across the United Kingdom, the continued cost of living crisis and wider geopolitical events mean that careful consideration has had to be given to balancing the budget. The UK Government’s decision not to fully fund the increase in the rate of employer national insurance contributions has added to the challenges that we face in balancing the budget.
Our prudent management of the 2024-25 financial year has allowed us to carry forward £557 million through the Scotland reserve, which is being used in full to support the 2025-26 position. Those amounts, in addition to in-year Barnett consequentials and an anticipated increase in the social security block grant adjustment, allow us to provide additional budget cover across portfolios to meet the emerging pressures within this budget revision.
The autumn budget revision sets out the funding changes and amendments to the budget since the 2025-26 Scottish budget was set. The revision that has been allocated deploys almost £1.2 billion of additional funding to support our public services. It contains the usual four categories of changes. The net funding changes increase the budget by £1,137 million and include the provision of £697.5 million to support health services, £173.7 million to local government, additional funding for the increased pension age winter heating payment and the removal of peak rail fares.
All the consequential funding that has been received from the UK Government in respect of employer national insurance contributions is allocated out as part of the budget revision. The technical Whitehall and internal transfers are presented in the document in the usual way. The supporting document to the autumn budget revision and the finance update prepared by my officials provide further background on the net changes as well as updates on information that has been requested by the committee. I am happy to answer any questions.
Thank you. Eight or nine months on from the budget, the range and extent of some of the changes is incredible. I understand that, as you pointed out, the health and social care budget has increased by £697.1 million, which is welcome, but £667.8 million of that has been transferred into finance and local government portfolios. Although the net changes are not quite as significant, I wonder whether you can talk us through some of those changes.
At every autumn budget revision—and, often, at spring revisions—the committee raises the fact that the same budget lines are moved every year. The committee has raised concerns about that. Will you talk us through those at this time?
It is important to reflect on the principle that, in most cases, the policy decision on how the funding is spent is in one portfolio but the delivery sits in another. That reflects the cross-cutting nature of the challenges that we face. Portfolios do not operate in silos. Indeed, as the committee recognises, a huge part of the work that we are taking forward through the public service reform agenda is to break down silos and allow funds to flow more easily so that we can deliver on outcomes and not just focus on inputs in the budget sense. If, therefore, you accept that policy decisions need to be made as part of overall policy on health, for example, but the delivery of that resource is through another portfolio, it makes sense to have those transfers.
We get that answer every year—that there is policy here and delivery there. Surely, the policy is where the delivery is. It seems to me ludicrous, frankly, that every year we get this huge shift. It distorts the budget line. I plead again for the Scottish Government to rethink that; otherwise, we will be asking the same questions ad infinitum. It does not seem sensible to me.
I welcome input from the committee on how to address that issue. I would not say that having those transfers is ludicrous; it reflects the complexity of the work that we are doing. The reality is that policy decisions are taken in the round across the budget so that those resources have the greatest impact. The delivery of that does not—
Sorry to cut across you, minister, but if the funding is for delivery in one area, that is really where the policy lies. It is a bit of a mirage to suggest that the budget is ever in health and social care if it is always going to be transferred. The Government’s policy is clearly to transfer the funding every single year to where it is being delivered.
The question is how much is transferred and how that transfer co-ordinates with other work that is happening in that portfolio. Those are important considerations. As we take forward the public service reform agenda, our approach is to recognise that it is more about outcomes than it is about inputs. We recognise that getting budgets in the right place requires them to move between silos. We are breaking down those silos as we focus on, for example, where corporate costs are deployed, how we deploy digital costs across the piece and how we move towards a preventative budget. I can only see it getting more—rather than less—complicated, and we need to work together to understand how best to deal with that. Putting money into portfolio silos and leaving it there is a great way to focus on inputs, but it does not really help to co-ordinate outcomes in a way that breaks down silos.
Let us move on. Technical adjustments increased the budget by £246.8 million. Will you talk us through what those technical adjustments are and what that really means?
Yes, there was an increase of £246.8 million. That includes the annually managed expenditure provision for future national health service and teacher pension costs, which is obviously not available for day-to-day spending. At £141.9 million, AME is the biggest part of that figure. Under Transport Scotland, there is an extra £78.7 million for Scottish Rail Holdings, a non-departmental public body, for the lease costs of existing rolling stock—again, that has no impact on Scottish Government discretionary spending. There is a transfer of £24.1 million within the student loans budget line, which reflects updated estimates for student loan capital and capitalised interest requirements. That is another technical issue that does not have any impact on Scottish Government day-to-day spending.
Another question that I seem to find myself asking every year is about pensions. For example, the justice and home affairs portfolio received an additional £122.6 million, of which £72.7 million relates to police and fire pensions. There is another £141.9 million addition for NHS and teacher pension costs. As I said last year, surely the Government knows more than one year in advance what pensions are likely to be for the number of teachers, firefighters or police officers. I can understand that the estimate might not be exact, but there seems to be a chronic underestimation of what those costs will be, with multimillion-pound increases every year to make up for that. What is the Scottish Government doing to assess those figures more accurately and effectively so that we do not see the same extent of adjustment next year?
