Chamber and committees

Thank you for putting that on the record.

Good morning, and thank you for joining us. We have been nestling around the sides of the budget through the course of the evidence session. We know that the Scottish budget will be particularly tight, and I think that we all understand that without having to go into the detail of it.

Given the cabinet secretary’s relentless focus on economic growth—although I note that she has talked about prosperity for a purpose, which I agree with—against the backdrop of a historical long-term trend of UK productivity being very low relative to that of comparable economies, can she set out her understanding of the macroeconomic environment in the UK? How will the restricted investment in capital, in particular, have a follow-on impact on what she is trying to achieve with economic growth so that we can get vital funding to pay for public services and, of course, increase our productivity?

There is sometimes talk of rediverting revenue to capital. Can you outline the implications in other areas of the budget if that is done?

Following on from that, capital has been extraordinarily important for our enterprise agencies and the Scottish National Investment Bank. Will the cabinet secretary reflect on what she hopes to see for capital going forward? How critical will the 20 per cent cuts on capital over the next five years that the Scottish Fiscal Commission predicts be? What are the implications for the Scottish National Investment Bank and Scottish Enterprise? There have been recent articles in the Financial Times about Rachel Reeves asking for a 10 per cent relative cut in departments.

Before you answer that, I note that my understanding is that financial transactions, which have also been cut, have been used as a loan mechanism because of the absence of capital. That is a potential double drop that limits economic growth and productivity.

A couple of weeks ago, we had the Scottish National Investment Bank and Scottish Enterprise in front of the committee, and Michael Robertson from SNIB—I will just get the Official Report up—commented on the bank’s “perpetual status”. My colleague Murdo Fraser picked up on a question that I had asked the year before about how profit was dealt with under the UK Government budgeting manual. What is the cabinet secretary’s understanding of how the UK budgeting rules align specifically with the UK Government rather than the Scottish Government? The reason why I ask is that Michael Robertson said:

“Where we see potential for advancement within the Scottish rules is on flexibility, and potentially on multiyear investments”—[Official Report, Economy and Fair Work Committee, 25 September 2024; c 28.]

That question is slightly technical, but I wanted clarification of what the UK budget rules are and, therefore, of whether there is any flexibility.

I will be very quick, cabinet secretary. I would not be doing my job properly if I did not ask a little question about the refinery in Grangemouth, which is in my constituency. There has been a lot of talk thus far about opportunities and the work around project willow and so on. However, the cabinet secretary’s interest is in the economy, given her role. A report by Scottish Enterprise noted that the refinery contributed an estimated £403.6 million to the Scottish economy. PWC estimates that, rather than 400 related jobs that could go, there are nearly 3,000. The First Minister has stated that the closure will create a “significant economic shock”. Are we still focusing enough on the economic loss and shock, or is the balance skewed too far at this stage towards what the future might bring?

[Inaudible.]—possibly agree to anything. As I will go on to say, it seems to be a moving feast as we speak—as he would know if he had read The Guardian today.

I would argue that at least three things argue against having a rigid fiscal rule and that we need appropriate flexibility and discretion in its use. First, we never have perfect information about the economy. Secondly, we do not know what future shocks await. Thirdly, we do not have perfect tools to enable us to meet targets. Perhaps it is those arguments, which I and others have been making, that prompted The Guardian’s report today that the UK chancellor is believed to be considering using an alternative debt metric and abandoning the one that she originally intended to copy directly from the Tories.

Nevertheless, those changes will simply increase UK debt, which is currently nearing a whopping £3 trillion and close to 100 per cent of UK GDP. An additional consequence of this dithering is that it is now more expensive to borrow. Despite that, I support—if it is true—more investment, given the chronic underinvestment, particularly in capital, of the UK over decades, which has consistently lagged behind that of other large, advanced economies.

The motion calls on the Scottish Government to use

“every power at its disposal”.

That is fine, but I want to introduce a cautionary note. Existing powers here are very limited and, critically, lack the flexibility and discretion that are needed for overall management of the economy. As a consequence, the very limited powers that we have must not be burdened with the expectation that they can address all areas in need. I am concerned, for example, that tax should not be treated as some kind of easy, short-term fix at the expense of medium and long-term growth. If we want to significantly increase our tax take, the most effective way to do that is to grow the economy. That emphasis on growth is missing from the motion, with its overreliance on limited tax powers.

I will return to the insight provided by Professor Chadha. In considering the wider context of fiscal rules, taxation, debt and policy objectives, he concluded that we need to take

“a decision about how to change the level of taxes to meet expenditures and to what extent debt should be issued to allow tax changes, which are sui generis distortionary, to be smoothed.”

He went on to say:

“The instruments ought to be used to meet the social objective but in our current framework”

—he means the current UK framework, of course—

“they have become the target themselves, and so we have conflated instrument with objective leading to fundamental failures in the regime.”

I watch with great interest to see whether the new UK Government continues those fundamental failures.

Will the member take an intervention?

The motion raises some important issues, but no single motion is likely to cover the full complexity of the issues involved—and neither will my short speech.

I have previously critiqued the new Labour Government for adopting the Tories’ fiscal rules—but do not take it from me. An important essay on fiscal rules was published this week by the distinguished Professor Chadha, director of the National Institute of Economic and Social Research. I will quote his opening line:

“The UK’s current set of fiscal rules are not fit for purpose.”

He goes on to say:

“They have clearly introduced an unintended incentive ... to trade off government investment for government consumption.”

Yes.