Chamber and committees

There are a number of issues in your question. First, there is a legitimate and proper place for borrowing for investment in our economy. We have borrowing powers. Mr Mason asked me whether the value of those should be increased. There is always an argument for that, but there must also be fiscal sustainability. When finance ministers set budgets, they must be confident that we can service the debt that we take on. However, borrowing for investment in the infrastructure of the country is total common sense. We do it successfully.

There is then the scenario of borrowing to deal with the dynamics of change and fiscal shocks. We have a small degree of borrowing capability to deal with a Scottish economic shock and we have some fiscal flexibility about how much money we can carry over from year to year to deal with a shock. We are using some of that flexibility to the maximum now. That still does not prevent me from having to redirect £560 million of public expenditure from previously expected projects to meeting the in-year costs of pay demands and inflationary pressures that are much greater than were anticipated when the budget was set. Therefore, I am planning on the basis that I have to find about £700 million more than I anticipated in this financial year to fund pay deals. That is why I am having to make the changes that I am making.

There is an argument for saying that, in the circumstances that we have, with inflation at, currently, 9.9 per cent compared to 2 per cent when the comprehensive spending review was undertaken or even 5 per cent at the start of the financial year, we should have some resource borrowing power to avoid having to take some of the dramatic decisions that we have to take. We do not have that flexibility just now. It would be helpful to have it but I come back to my fundamental point that those powers must be exercised in a climate of fiscal responsibility and sustainability, whichever way we exercise them.

There is an immediate short-term issue that revenue from LBTT might not realise our expectations. Equally, it might exceed our expectations. However, there is a substantial interruption to the housing market just now, so I think that it is likely that revenues will be undermined as a consequence. The forecasts that we undertake are designed to provide as much certainty as possible about the implications of the policy decisions that we make. Essentially, we will be mapping out what our policy approaches will be, securing projections on the basis of those and making financial decisions accordingly. However, those factors are material to the performance of the budget.

It might be helpful if we could write to the committee to give absolute clarity about those details.

Some of the same issues apply. We are still in discussion with the UK Government about the agreement that was reached earlier about having two green freeports in Scotland. Bearing in mind my point about displacement, if we have too many of these things, it is all—to be blunt—just swirling around. I hope that you understand the point that I am making.

Potentially, but those obviously flow into the level of growth that we can assume within Scotland, along with a range of other factors.

I suppose the best way to express it is to say that it will affect the purchasing power of the Scottish budget in the years to come.

If we are undertaking future borrowing—if we are in any way co-investing in a proposition with other interested parties, which the Government does from time to time—that will be a factor that we will need to consider.

If we take, for example, some of the investments that our enterprise agencies or the Scottish National Investment Bank might make, these are invariably co-investment propositions. The ability of other parties to co-invest, which we rely upon so that there is a sharing of risk, might be jeopardised because of those factors. There are a variety of knock-on effects that we may face as a consequence.

Without a doubt, yes. We have to look with care at capital projects. I am looking all the time at what the expectations are on capital projects because of the disruption to supply chains from Covid, exacerbated by the illegal invasion of Ukraine and all the disruption that comes from that, and the impact of energy costs. All of those factors are putting pressure on capital project budgets and we have to be very careful in the management of those sums.

Throughout my involvement in any of these questions, I have always been struck by the importance of investment certainty and attracting commitment to the market. I will take the example of renewable energy. Since 2007, we have given absolutely cast-iron policy certainty on our commitment to renewable energy. The reason why we have such phenomenal progress on getting to a position whereby, in essence, Scotland’s net electricity requirements are generated in their entirety by renewable energy is that we have given that certainty to the marketplace.

Therefore, I accept, fundamentally, the argument that Michelle Thomson puts to me. The Government has given a long-term commitment to the Scottish National Investment Bank. Although, as the committee will understand, I am not at the stage of defining particular budget numbers, the Government is committed to supporting the Scottish National Investment Bank and all of its purposes in the long term.

However, in all honesty, I cannot assure Michelle Thomson that I can insulate Scotland from the damage that has been done by the chancellor’s decisions and the investment uncertainty that has been created, because, fundamentally, the pension funds that she talks about will look at the United Kingdom and the decisions of the United Kingdom Government. I am not surprised that they are all very anxious and nervous about it, because it has been a total fiasco since a week past Friday. I cannot overstate the damage that has been done—on top of an already really volatile situation—by that fiscal recklessness.

I fear—I am really worried—that, in order to go from veering off to that extreme to the other extreme of creating market certainty, the casualty will be public spending, in particular the public spending that vulnerable people in our society depend upon. That is my big fear about where we sit today.

We monitor the position very carefully. The data on transactions and on the volume of tax generated is published monthly. The information about what has happened to the number of transactions and to revenues will be available. If we decide to change LBTT rates in any way, that will be part of the projection work that is undertaken and information about that will be set out to Parliament.

There are a number of things that we have to do to address that issue. Mr Greer’s characterisation of much of the debate is entirely accurate.

In the course of the limited period of time that I have been back in the finance and economy portfolio, many people have told me to, invariably, use the reserves, but they are all being used; borrow, but we cannot borrow; increase tax, but we cannot increase tax by law; and, finally, get down the back of the sofa and see what is there. Those four options do not provide answers to the challenges that I face, hence my statement to Parliament on 7 September.

Some of the answers to the problem that Ross Greer has raised lie in the points that I exchanged with Liz Smith in the programme for government debate and in our discussion during this meeting. In Parliament, we need to have a totally realistic, open discussion about the relationship between tax and spending. What we are prepared to argue for in spending terms, we need to be prepared to argue for in tax terms. I use “tax” as a catch-all for tax, revenue raising, level of borrowing—in other words, the income side of things. Let us have a proper discussion about that. I am very open to having that discussion. I not sitting here saying that there are easy answers; really difficult decisions will have to be taken and we will have to have a climate of openness.

I do not know whether you heard me say this in my opening remarks, but I am doing two things this year that I hope will help in that respect.

First, I have invited three significant economic voices to provide commentary to our debate—dispassionately; it is for them to construct their contributions. I had a briefing session last week with Professor Anton Muscatelli, Professor Frances Ruane and Professor Mike Brewer, and I invited them to reflect on the issues with which we are wrestling. I suspect that the discussions in this morning’s meeting will be a helpful reference point for them. They will contribute to the debate and set out some of the issues that we have to consider. I expect that group to make a couple of interventions in the debate. I have told it that I do not want recommendations and that it is up to me to decide what to do and what to put to the Parliament. However, I want it to help to inform commentary and discussion on the situation and to be as dispassionate as possible.

Secondly, I will open a consultation process on the various challenges that we face when it comes to tax and public expenditure. I will publish a discussion paper to encourage public engagement on choices. I expect to do that around the timing of the emergency budget review.