I will defer to officials on the technical aspects of that. Pensions are usually a complicated subject. They are affected by a range of factors.
The NHS pensions are dealt with in the AME budget—that is, under annually managed expenditure. AME budgets are very hard to predict and very complex. They are basically balancing payments. We get money from employer contributions to pension schemes, but there is often a gap; the cost of the pension is more than what we are receiving. The volatility element arises out of a correction to that. It is a balancing payment to make up the total value of the pension. That sits under AME—
But hold on—you are talking about £141.9 million, not about £5 million or £10 million here or there. I have looked at the figures over a number of years, and the volatility only ever seems to go one way. It is never overestimated; it always seems to be underestimated. That is a huge amount of money. Surely, the Government must know roughly how many people are going to retire next year, yet it underestimates pensions by £141.9 million for the NHS and teachers alone.
Basically, the Treasury manages the volatility on our behalf for AME budgets. It appreciates that the situation is very volatile and we cannot manage it in our Scottish budget. There is no loss of spending power. If we start changing the conditions or if it reaches a certain value, the Treasury would expect us to pay it out of our departmental expenditure limit budget, but it recognises that it is AME and it is volatile, so it covers the costs because it is broadly similar to what we see in the UK. Justice payments come out of our DEL budget, but the Treasury has recognised that justice should be in AME, because it is far too volatile for us to manage.
I am not suggesting that we change those; I am suggesting that there is concern about the accuracy of the figures, which means that the autumn budget revisions need to be revised more than perhaps they should be. It is about trying to get accuracy in the figures.
If it is helpful, we can come back with a more detailed explanation of how this flows through, but the bottom line is that on paper the number is moving but, in reality, that does not have a day-to-day impact on the Scottish budget. That is a function of a number of factors, including how the UK Government treats it.
One thing that seems to have had a major impact on finances is that the finance and local government portfolio is receiving an additional £204.3 million, of which £144 million relates to local government employer national insurance contributions.
Indeed.
Can you talk us through that?
The overall picture is that the cost of increased national insurance contributions to the Scottish public sector is about £700 million, and the amount of money received from the UK Government is about half of that. Money has been transferred to portfolios to cover those costs, including everything that the UK Government added in to support that—which was barely half of it—and additional funds that the Scottish Government has had to find to help with support for those costs.
In my area, the council is about £6.8 million down, even after the Scottish Government has made those payments, which accounts for about 54 per cent of the increase in council tax this year. What has been the practical impact of that across the board?
The cost runs into hundreds of millions. The total cost is around £700 million, and the UK Government has paid roughly half of that. As for the rest of it, I think that we paid 60 per cent in many cases; I will check the exact numbers. The Scottish Government has made transfers to support portfolios, but you are absolutely right that the pain caused by that has been shared. The Scottish Government is putting in funds where we can to provide support for that to a significant degree, but those funds do not cover all the costs for all parts of the public sector, due to the scale of the impact.
The briefing paper says:
“The Transport portfolio ... has delivered £53 million in capital savings through reprofiling the vessel procurement schedule”.
Is that Government-speak for delay?
It means that the cost that it had estimated is not all being spent in a particular year. We will never be able to judge in advance exactly what the cost profile might be. Things will change throughout the year for a number of reasons. As a consequence of that, as you know, we regularly see a capital position in which not all the capital budget has been spent in that year.
There has been a lot of talk in the media about the alleged £1 billion underspend. Do you want to talk us through the Scotland reserve? I understand that £566.7 million has been carried forward. That represents about 79.5 per cent of the cap last year, falling slightly to just under 76 per cent this year.
09:45
As you rightly say, a figure of £1 billion has been quoted, but that contains significant elements of non-cash items that are not relevant to day-to-day expenditure. The relevant figure is £556.7 million, which represents less than 1 per cent of the total budget of £63 billion. None of that money is lost to Scottish Government spending power. The underspend will allow us to support spending in this financial year.
That figure represents about three or four days’ expenditure by the Scottish Government.
Yes—if we spread things out over 365 days, it represents about three days.
The Scottish Parliament information centre has provided us with some information on portfolios. Earlier, we talked about how money gets transferred from the same budgets to the same budgets each year. If we compare the position when the Parliament passed the budget with the position now, we see that the finance and local government budget has increased by 9.9 per cent, whereas the education and skills budget has decreased by 8.7 per cent. Other variations are smaller than that—for example, the health budget has increased by 0.1 per cent. The fact that there are such huge variations does not reflect well on the budget process. I have heard what you have said about cross-portfolio working, but surely more must be done to ensure that the budget that is passed by the Parliament is, wherever possible, what is delivered across the financial year.
