Chamber and committees

A number of steps are under way under the Covid recovery strategy. In essence, they envisage a focus on the person-centred delivery of public services. That requires a great deal of alignment of activity from a range of organisations. The work on taking forward that approach is a constant part of the policy agenda that we are taking forward with our local authority partners, the national health service and other players. That is about reforming the way in which we deliver services, so that we support people more directly rather than relying on them to link up public services themselves.

Secondly, we are looking carefully at the functions of different organisations, and colleagues have set out to the Parliament some of that work—for example, in the field of skills, or in what is under way on the national care service.

Lastly, in the discussions that we have had this morning, I have highlighted work on the public sector workforce, and the range and selection of tasks that we expect to be undertaken as part of ensuring that the sector is appropriately sized and equipped to meet the challenges that we face.

Thank you, convener. I add my comments to yours in relation to the bereavement that Mr Gibson has experienced, and I send my sympathies to him and his family.

I welcome the opportunity to meet the committee to discuss the pre-budget scrutiny of the 2023-24 budget and issues in relation to the public finances. The preparation for the budget takes place against a challenging and highly volatile landscape with significant implications for our fiscal approach. From the Covid pandemic to Russia’s illegal war in Ukraine and rising inflation, we are in the midst of a cost crisis that is having profound impacts on households and businesses across the country, as well as creating significant strain on the public finances.

That cost crisis has now been exacerbated by the United Kingdom Government’s mini-budget, which involved substantial unfunded tax cuts, led to rises in mortgage costs, sparked turmoil in the economy and has been described as

“the worst unforced economic policy error”

in a

“lifetime”.

I wrote to the committee yesterday to share the Treasury’s latest estimates of the block grant adjustment impact of the cuts to income tax and stamp duty land tax, which imply a £540 million net benefit to the Scottish budget over three years, including this financial year. In the space of just 10 days, that estimate has fallen from £660 million, which is a fall of 18 per cent.

As the committee is aware, those estimates should be treated with a significant degree of caution because they are not informed by independent forecasts from the Office for Budget Responsibility. They also assume that Scottish tax policy will remain unchanged. However, the United Kingdom Government’s mini-budget poses important questions for our devolved taxes policies. My judgment is that we need to take the appropriate time and care to consider those implications as part of our annual budget process. As part of that work, I have established an expert panel of economists who will assess the impact on Scotland of the Chancellor of the Exchequer’s fiscal approach.

It is also essential that we engage more broadly on the tax and spending choices that are before us, including our commitments, priorities and values as a Government. Alongside the review, I will therefore publish a discussion paper to encourage public engagement on those important and difficult choices on tax and public expenditure.

The committee will be aware that the Office for Budget Responsibility is now expected to publish its forecast earlier than the originally proposed date of 23 November. The OBR forecasts are crucial to our budget planning and they will allow Scotland’s block grant adjustments for 2023-24 to be calculated. Those forecasts will inform our approach to setting the Scottish budget and will provide information to the Scottish Fiscal Commission to inform its independent forecast. It is vital that we base our budget decisions on high-quality information, and I am unreservedly committed to doing exactly that.

I am keen to discuss and agree with the committee a timetable for that work on the budget, and we will do that in due course. The committee will also be aware that I am expecting to conclude the Scottish Government’s emergency budget review in late October, the purpose of which is to identify any further resources that could be deployed to assist those who face hardship in these challenging days. I look forward to addressing any questions that the committee has.

First, I make the general point that the committee will be familiar with the length of my involvement in the public finances. I have been a minister continuously for more than 15 years. I was finance minister for nine years and I have now come back into that role. I therefore have a fair line of sight of the Scottish Government’s finances, and I have never seen financial strain of the order that I am wrestling with just now—not in the aftermath of the financial crash in 2008 and not even in the years of austerity from 2010 onwards.

The situation is of a different order, and it is a product of extreme volatility as a result of the events that I cited—Covid, which led to an increase in the public sector workforce; the enormous disruption that has been created by the unwarranted and illegal invasion of Ukraine; and the impact of inflation. Frankly, and to be blunt, that has been made worse by the backwash of the mini-budget, which has been a disaster for the situation that we face. The pressures are therefore absolutely colossal. That is why I have already had to come to Parliament to announce reductions in public expenditure this year, and I might have to do more of that in the period that remains. The challenges that we face are therefore significant.

I understand clearly the need to give the public sector workforce reassurance about how we intend to tackle that issue. I have already embarked on discussions with trade unions about the strategic approach to that, because we must take the greatest care in building as much confidence as we can around those approaches.

