Chamber and committees

We have been joined by Kate Forbes MSP, Cabinet Secretary for Finance and the Economy, for our second evidence-taking session on the Scottish budget 2022-23. Ms Forbes is joined by Scottish Government officials Lucy O’Carroll, who is the director of tax and fiscal sustainability; Douglas McLaren, who is the deputy director of budget, pay and pensions; and Ian Storrie, who is the head of local government finance. I welcome the cabinet secretary to the meeting.

I remind members and witnesses that our broadcasting team will operate the microphones and that they should pause for a few seconds before speaking to ensure that they will be heard. I intend to bring members in to speak in the order that we discussed earlier. If anyone would like to come in at another point, they should type R in the chat function.

All questions should be directed to the cabinet secretary, in the first instance. If Ms Forbes wants an official to respond, she should make that clear so that the broadcasting team can bring them in.

We have up to two hours for the discussion. Before we open up the meeting to questions, I invite Ms Forbes to make a short opening statement.

Of course.

That concludes the committee’s questions absolutely on time. I thank Jackson Carlaw and the supporting officials for their evidence.

I suspend the meeting for five minutes to allow final checks to take place before the cabinet secretary takes questions.

In your statement on 9 December, you said:

“On income tax, the Government’s priority has been to make the tax system fairer and more progressive, and to protect low and middle-income taxpayers.”—[Official Report, 9 December 2021; c 72.]

However, on page 18 of its briefing, SPICe says:

“Scottish taxpayers who earn between the proposed Scottish higher rate threshold (£43,662)”—

that threshold has not increased by inflation, and neither has the UK one—

“and the rUK higher rate threshold (£50,270) will pay 41% income tax and 12% NICs on their earnings between these two amounts – a combined tax rate of 53%.”

That means that people in Scotland who earn between £43,662 and £50,270 will actually be paying more in tax than people who earn more than that. Someone earning £51,000 will have a marginal rate of taxation of 43 per cent, because of the 10 percentage point reduction in national insurance. How can that be deemed to be progressive, given that that includes many people who have families and large mortgages?

I can understand your argument about the UK, and, obviously, that is something that I subscribe to. However, if people earning over £43,662 are going to be confronted by a 54.25 per cent marginal rate of tax, perhaps the threshold should have been increased, rather than allowing the fiscal drag to ensnare more people in that tax net.

There has been a lot of debate and discussion on the resources that are available to the Scottish Government, but there has not been much debate on capital and infrastructure. Everyone accepts the figure on page 2 of the budget: there is a 9.7 per cent reduction in real terms of the draft capital. That is backed up by the SPICe report, on page 34. That has significant implications for Scotland’s capital programme, particularly as the cost of materials is still much higher than the general rate of inflation. What projects in Scotland are likely to be put on hold, from repairing fewer potholes to building more schools? What are the implications of that severe cut in capital resources?

We are scrutinising this budget, not the budget that we might like to see.

In that case, we will go straight to questions. I will base my initial questions on the statement that Professor Roy has just made. You basically said that we must look at public service reform, and that we must be genuine in that reform. However, the issue will be about how we bring in genuine reform and move towards prevention, more efficiency and better use of the public pound, and whether such reform will be seen simply as cuts, and so on. Could you address how we can approach that?

The second issue is, regardless of whether we do that and regardless of whether it is successful, there is still a long-term issue around the sustainability of the public finances and the relative divergence in tax revenues between Scotland and the rest of the UK. Following on from that—I will ask David Eiser to comment on these matters, too—what can we do to reverse some of the issues with productivity that we have in Scotland? If the economy was 1 per cent more productive per year than it is now, for example, we would not face this problem for much longer. How do we address those broad issues? I ask those questions before we get into the meat and drink of the budget itself.

David Eiser touched on the Scottish Fiscal Commission assessment, which sits half way between the Scottish Government’s and the UK Government’s assessment of the figures. In paragraph 9, the Scottish Fiscal Commission says:

“Overall the Scottish Budget in 2022-23 is 2.6 per cent lower than in 2021-22, after accounting for inflation the reduction is 5.2 per cent.”

As David Eiser said, one of the issues is that that includes the drawing down of resources. What are the implications for the long-term sustainability of Scottish finances, given the fiscal framework that we have to work within, which has become increasingly tight through inflation and so on?

You touched on the issue of demographics, which was discussed a lot in the session with the previous witnesses and in the pre-meeting private session.

David Eiser, perhaps you could touch on that. I would also be happy for you to respond to any of the points that have been raised. We discussed, for example, the fact that immigration is down, perhaps because of Brexit; the birth rate is down; and even the number of younger people who are in tertiary education is down. However, we still have a high—in fact, a record—number of vacancies in Scotland. Around 100,000 people, or roughly 4.5 per cent of the working population, are unemployed. If those people were in productive employment, that would make a difference. What could we do to upskill those people in order to improve market participation and reverse some of the trends that we currently see?

You were going to say something about capital, David.