What is important is where the money is spent and the impact of that money on outcomes and services. If we want to compare sets of numbers, it is important that we compare apples with apples. To do so, we need to compare figures at the same point in the process—either before transfers are made or after they are made. That will give a more accurate reflection of how trends are operating. We are very transparent in setting out the transfers and the need for them. We can agree on that. From our perspective, the split between policy and delivery is important, and we are transparent in articulating that. As I said, to compare apples with apples, we need to compare figures at the same point in the process, rather than at different points in the process, so that we can see what shifts have taken place.
Over the years, the committee has pushed for that, and I am pleased to say that there have been some changes in that regard.
Colleagues are keen to come in.
Good morning. I agree with what the convener said about the difficulties when considering year-on-year and in-year positions, given the way in which the figures are presented. According to my tallying up, additional expenditure relating to pay and pensions totalled somewhere between £400 million and £500 million. Given that, as you have said, you need to balance your budget—I accept all the constraints, including those relating to ENICs—had you not been able to draw down that money or had you not received additional consequentials, where would you have found £400 million to £500 million?
That represents less than 1 per cent of the total budget.
It is still a significant sum.
The Scottish Government balances our budget every year. There are rules about how consequentials relating to pensions operate, and those funds are transferred from the UK Government. I am not pretending that the process is easy, but the Scottish Government works on a weekly and daily basis to ensure that, when we get to the end of the year, we balance our budget, as we are required to do.
One of the elements in balancing the budget would involve sticking to your pay policy, but there is significant reference to pay deals littered through the figures. Local government was given another £29.7 million for pay deals, the police were given £6.2 million for pay awards and £85.4 million was provided to address pay pressures in the health service. What are those pay pressures in the health service, for example? Why could you not have accounted for them as part of your 9 per cent pay strategy?
As we go through the year, there are negotiations with the relevant trade unions and workforces to arrive at agreed pay awards, which obviously have an impact on the budget figures. We do not necessarily know at the start of the year exactly what the figures will be. However, the move towards multiyear arrangements—many of the deals now cover two years or more—will provide us with a bit more certainty on the numbers.
We value our public sector workers and think that they should be adequately rewarded. Obviously, the impact of the cost of living and high inflation flows through into those payments. I think that the general public would be comfortable that we are paying the people who are serving them well to do their jobs, whether they are in the front-line in the health service, in classrooms, or in the police service. Unlike down south, we have avoided the need for industrial action, which is important.
You have avoided that so far. Taxpayers would look at it and think, “The Scottish Government is telling us that there is a three-year 9 per cent pay deal, but it already seems to be exceeding that in year 1 of the deal,” which the figures highlight. Should they have any confidence that you will stick to the 9 per cent pay deal over three years?
That is what the policy is based on. Negotiations with each of the unions take place in that context. You need to reflect the fact that inflation will be higher in some years, and it will not necessarily be 3 per cent each year.
In order not to have to cut expenditure elsewhere, if you have set a 9 per cent pay policy over three years and in one area the two-year projection is 7.5 per cent, that leaves you with 1.5 per cent. Does that not mean that you will bust your own pay policy?
The pay policy is in place over three years, which is what we are working to, but you are speaking as though spending money on paying public service workers is not public service; of course it is. Half, or more than half, of the budget goes on pay for the person-centred services that people receive, whether that is nurses, doctors, teachers, or police officers. If we are to retain those numbers and hire and recruit to those services, it is important that we pay people. That is precisely what the public would expect us to do in order to maintain the quality of those services.
I accept that, but it is taxpayers’ money. You set a public pay policy of 9 per cent. What confidence do you have that the 9 per cent will be achieved over the three-year cycle?
That is the policy that we are working to.
How can you compute 7.5 per cent over two years? In the year after the election, are we looking at you potentially playing hardball with the public sector unions, which you have not done so far, and saying to them, “It is 1.5 per cent. Take it or leave it”?
The 9 per cent is clear and everyone understands that. The negotiations happen with trade unions; each situation is different depending on the circumstances. We have had discussions and reached those agreements in the context of the three-year policy for current pay deals. The policy is clear.
You are the minister who is responsible for public sector reform and you have set ambitious targets to reduce the core civil service head count. We are two thirds of the way through the year. How have you achieved on the targets that you set yourself for this year?
As you will be aware, recruitment has been significantly focused on ensuring that we are only bringing in absolutely essential staff, or staff for which there is a cost saving by bringing them in, because we are replacing more expensive contractors or third-party services that are more expensive. There has been a reduction in each of the last two years in the total Scottish Government workforce. This year, the reduction has continued, and we are on target to deliver another significant reduction. I do not have the numbers to hand, but the Scottish Government has fewer staff now than we had at the start of the financial year and we have fewer than we had two or three years ago. That reduction is continuing.
Should you not have the number at your fingertips?
It changes week on week.
Can you say roughly what it is?
I cannot remember the exact percentage, but there was a significant reduction in the first part of the year. I go through the information with officials every two weeks and look at updated numbers every month. We are on target to deliver another significant reduction this year, which will continue in the next five years. We have committed to that reduction.
It strikes me that the vulnerability of the budget this year relates to pay and pensions. There is also an issue with social security. I would have hoped that you would have had the figure to hand, because it is vital to this year’s budget.
