Chamber and committees

As you can imagine, over the past few years in particular, local government has looked extensively at ways of generating income. For the most part, local authorities have developed their own schemes. We saw that impact acutely during Covid, when some local authorities were more exposed to income reduction than others. You will recall that I put in place funding to cover the fact that some local authorities were no longer generating income during Covid.

On additional taxation powers, prior to the pandemic, we were in discussion with local government about a number of different local taxes, including the tourism levy, on which members, the Parliament and people beyond the Parliament have different views. We were considering the most comprehensive devolution of additional tax-raising powers to local authorities since the advent of devolution. Covid has put a temporary stop to some of that.

However, I am sympathetic to allowing additional fiscal flexibilities for local government. If we call for fiscal flexibilities for the Scottish Government, it is only right that those be passed on to local authorities. We have managed to secure some temporary additional fiscal flexibilities for local government; in fact, we have been more successful in securing temporary fiscal flexibilities for local government during the pandemic with the support of the Treasury than we have been for ourselves. I am very happy to continue to explore with local government what additional powers it needs, but I stress that different authorities have different balances of income from different taxes, other fees, charges or income, or from the Scottish Government. That is how it should be. Local authorities should be able to tailor their income generation approach to local circumstances.

I do not know whether it is just my connection. I am struggling to hear committee members.

I should say at the outset that we of course track Scotland’s economic performance very closely, not only because of its implications for our revenue position but because it is important that we track our performance in relation to that of the rest of the UK, given the operation of the fiscal framework.

Although Scotland’s gross domestic product is still below pre-pandemic levels, it is gradually recovering and it is continuing to broadly track that of the UK as a whole. As you said, convener, the pace of recovery is different across not just geographies but sectors, and it is clear that some sectors are more exposed to the bottlenecks in supply chain and recruitment. Food and drink, for example, which is a particularly important Scottish industry, is facing severe challenges as a result of rising prices and labour market shortages.

The Scottish Government stands ready to do whatever we need to do and can do. That includes close engagement with the UK Government. Richard Lochhead is leading on the labour market shortages and is working hand in glove with industry to intervene where we can. One of the most obvious interventions that we can make is in the skills system.

However, I strongly emphasise that I do not believe that the shortages and challenges that we are talking about can in any way be resolved through the Scottish Government’s budget alone. We have a role to play, and we play it and take our responsibilities seriously, but it is well documented that the acute labour shortages that we face right now are largely to do with immigration policy, over which we have no control.

We can intervene. Some of those interventions might look small, but we are doing what we can, for example by funding a marketing campaign to try to recruit more people to the hospitality industry. I am sure that industry will say that that is small fry compared to what it really needs, which is the ability to access visas and bring in far more people to work in the sectors that we are talking about.

The same goes for supply chains. We engage closely with our UK Government counterparts—I have regular meetings—not least on the challenges to do with gas prices and the CO₂ shortage, which has been temporarily fixed but not resolved for the long term. Those are acute issues.

I guess that what I am trying to say is that, where we can intervene, we absolutely will do, but I do not think that anyone is suggesting that the Scottish Government can resolve the issues. Certainly, from a budget perspective, financial support will go only so far: the issues are much bigger.

Again, that is an important question. Last year, we had a guarantee. Where money was announced, it was guaranteed to come. However, prior to the pandemic, the way in which the UK Government funded the Scottish Government was by making announcements and confirming the funding at key points in the financial year.

On our funding position, we have allocated £980 million of the £1 billion of Covid consequentials in the budget revision, which I imagine the committee will take evidence on over the next month. The Minister for Public Finance, Planning and Community Wealth will lead on that. On top of that, we have drawn down £168 million of balances from the Scotland reserve to support the health service and farming in particular. The balance that is left for formal allocation following the budget revision, which the committee will take evidence on, is £328 million, of which £250 million relates to capital and financial transactions that are being deployed across a range of pressures for capital budgets, such as in health, transport, energy and education.

Obviously, there is a difference between funding that is allocated formally through the budget revision and our on-going internal budget management in the Scottish Government. Every single penny has been earmarked or allocated, and the money is supporting our in-year budget position. Where we have not formally allocated funding, we will do so once we have had reassurances from the UK Government at the supplementary estimate.

