Chamber and committees

I will start with income tax. It must be borne in mind that I have no choice but to accept SFC forecasts and figures—I am obliged to spend within SFC forecasts—so, in a sense, whether I accept its forecasts is almost a moot point. However, when it comes to income tax, the final position on the performance of income tax revenues next year—the year for which we are setting the budget—will be known only once the outturn data is published in 2024. My issue in next year’s budget is to manage the reconciliation from two years ago, which was one of the lowest reconciliations that we have had to manage.

I come back to two points that I have made already. One is that managing budgets over a long period requires you to set multiyear spending reviews, and the spending review will need to factor that in. Therefore, the spending review will be able to allocate only the funding that we expect to receive. That includes grants from the UK Government as well as the income tax forecast. We will need to spend, and, once the outturn data is published, we will need to manage any reconciliations. In the past, forecasts of those reconciliations have nearly always been revised multiple times. The best way to deal with reconciliations is, of course, through resource borrowing for forecast error.

That confirms the point that we have made throughout the fiscal framework discussions that we need borrowing for forecast error to recognise the levels of volatility, whereby, in one year, the error could be £309 million and, in another year, it could be £14 million. We need to be able to manage both those levels. The borrowing powers are designed to smooth that path or trajectory, and to avoid our having to use real spending power for forecast error, because that is what it is—when it comes to the reconciliation process, we are talking about forecast error.

Social security is another challenge, because it is a demand-led budget, so we need to manage that. We have taken a slightly different approach in Scotland, which is, as far as possible, to promote uptake of social security benefits, because we think that people have a right to those. We will need to manage that.

My final point is that you will tell me—and I will agree—that the best way to deal with all that is to have economic growth, shared prosperity and fairness. That will not be delivered single-handedly by one budget. A budget is a list of spending commitments, whereas this is as much about policy as it is about spend.

We will need to manage that. There is not really any other answer but that we will need to manage that within our resource spending review. Come back to me if I am misunderstanding the question, but the nature of social security is very different from that of income tax, because social security is demand led. I will therefore need to meet that demand—I cannot say halfway through the year, “Sorry, I’ve run out of money”—and we will need to take intelligent decisions about the nature of social security in order to meet that demand.

I fear from the look on your face that I have perhaps misunderstood the question.

Absolutely. You have hit the nail on the head. We cannot get away from how important the resource spending review is. I have to manage a trajectory of spend. In each budget, I can almost manage a snapshot of spend. This year, to get from A to Z, how do we plan?

The spending review will allow us to do two things. First, it will allow us to spend over multiple years, which can drive reform, and to manage budgets. It is difficult to drive reform on a year-to-year basis, as we end up budgeting for the immediate challenges in front of us, rather than for the challenges in three years’ time.

The spending review also leads us to expect—and the SFC is forecasting—that, in two years’ time, social security spend will be a certain figure, so we need to manage other budget lines on a trajectory of getting to a position where we are dealing not with huge cuts but with a plan that gets us there. That will not be easy.

When you say “lagging”, will you tell me what metric you are using?

In other words, you are basically talking about earnings growth.

The balance of the initial £220 million was based on health funding that was already expected. We actually anticipated £120 million of additional health spending, but only £75 million was agreed. Therefore, with the second batch of £220 million, there is automatically a £45 million shortfall, which we have used to top up the original expectation on health funding.

I will answer that question in parts. On the size of the budget, you are right that the Scottish Fiscal Commission’s figure is the one to prioritise because, ultimately, I cannot spend a penny more than the SFC has forecast. That really matters in terms of the overall size of the budget.

Her Majesty’s Treasury’s figures are useful too, because, as is indicated in its publication “Block Grant Transparency”, the block grant is less than the current aggregate for 2021-22 in every year of the spending review. For resource, that will mean a £2.6 billion real-terms reduction for next year, and for capital it will mean a £0.5 billion real-terms reduction in 2022-23.

The convener referenced the forecast deficits. One of the key points to make is that we will use the forthcoming resource spending review to plan future years. On social security in particular, but also on income tax, we know that the Scottish Government needs to manage those within its budget and that our choices have a direct impact on the level of funding that is available.

There is an argument to be made—I have made it in the past and will continue to do so—about income tax and the methodologies that are used for bulk grant adjustments. You will know about the forthcoming review of the fiscal framework; I hope that the matter will feature in the review. However, to put it bluntly, I say that, when it comes to social security, the uncertainty—it is a demand-led budget—needs to be managed within a fixed budget. That is where multiyear spending plans are essential.

This is the first time for a number of years that we have been able to make multiyear plans. Inevitably, that will require that we make some very difficult decisions. However, at the end the day, that will allow us to plot out and plan how best to allocate the available funding to meet our evolving priorities over subsequent years.

Thank you for the way that you have asked that question, because it allows us to bring more light than heat to the issues. I am happy to go through the figures, one by one, to explain. Just for the record, I have no issue with Audit Scotland’s very important report, because Audit Scotland plays a hugely important role.

Regarding the figures on page 104, £580 million is the figure that has been identified not from Covid consequentials but from the total Scottish budget. That is against an overall budget of about £50.7 billion, so it is about 1 per cent of the total.

If we divide that further, £207 million of that is underspend on capital projects. That is primarily because of the impact of the last quarter when, as you will recall, we were in lockdown. A lot of initiatives were not able to proceed and could not draw down that capital. There was an appeal from community groups, local government and others to try to manage that slippage into this year. All of that funding has been allocated on an on-going basis to capital needs, including for infrastructure. One of the key lines, where there was an underspend of £321 million, was in transport infrastructure and connectivity.

On the issue of resource, I draw your attention to the fact that it is the health line that is seeing a significant underspend. You might wonder why on earth that is the case with health spending during a pandemic. You will recall that, in the last month of 2020 and the first few months of 2021, there were considerable late consequentials, particularly for things like vaccination programmes.

I recall the conversations that I had with health colleagues at that time. If I had obliged them to spend all that money in the run-up to the end of the financial year, that would not have made for a smooth spending pattern into this financial year. So, we agreed with health that we would try to manage some of their budget through the reserve, to meet the challenges prior to the end of the financial year and immediately after the beginning of the new financial year. In other words, that prevented any strange behaviour if they had desperately tried to draw down that money before the end of the financial year. Instead, they could manage the Covid response over that bridge of 31 March.

I realise that I am going on. I want to answer your question about where the money has gone.

The autumn budget revision was passed just a few months ago. It has formally allocated £560 million of that original £580 million. All the lines that show where it has been allocated are in the autumn budget revision, which gives a full account of how the money has been spent. You will see that health is drawing down a lot of that funding.

With capital, there is almost an opposite risk in that it has to be managed over a longer time period because of the risks of Covid. That is where we get into the territory of trying to figure out how we carry forward funding from year to year. Last year, the situation was acute, given that—as I said—we had a lockdown in the last quarter. We then had to figure out how not to breach the limits of the reserve drawdown, and how to ensure that all that funding would still be available to us in subsequent years. Technically, local government can carry forward more funding than we can. The risk, therefore, is in ensuring that money can still be managed and drawn down.

As you can imagine, that is part of the reason for the length of the dispute. I believe that the Scottish Government should be properly compensated as per the methodology and the agreement with the UK Government.

The key is that the funding assumption that we have made in the budget should not prejudge the outcome of the dispute resolution process, and we will continue to engage with the UK Government in good faith as we progress that process.