I will provide the updated number to the committee to show you exactly where we are on that, but there has been a reduction so far in the first six months of the year, which will continue. We have targets for each of the next five years that we will deliver on, as we have in the past two years.
To clarify, as we interrogate the numbers more closely, we can see the vulnerability. It is possible to bring down head count but employ far more senior civil servants and lose a significantly larger number of those who are on lower salaries, which means that the pay bill is still rising. Do you have confidence that the pay bill as well as the head count will fall over time?
Absolutely, that needs to be delivered. I understand the point that you are making. Part of the answer is that we might bring in information technology staff, for example, who are well paid because of their skills, but that is significantly cheaper than hiring contractors or contracting a third party to deliver those services. That has been a significant aspect of the increased bill for those pay grades, but across the whole budget it has delivered significant cost reductions.
At the start of the next financial year, will you be able to get back to the committee and say that both the head count and the cost of the core civil service fell this year?
The civil service is now operating on a total operating cost that is to target. That is one of the changes that we are making as we go into next year. Something that adds another layer of complexity, which the committee wants to get its head around, is that, traditionally, the total operating budget for the Scottish Government has been allocated by portfolio, so the budget for the core Scottish Government has been a small part of much bigger portfolios’ budgets. We are looking separately at that, through the lens of the total operating cost, and at setting budgets for that. That means that the Scottish Government core civil service has not only workforce targets but financial targets that have been laid out.
But you could still get around that by cutting other areas.
Which other areas?
You are saying that pay and pensions are going to fall. Total operating costs—
The total operating cost budget has been set during the spending review period. Taking inflation into account, there will be a year-on-year reduction in that budget.
I will move to some other areas and points of detail. In relation to the £11.3 million that has been provided for the two-child limit mitigation, am I right to say that that policy will come into effect next year? What is the £11.3 million for?
It will come in in March. A small part of it will fall into this year’s budget.
Fine. There is also the issue of £30.2 million for the Scottish Qualifications Authority to support on-going activities. Can you say what those on-going activities are and why they are one of the budgeted costs?
They are operating costs for the SQA. That budget needs to be reset to reflect the reality of its costs. That is an issue that we need to address.
Why was that not in the original forecasts?
It is the on-going costs of the SQA. You are right—
It is a big chunk of change, though. You do not suddenly find £30.2 million.
If you look back at historical SQA budgets, you will see the reality of what its spend has been. That needs to be reflected in the budget going forward.
It probably should have been in there at the beginning of the year.
In relation to an underspend—this is welcome in some respects, albeit you have net zero targets—significant savings seem to have been identified in demand-led schemes such as remediation to windows in housing. Why is that not being spent?
The total budget across that area was just above £300 million, if you add up all the various schemes that are in play and the funds that are operated. The underspend is about £18 million, so, in the scheme of the £300 million and given that it is a demand-led service, that reflects the fact that 90 or 95 per cent was delivered.
Building societies are saying that people are not borrowing in the same way any more to do that kind of work to their houses. Is the public’s appetite for that sort of activity on the wane?
I think that there is an appetite, which is evidenced by the fact that almost £300 million was spent to support that investment. It will be dependent on everybody’s circumstances, which will be different, but the ability to save on energy bills makes a significant difference. The cost of energy is very relevant; individuals will find themselves in a place where that investment could make a huge difference over time to their energy bills and to the quality of their housing and their lives—not to mention the net zero impact. It is an important investment and clearly there is still an appetite for it.
My questions are about similar areas. To start, where in those figures can we see your agenda for public service reform?
That goes back to the point that I made earlier about looking through that lens. Last year, for the first time, we identified what the corporate costs were across the public sector. That pulled out a number of approximately £5 billion, which has driven the target of £1 billion of savings that we are identifying. The issue is that it is spread across every portfolio in every public body and across Government. Corralling that into one place so that you can see it in a separate virtual pot is an important piece of the mechanics, but it adds another layer of complexity to how you look at those budget lines.
10:00The answer to your question is that, throughout the accounts, the budgeting process is developing to set those corporate cost-reduction targets as part of portfolio budgets. For every portfolio, you will see what has been done previously, what the new budget looks like and, on your corporate costs, whether it is projected that there will be savings. That will be different for every portfolio, depending on the profile, but now that we have the information, we are able to do that.
There is £1.4 billion of additional money available to the Government, and £1.1 billion available to portfolios, but it seems that it is being allocated to the increasing cost of delivering the same model of public services across Scotland. That is my reading of it.
As I said, the targets in relation to the corporate cost savings, which is one part of it, are clear. They have been allocated across the piece. In you look at, for example, the health portfolio through the portfolio lens, you will see that there will be more doctors, more nurses and more spend on various parts of the service, including social care. However, you will also see that the corporate costs are being reduced. Where that sits in the profile of the portfolio at the top level—level 2 or whatever—will depend on the amounts of corporate costs that are in each portfolio; however, there is a very clear focus on the corporate costs and the reductions in each portfolio, and on how they impact the overall budget.