In short, I cannot confidently allocate every penny without the Barnett guarantee until that funding has been formally guaranteed for me by the UK Government. We expect the Treasury to provide an update on additional funding for 2021-22 alongside the spending review in late October. Formal confirmation from the UK Government often happens in the days after the spending review. We will be in discussion with it to get that formal confirmation of our spending so that we can ensure that the Parliament, through the budget revision, has a formal allocation of every penny.

You are right that this is primarily a justice issue and that, ultimately, when it comes to policing such issues, responsibility lies with Her Majesty’s Revenue and Customs and with Companies House, which both come under United Kingdom Government competence. Obviously, Police Scotland has a role when it comes to suspected criminality. However, with regard to funding, when something is a reserved matter, it will be funded on a UK-wide basis, which means that consequential funding will not be generated for the Scottish Government.

Please come back to me if I have misunderstood any element of your question.

We are still trying to fully comprehend what the impact will be, particularly on economic growth. A lot of our attention has focused on the impact on employees, rather than on employers. Let us consider the example of the hotel on the Isle of Skye that was in the press over the weekend. The owners were lamenting the fact that VAT is increasing, that they cannot secure labour and that prices are increasing across the supply chain. The national insurance increase is clearly another issue for such businesses to contend with, on top of a number of pressures that they are facing.

You will recall that we were all set to devolve air passenger duty when we discovered a pretty major issue to do with subsidy control in relation to the Highlands and Islands air discount scheme. We had extensive conversations with the UK Government about where the matter would sit. We could not expose our finances to any potential liability before the matter was resolved—as it had to be—with the European Union.

In the past six to nine months, however, the fundamental issue has moved slightly because of Brexit. We will want to progress the matter in our discussions on the fiscal framework. Ultimately, the challenge was to resolve the issue of the Highlands and Islands exemption before air passenger duty was devolved.

I hope to discuss it. We are not seeing a huge appetite for change, and I have not had much evidence of such an appetite during the pandemic when we looked for temporary fiscal flexibilities. I think that the discussion is unlikely, but there is an opportunity for civic Scotland—if I can put it like that—on a cross-party basis to come to a position on borrowing that is good for Scottish businesses and the Scottish economy, and is not new, since local government already has it.

The Scottish Fiscal Commission obviously has to judge our projections of capital borrowing, and its most recent report said that they were reasonable.

Yes and no. I wrote to the UK Government in the immediate aftermath of the announcement of the health and social care levy to seek clarity on various points. The response that I got did not actually give me any of those answers. The big question remains what we will get in additional consequentials. In the past, when there have been announcements about increased spend on health and social care that have generated consequentials, we have later discovered that those have been netted off against funding that was due to come anyway, so it is not all additional. We know what the UK Government has publicly announced for Scotland, but the big question for 27 October is whether that will all be additional or whether some of it will be netted off against decreases in other health and social care lines, so that it is not, for example, a net additional £1 billion.

That is a great question. From a technical perspective, being able to have a wider mix of tax powers would be far more effective for the management of our budget and of the economy. Taking business support as an example, we have just spent time discussing non-domestic rates despite the fact that that is not a business tax but a property tax. It would be good to have a broader mix of tax powers and to have all the powers associated with income tax as well as a wealth tax and perhaps capital gains tax. It would be helpful to understand and have responsibility for the interactions between national insurance contributions and income tax.

My first ask would be to have a far more comprehensive toolbox of tax powers at our disposal, so that we are not basing all our action on a few narrow taxes that cannot bear the weight of what we ask them to do. That is certainly true of income tax and that position is universally shared by tax professionals.

The second thing would be to be able to manage year-on-year volatility in the budget. It is hugely detrimental to have an arbitrary cap of £300 million for forecast error. It reduces our ability to plan ahead and it means that when forecast error exceeds £300 million, as we have seen in previous years, actual money that could otherwise be used for public services must be used to deal with the forecast error. The ability to manage our budget in year and from year to year needs to be considered.

My final point is that we should have a prudential borrowing scheme that is based on affordability. We already have to base capital borrowing decisions on affordability. I have to deal with the revenue consequences of capital borrowing in future years. I know that. The medium-term financial strategy sets out how we manage it. The notion that we would not use borrowing powers prudently if we had them does not bear scrutiny. We have had to do that in part with capital borrowing. All that we are asking for is something similar to the prudential borrowing arrangement that local government has.

Those are the three items on my wish list.