Chamber and committees

Happy new year to you, convener, and to members of the committee and its parliamentary staff.

When I set out the budget in December, I indicated that it was a particularly challenging one to construct. We are managing a range of unprecedented circumstances due to volatility from global factors, the impact of inflation and the cost of living crisis, and the consequences of the September fiscal statement from the United Kingdom Government.

Across the Government, through the emergency budget review in this financial year, we have taken difficult decisions that have resulted in a total of £1.2 billion of reductions in public expenditure, which has allowed us to meet the costs of increased public sector pay and to provide further help to people who have been most impacted by the cost of living crisis. I am still working to ensure that we can forge a path towards balancing this year’s budget, and have applied the assumption that there will be no carryover of resources into next year’s budget from this year.

In developing my approach to the 2023-24 Scottish budget, I have taken the necessary steps to continue to maximise the Scottish Government’s support for people in Scotland during the cost of living crisis. The pressures on this budget cannot be overstated. We have chosen to act to do everything in our power to deliver for the people of Scotland. We are confronting the challenges that we face by increasing taxation for those who are most able to pay, to enable additional investment to be made in the national health service at this critical time. With this budget, we are choosing to invest in Scotland and focus on eliminating child poverty, prioritising a just transition to net zero and investing in our public services.

I welcome the opportunity to meet the committee to discuss the Scottish budget in more detail and to assist in its scrutiny process.

It is not for me to explore or explain the numbers from SPICe. I have put forward the Government’s numbers and our assessment, which we have made in a transparent way. That indicates a number of points.

First, the impact of inflation can be viewed and judged in a variety of ways. If I recall correctly, when I was last at the committee, I was asked whether I would use the GDP deflator and I indicated that I would, because that was important for consistency in the way in which budget documentation is presented. Having said that, what the Office for Budget Responsibility and the Fiscal Commission said to the committee is accurate. The GDP deflator is a measure of comparative effect from year to year, but the effects of inflation will present themselves in a variety of ways to different aspects of the public services and public finances. Although the numbers that I present are underpinned by the GDP deflator, I cannot ignore the fact that, in reality, the ability or capacity to spend is eroded by the effect of inflation.

On the details of the numbers in the budget, the budget documentation clearly shows that, between 2021-22 and 2023-24, there is a real-terms fall of 3.2 per cent in the Barnett resource funding that the Government has available to it. We have taken steps in the budget to address some of that impact. Through the decisions that we have taken on tax, we have tried to overcome some of the effect of the erosion of the contents of our financial settlement and the capacity to spend as a consequence of the effect of inflation.

Of course, convener. As a consequence of our decisions on tax alone, £519 million is available to be spent in the Scottish public finances that would not have been there had we not taken those decisions. According to the Fiscal Commission, in this financial year, the budget benefits to the tune of about £1 billion as a consequence of the cumulative effect of the decisions that I and my predecessors in the role have taken over the past few years.

Convener, you are correct that the philosophy behind all of this is that we must take a balanced approach to ending child poverty. We take into account direct financial support to families and efforts to maximise families’ income, and, crucially, we emphasise the move into employability and employment for individuals and families. It is essential that those three elements are kept in proper balance because, as you correctly put to me, convener, if there is an imbalance in those measures, there is a danger and a risk of creating a disincentive for people to enter employment. For example, there could be and is pressure on me to increase the child payment to a higher level than it currently sits at, but that would not be an appropriate step because it would risk disincentivising employment. A properly calibrated balance has to be established in that respect, and I think that we have found that balance in our proposals.

In relation to the timescale, we are obviously anxious to make as much progress as we can, and we have statutory targets to meet in that respect. The statutory targets are essentially the milestones that we have to achieve, but the Government is working to make progress within an earlier timescale. Given that, comparatively speaking, we have a lower level of child poverty in Scotland than exists in other parts of the United Kingdom, I am optimistic that the measures that we are taking are working effectively in that direction.

Any budget has to balance all those factors. We are—correctly, I believe—taking steps to support people who face significant vulnerability and hardship; equally, we are investing to increase the productive capacity of the economy. For example, the commitments that have been made to sustaining investment in the Scottish National Investment Bank demonstrate the Government’s support of exactly the agenda that you are talking about. I have made specific provision in the budget to fund the Techscaler programme. The enterprise agencies have had budgets that provide them with stronger resource settlements than they would have anticipated in the resource spending review. The expanded investment in our university sector is designed to assist in that respect, too.

The medicines manufacturing innovation centre venture that you talked about will be a collaboration involving universities, private companies and various other organisations. In the nature of that collaboration can be found some of the most substantial opportunities to enhance the productive capacity of the economy.

If you look at the totality of the budget measures, whether it is the support that we are providing to assist new ventures, the investment through the SNIB or the investment to support employability that is about broadening participation in the labour market, you will see that we are taking a range of measures to ensure that Scotland is an attractive place for investment. The data speaks for itself in the sense that, outwith the south-east of England and London, Scotland remains the most attractive and successful destination for inward investment of any other part of the UK.

Discussions on the local governance review are part of the invitation that I have made to local government to work with us on constructing what I have described as a new partnership between national and local government to work collaboratively on shared endeavours, which is what we did on the Covid recovery strategy. Inevitably, that will be part of those discussions.

We will simply have to look at that on a project-by-project basis. We need to see what price estimates are coming in for projects and make a judgment on the nature of the sustainability of those projects. That will be an on-going consideration during the year, but it is important that I flag up to the committee at the outset that that is a material consideration in how we proceed through this period.

I am mindful of the fact that there will be wider considerations to be borne in mind—a point that Michelle Thomson has made—about the importance of constant attention to the affordable housing challenge. It is an important point, and one that will weigh heavily in decision making and determination on these points. As we speak, commitments are being made in relation to affordable housing projects in the current financial year, despite the fact that we face enormous external pressures.

Those are technical challenges. My officials wrestle with such questions, as does the Fiscal Commission. We depend on the commission’s final view on behaviour change—as I said to the convener, it is right and appropriate that I depend on the commission’s conclusion.

I was finance minister for many years and have come back into the area after a bit of a gap, and I make the observation that the arrangements are a great deal more complex than they were when I left the role in 2016. The issue that you put to me is just one example of an area where there is a need for a more sophisticated understanding of the choices and decisions that people make. That issue is being constantly addressed, to try to ensure that the work is of the highest possible quality.

Of course, we are talking about predictions and assessments. There will be outturns, and we will see the validity of some of those judgments in due course.

I have not built assumptions on pay into the budget. I have undertaken—using the most careful judgment that I can deploy, by looking at the challenges and pressures that exist across the public sector—to look at what the best distribution of public resources is and, obviously, judgments about pay have to be made within the parameters that are set by those judgments.

That depends on where we end up in this financial year, because I have an expectation—or, perhaps, a prediction—about where we might end up during this financial year, and as I have said to the committee a couple of times today, I am not in a position to see that in balance, so part of the sum that I have not yet been able to reconcile will involve an assumption on certain pay deals. For example, the difference between 2 per cent and 5 per cent for the teachers’ pay deal will be in my contingency element, which I have not yet resolved. If I get to the end of the financial year and have an underspend, and there is the difference between 2 per cent and 5 per cent for a teachers’ pay deal, then that that will go into the carry-over, but if I have not been able to balance this year’s budget, then that money does not exist.