Is that what your scheme amounts to? Is it about bearing down on corporate costs rather than being a different way of delivering public services in Scotland?
There are different parts to it. If you go through the public service reform agenda, there are 18 workstreams in there. I will not go through them all, but some of that is about core efficiency, whether in estates, procurement, digitisation, automation, and so on. A lot of that is in the corporate space. However, when it comes to looking at the size of the prize, you will see that there is a significant amount about how we do integration more effectively, how we join up services and how we invest in prevention.
The whole-family support work is an example of integration. It is about getting a number of agencies in a local area to work together to understand how they interact with the individual and the family they are all supporting—it involves joining up those services. What do you need in order to do that? We also have a workstream on data sharing, so that the same story does not have to be told multiple times. Different agencies and parts of the public sector are then able to provide support because they have the full set of information on the people they are working with. It also means that budgets might need to move between silos at a local level to best corral the resources and deploy them in the most effective way.
There is a whole range of stuff in there on leadership, culture, empowerment and data sharing, as well as on the corporate cost savings.
It is fair to say that very little of that is visible in the briefing. I realise that these are budget revisions and that we would not necessarily expect to see the information laid out as a mission-led piece of work, but when we match it up to your programme of reform, we will have to reflect on whether we are seeing the output.
We are very clear on this. The way in which we traditionally do budgeting—we have been doing this stuff for a long time in the public sector—does not necessarily lend itself to an environment in which there is money moving between silos and to prevention and so on. I recognise that and I am happy to work with the committee on how we address it. Indeed, workstreams 5 and 6 are all about preventative budgeting and how we configure budgets.
That is useful.
On the point about the net zero and housing underspend, that is not a this-year thing; every year, there is significant underspend in different areas of demand-led schemes. That has been the case for quite a while. Have you challenged colleagues who are running those portfolios about whether they are making accurate forecasts of actual demand?
You say “significant”, but if you look at that example, I think that £18 million out of £305 million was carried forward, so around 94 per cent was spent. You make an assessment at the beginning of the process of what the demand will be. There are only three scenarios. We either hit it right on the button—which, statistically, is unlikely—or we spend more or we spend less. We have had conversations about spending more on certain demand-led services and less on others. There will always be—
Is there no concern about that?
The concern would be to get the spending on a demand-led service within 5 or 6 per cent of the budget. I suggest that that would a reasonable projection.
The land and buildings transaction tax has realised about £40 million less than forecast. We have an evidence session later this morning on construction taxes. Can you account for why the LBTT receipts are lower?
That number had been increasing. Last year, the conversation was that we would receive more from LBTT. That is a prime example of where we are either higher or lower. There was perhaps an overcompensation. Historically, that number has increased significantly and, in most cases, it overshot the estimate. I will let officials talk to the extent to which the Scottish Fiscal Commission’s forecast is relevant. It was estimated that the number would continue to increase, but it did not quite increase to the expected level. Again, that is £40 million out of about £1 billion of LBTT in total, so it is within 3 or 4 per cent.
That is an internal figure at the moment. We are still waiting for the SFC to kick off its forecasting as part of the budget work, and we will reflect on what comes out of that at the spring budget revision. There has been a degree of slightly lower than anticipated LBTT take. We did not want to overestimate that at this stage and then come to the spring budget revision and have a significant reduction in funding. We have chosen to revise down our estimate, subject to what the SFC forecasts as part of its budget work.
Housing completion rates are among the lowest in recorded history, and there is a reasonably cool commercial property market at the moment. Does that give you concern, minister? I understand what you are saying about it being a relatively small percentage against the overall figure, but, looking at trajectory and trend, do you have any comments on what you are seeing in the marketplace?
There is a lot of complexity in the housing market. The LBTT numbers, which are a function of house prices and the number of transactions, have been increasing strongly over a number of years. This year, the numbers have not quite met the target, based on previous years’ growth. House price inflation is running ahead of general inflation and there is clearly demand in the system, which is driving both the requirement to increase completions and the work that my colleague Màiri McAllan is taking forward. Reflecting on those numbers, what you are seeing is a housing market that is still active and generating returns. However, we need to consider all that in the round, because house price inflation is good in one sense but not necessarily in another. For example, if you are trying to get on to the property ladder, the market could be too hot. However, considering where we are now, we have seen growth, which, for a number of years, has been stronger than expected. That is reflected in the LBTT numbers.
Would you be comfortable with additional taxation in that area?
Do you mean rates of taxation?
Under the next agenda item we will be looking at a tax on construction.
I think that I am coming back next week to talk to you about that.
I look forward to that.
Looking at the trend in the numbers, do you feel comfortable that the marketplace can take additional taxation weight?
The genesis of the Building Safety Levy (Scotland) Bill follows on from Grenfell and the requirement to find the funds to support retrofitting at-risk buildings. The intention of the building safety levy is, from memory, to raise about £30 million a year for Scottish Government funds over a 15-year period. The total fund required to retrofit is significantly in excess of that, so the levy covers only a small part of it. The rest will come out of general Government spending, which impacts other services. The levy is a mirror of the policy that has been taken forward in the rest of the UK by the UK Labour Government.