Undoubtedly, the public sector head count will have to reduce in the spending review period and throughout the current parliamentary session. How that is done is crucial, and I want to do it in the spirit of partnership with our workforce. I want to be open about the steps that we are taking to do that. We already have recruitment controls in place, which are tempering rises in employment. Recruitment controls mean that, in some circumstances, vacancies are not being filled, which reduces the public sector head count but in a managed and careful fashion, which is the approach that I want to take.

With each budgetary event that we go through, we must reflect on how we can best address the strategic challenges. That is the approach that I will take throughout the discussions. I welcome the dialogue that we are already having with trade unions, which have a clear and legitimate interest in ensuring that the workforce is dealt with properly and with courtesy and dignity. That will be my approach throughout that challenge.

In general, that should be the case.

The UK Government would like the idea to be rolled out across the whole of the United Kingdom. It can provide, in essence, a foundation for the approach, through national insurance contribution concessions, but some of detailed and specific provisions that are in the guidance document for England, which I have had a look at, relate to devolved issues, that is, mostly planning and environmental considerations as well as a variety of other questions. The UK Government is engaging us properly on the substance of those considerations.

I rehearsed with Mr Mason some of the issues that I have with investment zones. We have to be careful about the effect of displacement. Does a zone generate new economic activity? Are there alternative ways to support activity? I assure you that we are engaging with the process in a constructive spirit and that the UK Government is engaging constructively with us.

First, I acknowledge Liz Smith’s candid comments. I think that they help the quality of our discussion and reflect the reality of the situation. I also reflect on the exchange that Liz Smith and I had during my closing speech in the programme for government debate on 6 September. One of her colleagues—I will not disclose who the colleague was, to avoid causing any disruption to their prospects in life—told me that it was an example of the more thoughtful contributions that Parliament could do with more of. I am certainly interested in engaging in that type of discussion, because we face difficult challenges and there are no easy answers.

I welcome the timely question that Liz Smith puts to me about economic growth, because it allows me to illustrate the Government’s approach, based on some conversations that I had yesterday at the convention of the Highlands and Islands in Oban, which brings together a variety of public sector leaders from the region. Fundamentally, the Government’s growth agenda is based on the national strategy for economic transformation, from which I would draw out a few key themes. The first is an emphasis on innovation and creativity; the second is an emphasis on the importance of regional economic policy; and the third is a recognition of the importance of activating as many levers in our control as we can in order to support economic activity. Those are three of the big themes from the national strategy that I would draw on.

In one respect, the conversation that I had yesterday with the convention of the Highlands and Islands was enormously encouraging and motivating, because we talked through a more buoyant set of economic opportunities than I have seen in a long time in the area. For example, there are the ScotWind developments, the prospects for technological development around the Beechwood campus in Inverness, some of the related energy activity that is going on in Orkney, Shetland and the Western Isles and a variety of other economic opportunities, including in the tourism sector. There is a huge range of economic opportunities.

However, the challenges that were identified would best be summed up by four factors: availability of the workforce to deliver the opportunities; availability of housing at all levels of the market, not just affordable housing; transport connectivity, including issues about ferry services—those issues were very much to the fore of the discussion—and finally, digital connectivity, where there was a recognition that we are in a much stronger place than before but still have some way to go.

On the one hand, there are some substantial economic opportunities and prospects but, on the other, there are four chunky policy issues, three of which the Scottish Government can help to influence, and one—the availability of people—that is a real shared endeavour and challenge. We have historically low unemployment, although that might not be the case in the period ahead, and we are reducing the level of economic inactivity in Scotland. That is happening slowly, but I expect it to be slow, because trying to reduce economic inactivity invariably takes a lot of focused activity. Fundamentally, however, we are short of people. That is the consequence of the loss of free movement under EU membership.

I am getting a sense that the UK Government is beginning to realise that the loss of migration is a problem—Liz Smith may be party to some of those discussions. I am picking up elements of dialogue within the United Kingdom Government that recognise that the whole of the United Kingdom is getting short of working-age population. I hope that that opens up recognition of some of the steps that we need to take to address that.

I hope that that gives you a flavour of my thinking on those issues.

Yes, there are serious issues about the size of our working population, which is why I thought it absolute madness for us to give up free movement of EU citizens. Even if we had to leave the European Union, why we could not have stayed in the single market is totally beyond me. As an act of absolute self-harm, it is beyond belief.