That is not an answer to the question; that is a description of the policy.
Indeed—I am rehearsing my lines for next week.
Indeed. We are talking about the trend. My question is, do you think that, at the moment, there is space in the marketplace for additional taxes?
We are very conscious of the cost pressures that house builders, particularly SME house builders, are under. There has been extensive engagement with Homes for Scotland and round-table meetings have been held with SME house builders on that. We recognise that a number of legislative and regulatory cost pressures are impacting on the cost of delivering housing units. I look forward, with interest, to seeing the evidence that you are taking on that this week and I will reflect on that before I talk to you next week.
We will chat about that next week. Thank you.
Minister, I want to explore the issue of the underspend. It is not the case that the money will not be spent. The issue is the timing of the spend, which is something that is perhaps missed in some of the media reports.
Indeed. Thank you for mentioning that.
Nonetheless, this year, the underspend in the economy portfolio is substantial—it is £106 million. That comes on top of the real-terms cut of 8.3 per cent to the economy portfolio three budgets ago, which, as you know, was widely criticised by business and industry.
I want to ask about policy direction. Why is it that, at a time when the Government—rightly—has so much focus on economic growth, the overall spending in Government on the economy portfolio is being put at a disadvantage compared with some of other areas? That money is essential when it comes to boosting economic growth. Will you talk us through that decision making?
I do not have to hand the figure on that underspend, but officials can pull up the specifics of that. Again, what is important is outcomes, and we continue to outperform the rest of the UK in terms of inward investment. We also have strong export growth. Yesterday, I had the pleasure of opening a premises for a Scottish biotech business in Glasgow—a spin-out from the University of Glasgow—with world-leading technology. It is one of many, many businesses in that space, and Scottish Enterprise is supporting its move to new and larger facilities.
That support is there, and it is impactful, but it is important that it is targeted, effective and cost effective, and that we get results from that.
Notwithstanding the fact that there are some good signs within inward investment, there are other very serious signs about the weakness in, for example, productivity and economic growth. It does not sit well with the Government’s focus on stimulating the Scottish economy when there are quite disproportionate cuts to the economy portfolio. I do not really understand why that is happening. It would be helpful if you could explain that to the committee.
First, as I said, we recognise the importance of economic growth—of course we do; it is central to the Government’s mission. Enterprise agencies are not the only players there, but they have a role to play. The funding that is allocated is to support their activities, which are delivering results across a range of areas.
The budget process is about ensuring that we allocate funds as appropriate across all portfolios, given competing pressures—and there is no shortage of pressures across the piece. We believe that the money that is allocated means that enterprise agencies can effectively deliver what they need to. Of course we would like there to be more funds, but they are getting significant results with the funds that they are being allocated.
Two budgets ago, when there was considerable criticism from business and industry, one of their concerns was that, within the economy portfolio, there are quite a lot of enterprise schemes that help with the development of skills, which are essential to boosting both the labour market and productivity. Those things are very real to the potential of the Scottish economy, and it seems strange—I say it again—to have cuts or underspends at this particular juncture, given the urgency of ensuring that the labour market is as buoyant as possible, that productivity is improving and that we get some benefit from economic growth.
I absolutely recognise that we want to be supporting that. As I said, when it comes to economic growth and economic activity, we can pull a number of levers. One of them is the investment that goes into the enterprise agencies, the Scottish National Investment Bank and others. I think that that funding is effective when it comes to delivery. We would, of course, like to spend more but that would be a conversation about the shape of the budget in general. There are competing pressures and it is a question of balance.
10:15
I am not going to ask you to give anything away.
A lot of the specific underspend is to do with historical issues regarding European structural funds, which were running down.
Within Scottish Government decisions about recent budgets, there has been considerable pressure on the economy portfolio and the related enterprise schemes that try to boost growth. Three weeks ago, we took evidence from Colleges Scotland about the pressure within the college sector due to exactly the same issues. Colleges are worried about the effect that pressures on the education budget will have on skills development, and, given that they are at the heart of many of our local communities, they worry about the prospect of another budget in which there will be difficult decisions that will affect their ability to contribute to skills development and economic growth. Can you guarantee that that is at the forefront of the Government’s mind as it approaches the budget?
First, regarding the underspend, we are confusing a number of different issues. The bulk of the underspend was due to the final phase of the winding down of European structural funds. That addresses that point.
We are now moving into the budget-setting process for next year and I can give an absolute guarantee that economic growth is central to the Government’s mission. It is one of the First Minister’s four priorities and we absolutely recognise the centrality of skills provision in that agenda to enable us to drive growth across the economy. That will absolutely be given its place in any discussion about the allocation of funds in the budget process.
We have these tinkering discussions between the autumn and spring budget revisions every year because that is a function of having yearly budgets, and I am always struck by the fact that a lot of what we discuss is just for information and we do not get anywhere near looking at the aggregate picture or the real issues. I am thinking about that because of the convener’s opening discussion about reassigning money to the delivery point. My working assumption is that the Scottish Government does that so that it can retain control, because the only way to retain control of a fixed budget is to have reassignment. Is that correct?
I would not use the word “control”. I go back to the fact that we have a complex and interrelated system and that, in order to set a budget and have accountability, that has to be broken down into chunks or what you might call “silos”. There is huge recognition that one of our biggest challenges is about having the ability to co-ordinate, integrate and join up so that funds flow to where they will make the most impact, which may not be where they sit on the page. That requires flexibility but also co-operation, and money has to move between portfolios to facilitate that.
What underpins all of that is the fact that we have a fixed budget.
Of course.
I have a gentle challenge. Although there may be a shift in the future, there is still ring-fenced funding for local government so that the Government can ensure that its priorities are met. I may have asked this question last year, but why do you not attribute the same discipline to yourselves in respect of, say, the housing budget—I use that example because of the multi-factor economic benefits, although it may be a bad example because of the issue of capital, which we may get to—by fixing that as n per cent of the overall budget?
The problem with “tinkering”, as I describe it, is that it always involves short-termism. If you do not set aside a certain percentage and say that it will always be spent on something that we know gives economic benefits, you are perpetuating the status quo of tinkering. Notwithstanding that, I fully accept that annual budgets are a function of a fixed budget and the role of the Treasury. However, every year I hear about the constant tinkering of moving budget moneys from pot to pot, which has an insidious impact on long-term strategic planning that is aligned with economic growth.
You can call it “tinkering”, or you can call it “agility”, but—
One person’s tinkering is another person’s agility.
There are a number of points in response to that. Yes, we work in an environment where there is a fixed budget, which we need to balance—and it is not even a fixed budget, because it moves in-year, depending on consequentials. Even at this point, we do not know the final position for 2025-26, nor will we for a period of time yet. We are always trying to hit a moving target, but the money with which we have to hit it is also moving. We have to balance all that, which creates complexity. If we were in an environment where we knew the multiyear position from the UK Government, we would be able to lay out multiyear spending for various parts of the system.
With respect, local government does not know that.
Exactly.
However, the Scottish Government says to local government—and you can track the numbers—that an aggregate percentage has to be ring fenced for an entire session’s policy priority. If you can do that for local government, why can you not do it for yourself, as fiscal discipline?
As I said, we are trying to hit a moving target. There are a number of dimensions to it. There is demand-led stuff, which changes; there is what you have to spend, which also changes, depending on the consequentials—
But that is the same for local government—that is the point that I am making. Local authorities always have a whole range of things and are subjected to the same—
I appreciate that, but I do not understand your point. They operate within that environment, knowing that their budget could change during the year, and they have reserves to manage as well. They have the whole range of levers that they can pull, as do we, but we are constrained by that broader picture.
That is my point. I am sorry if we have been at cross purposes. The scenario that you are illustrating for the Scottish Government is the same for local government, yet the Scottish Government will choose to make ring-fenced spending allocations in order to ensure that policy commitments are met and to allow a sufficiently long-term basis for that spending in order to see the outcomes at the other end. My question, or my challenge, to you is, that if you understand that a slightly longer-term picture is needed in that case, and you are saying, “Right. You just need to manage all these other moving parts,” why will you not apply that to the Scottish Government in the areas where we know it would give material benefit on a longer-term basis?
In terms of multiyear funding?
No. Perhaps I am not being clear, but, for example, there will always be money for transport, because everything would fall apart if folk could not travel from A to B. So, the Scottish Government is able to say, “Within an envelope, we are going to be spending roughly X to Z on transport.” You are not thinking, “I wonder if we will get any money for transport next year.” You are making working assumptions about money that will be in the budget.
What I am saying is, why can you not—or will you not—ring fence money that goes into other areas that you know bring economic growth in the same way you would do for transport? Not everything is on a year-by-year basis. You ring fence money for councils and leave them to manage those in-year budget challenges, but you do not ring fence money for particular areas in your own portfolio, despite the vagaries of all the stuff that is happening.
Again, I am not following. Local government delivers services such as education, social care, housing and so on, which are within the total budget. There is complexity in terms of what moves around. Everybody is working within that environment. Unfortunately, we do not have certainty on multiyear funding, and things change in-year.
As we roll out the reform agenda we increasingly find an interconnectedness, with a requirement for flexibility in how funds move. Take whole-family support, for example. That consists of a whole series of funding pockets from different portfolios. The range of public servants who are engaging with a family on the ground will want those elements of funding to be joined up, and that requires a mechanism that allows funds to flow effectively at the local level. That is the reality of what we are doing.
There is very little ring fencing with local government. The vast majority of that has now been taken out and, for the most part, local authorities must now make decisions as to how they allocate the resources.