I have been around here for ages and I remember vividly that, 20 years ago, Jack McConnell’s Administration was obsessed by the danger presented by the decline in the working-age population. I take my hat off to those members—they were totally obsessed by the topic. They did all that work on the fresh talent initiative. Jack McConnell phoned me, as leader of the SNP at the time, to ask if I would support the policy so that he could get good cross-party agreement. There was a lot of rancour between my beloved party and the Labour Party at that time—how things have moved on!—but I gave Jack McConnell unreserved support on that. It was a good idea and it made a bit of headway. Then, in 2002, EU expansion took place, free movement of citizens was enabled and our population started rising.

I think about the community that I represent. My son has just left primary school. A third of his class were the children of EU migrants who came here as young people 20 years ago, started working, met people and made their family life here. They boosted our population, and we did not have to worry about that for 20 years. We need to worry about our population now, and the situation is completely and utterly self-inflicted.

If we could have some thawing of the attitude towards migration, that would be of great benefit. I cannot magic up people out of thin air. Yes, we can work hard to try to activate people who are economically inactive, and I commit to doing that. We are doing good work on that—great pathfinder projects have been undertaken in Dundee and Glasgow to activate economically inactive people—but we are still short of people. That change of attitude would help.

Liz Smith puts it to me that there are forecasts of growth in the United Kingdom. That is not quite what we have got yet. We have got rhetoric about growth; we have not got any forecasts. The forecasts will come from the OBR and we will all have to wait to see what that adds up to.

In the mini-budget statement, the single policy initiative that was about growth was on investment zones—that was it. If the chancellor believes that the OBR will come along and say, “Yeah, yeah—these investment zones are going to be the absolute dynamo and that’s going to deliver 2.5 per cent growth,” my response to that would be, “Good luck with that,” because I do not think that that will be the case. I do not want to foresee OBR forecasts too much, but I suggest that the chancellor will have to come up with an awful lot more growth-related initiatives to substantiate an OBR forecast that would get to 2.5 per cent growth, given what we are experiencing now. Indeed, if the chancellor wants to repair the public finances without making spending cuts, the growth assumption will have to be higher than 2.5 per cent.

Lastly—forgive me for the length of my answer, convener; I am not really helping you with your time management, but there is a lot of really important stuff in here—I unreservedly accept the importance of the Scottish Government having an agenda that is about realising our economic opportunities. I mentioned the discussions that I had yesterday about doing that in one part of the country, in the Highlands and Islands. We must take the steps to enable that to happen.

On the housing question, I accept that we must look at what we can do to help. However, housing developers in the Highlands and Islands tell me that one of the biggest impediments to their building new houses is the availability of people—they just cannot find people.

On people’s availability, that has been fundamentally affected by Brexit. There will be other factors, but that is undoubtedly the key factor.

As I said in my earlier answers, we have to make careful judgments about tax policy, because we must be mindful of the legitimate issues that you put to me. However, we must consider those in their proper perspective, which is why I cite the other issues, including the need to consider what the total relevant housing costs are. Property prices are higher in England than in Scotland, so people will have to be able to command much more substantial salaries to afford those properties if they are trying to buy them with a mortgage.

A variety of other measures in place in Scotland provide some degree of difference in the availability of public services, whether that is in relation to lower council tax, no tuition fees, more early learning and childcare, no prescription charges and so on. There has to be careful consideration of all those questions.

My final point is on the mini-budget. The chancellor took the decision to change stamp duty on the basis that it would stimulate the housing market in England. He has done enormous damage to the housing market in England, because of the fiscal recklessness of the mini-budget and what it has done to interest rates. I have read stories in newspapers about people who were all set to buy houses but cannot now do so because interest rates have gone through the roof. Those young people were full of hope about getting on with their lives. With total recklessness, the chancellor has just shattered all that.

Forgive me for wanting to be careful about the tax decisions that I take, but on the basis of what the chancellor has done, a lot of misery has been created for people who were about to take big steps in their lives and have had that taken away from them.

We are contributing towards the financing of some of that new housing activity but the fiscal model has to be sustainable.

It is an issue that the Parliament and the Government have to be careful about in relation to the rent freeze question and what implications that has. We have to be open about any potential implications that come from that, but undoubtedly it is an example of an approach to co-investment where we need other parties to be able to undertake fiscally sustainable measures.

I come back to my answers to Liz Smith on the challenges that we face around realising economic opportunities. The housing challenges that we face are not just about the Highlands and Islands; the convener’s constituency will face acute challenges in relation to housing availability and workforce, and the necessity to ensure that there is accommodation to contribute towards economic growth. The last thing I want to see is any lack of constancy in the housing investment programme. It is not a capital saving that I would be particularly interested in pursuing.