For the sake of other committee members I will not labour the point, but I want to pick up on AME versus DEL for pension contributions, which is something that Claire Hughes mentioned earlier. I find it staggering, from a Treasury perspective, that pensions have been going through DEL, given their type and nature. How did we get to that position? That surely cannot be the case for other budgets coming out of Whitehall. It seems staggering.
There are arguments for having AME or DEL. The benefit of AME is that the UK Government covers the losses. However, we do not get to keep the gains; if the amount is less than expected, we do not get to keep the underspend, and it goes back to Treasury.
When is it ever less than expected?
Pensions are risky, as has been recognised by officials and ministers. There have been extensive conversations with the Treasury on that, and on the risks that we carry. There has now been an agreement to transfer that budget into AME for police and fire pensions. Their treatment will be similar to that of NHS and teachers’ pensions.
That risk is not a surprise to me, and I suspect that it is not a surprise to you, either. I am therefore surprised that we are in this position. An assessment of risk—not just a treatment of what funds come back—must surely have been part and parcel of the decision on which budget pot those contributions went into. Is that a matter of catching up with what is still a relatively immature system of Whitehall fiscal transfers? Is there something more?
Craig Maidment might have something to add on that. It was a historical decision.
That arrangement has been in play for the best part of 20 years, I think. When the system was devolved, police and fire pensions were attributed to DEL budget in Scotland, and they were DEL in the rest of the UK. There was a point in time when that was switched to AME in the rest of the UK. We did not reach agreement, at that point, for it to be switched in Scotland, and we have borne the top-up element costs out of DEL over the past 15 to 20 years. As Claire Hughes has said, there have been discussions and there is broad agreement on transferring that to AME in future. That will remove that risk, but it has been a relatively long-term feature.
That was just out of interest. Thank you.
That appears to have exhausted the questions from the committee.
I would make an appeal to you, minister. You have mentioned flexibility, and you have talked about the outcomes of most impact. On the credibility of the budget and the portfolios that we discuss and debate as we go through the three stages of the budget, we are dealing with stuff like investment in the integration of health boards and social care, costing £257.2 million this year, a transfer of £79.2 million from housing to local government within the finance and local government portfolio for discretionary housing payments and a transfer of £49.3 million from health and social care to the education and skills portfolio to pay the teaching grant for nursery and midwifery students. Given that such transfers are happening every single year at this point, would it not be much better to have such funds in the budgets where delivery will take place? I do not see how that would adversely affect outcomes, although it might affect how some budget portfolios look, in the context of the public presentation of the budget. There is perhaps an element of that in Government thinking.
I wonder how many more years we will have those continuing transfers for, given that they happen every single year. As the Parliament has to vote for a budget every year, the more the budget reflects actual expenditure, the better it will be.
10:30
Let us explore that issue, because it is important. Let us look at the health and social care budget, which involves the biggest transfer. When it comes to the health and social care environment, the whole thesis is that it is cheaper, more cost effective, better for the individual and better for outcomes for people to be moved through the system into social care. To some extent, the reason that that does not happen is that the funding is not there for that. If we look at the health and social care budget in the round, we can see that it is more cost effective to have that money in the social care environment than it is to have it in the health environment. In order to recognise that balance, the funding is in the same portfolio.
However, the reason for the transfer is that the delivery of social care takes place in the local government portfolio. Part of the issue is that, if we were to keep those aspects of spend completely separate, that would create restrictions on spending on social care, which would affect our ability to invest to the extent that we need to in order to free up beds in acute hospitals. That is a concrete example of the policy being in one place and the delivery being somewhere else, and the need for the relevant budgets to reflect that.
If the money is moved every year, it should be allocated to where it is going to be spent.
The key question is how much is moved every year.
Indeed. Next year, the transfer is going to be £250 million or £300 million. If that money was in the relevant budget, and only £5 million or £10 million had to be moved one way or the other, that would not be the same as having to move such a large sum.
Discretionary housing payments will always be roughly the same amount—they are usually about £75 million or £80 million. Next year, they might be £85 million. We know that the Government will not spend less than £75 million on DHPs next year, so why not just have that money in the local government portfolio to start off with?
The transfer to education and skills for the training of nursery and midwifery students is £49.3 million. If there was £45 million for that in the education budget, members would have a clearer view of what was happening in that area. If you had to move a few per cent here or there, that would be fair enough.
Including the money in the portfolio in which it is spent would present a much clearer and more accurate picture of the budget, not just to parliamentarians but to the wider public.
I thank the minister for his responses to our questions. We now move to item 2, which involves formal consideration of the motion on the instrument. I invite the minister to move motion S6M-19303.
Motion moved,
That the Finance and Public Administration Committee recommends that the Budget (Scotland) Act 2025 Amendment Regulations 2025 [draft] be approved.—[Ivan McKee]
Motion agreed to.
I thank the minister and his officials for their evidence. In due course, we will publish a short report to the Parliament setting out our decision on the draft instrument.
We will now have a break until 11.05, when we will reconvene following the remembrance events in the garden lobby.
10:33 Meeting suspended.Previous
Attendance