Chamber and committees

I have not compensated the NHS for national insurance contributions. It has chosen to use part of its budget for national insurance contributions. That obviously has an inflationary impact. There is not a line in the budget that we received that is for national insurance contributions. I have taken the overall budget and allocated it, and all public bodies are being expected to absorb the national insurance contributions.

Thank you very much, convener. I thank the committee for allowing me to come and give evidence so soon after publication of the budget. Events over the past two weeks have almost overtaken the budget that was published, so this scrutiny session is hugely important.

This is another challenging budget; it is probably the most fiscally challenging budget that I have been involved in over the past few years. It is now, I hope, beyond debate that our overall funding for next year from the UK Government is falling. On the other hand, I recognise that our funding is greater than its pre-Covid levels. We can get into some of the numbers and the data during our scrutiny session.

I am keen to provide as much transparency as possible on the budget, given the extreme levels of volatility and uncertainty that exist right now, particularly in our fiscal outlook. I have set out clearly where we have had to make assumptions about our funding and I have set out some of the difficult choices. Even before omicron hit, it was clear that public services’ responses to Covid would continue beyond the end of this financial year.

Over and above the impact of Covid, it is important, as part of our recovery, that we push ourselves to be as ambitious as possible within our fiscal constraints. It is very much a budget of choices and it is a transitional budget, as it continues to address the immediate pressures in the NHS and supports the recovery effort. It should be seen as a step on the road to our resources spending review for the longer term. The choices that we have made are all informed by the priority themes of tackling inequality, supporting economic recovery and fulfilling our net zero obligations.

I know that the committee has been busy this morning. I know also that predecessor committees have been interested not only in where budgets are spent but in how they operate, so I commend the report on budgets that I saw this morning from David Bell, David Eiser and David Phillips, which underlines the need for fiscal flexibilities and guarantees at a time of volatility such as we are in just now. I hope that that is in line with many of the committee’s previous discussions.

I look forward to the committee’s questions.

On your first question about the UK Government spending review, I think that I answered that when I pointed out that our budget will fall in every year of the spending review period. That is a challenging outlook for Scotland that underlines the challenging choices that we have had to make.

The other element is the opportunity for investment in, for example, infrastructure or the transition to net zero. From a capital perspective, the UK Government can do that through borrowing; ultimately, I am constrained by what is allocated to us in the spending review.

As for the overall budgets, I can take you through the detail of the net zero, energy and transport and finance and the economy budgets, but I have to make it clear that this has not been an easy budget. For me, the bottom line is that although, on one hand, we have headlines about record funding for Scotland, on the other there are hard choices to be made in determining where the funding is to be spent. In the net zero, energy and transport portfolio, we have absolutely prioritised investment in the transition to net zero; you can see in the budget the significant investment that is being made in climate change initiatives and the huge investment in energy. We are ramping up delivery of the heat in buildings programme, doubling Home Energy Scotland’s budget to deal with energy efficiency and investing in hydrogen and carbon capture and storage via the emerging energy technologies fund. Significant investments are being made.

I will go back to the point that I started with. This is a budget of choices, and one of the three key themes that we have chosen is investment in the transition to net zero. You can see that in the infrastructure portfolio.

With regard to the finance and the economy portfolio, I have chosen to prioritise our enterprise agencies—Scottish Enterprise, Highlands and Islands Enterprise and South of Scotland Enterprise—and the Scottish National Investment Bank, as key levers and agents of economic growth. There will be views and opinions on how they can do their jobs better, so I am engaging with them. From a budget perspective, that is what I have prioritised.

The report highlights that business investment as a share of gross domestic product has increased in the past decade, but it is still low by the standards of the Organisation for Economic Co-operation and Development, and it has fallen in the two consecutive years since 2018.

What are we doing already? Our global capital investment plan, which was published earlier this year, does what it says on the tin—it tries to attract additional investment. The inward investment plan was published in 2020.

Those are both key to improving Scotland’s business investment performance. We have seen good data tracking against that, but these are not things that can be delivered within a matter of months. We have already set ourselves a business investment target.

If I heard correctly, the second part of your question was about innovation and the fact that the share of innovation-active businesses in Scotland was about 32.2 per cent, which was a decrease from about 50 per cent in 2015. That area is one of the key elements of the national strategy, which looks at how we develop actions to improve Scotland’s performance. Among the five objectives of the strategy, one is on productivity and another is on entrepreneurship, and they are closely aligned to innovation. It is about us incentivising businesses to do what they want to do, rather than us making substantial investment. A few sectors that are doing exciting things, from manufacturing through to the green economy, which is leading the way on innovation.

I do not think that it will be deployed differently, because that would just create a big hole somewhere else. If I move that money, all it does is give me a headache elsewhere. It is not new money.

There was a lot in that question. I will ask Lucy O’Carroll to comment, but we need to get beyond the headlines of what this means and what it does not mean. We might automatically think that it means that earnings are not growing in Scotland, but earnings grew in every year between tax devolution and the pandemic. There is clearly a challenge around the fiscal framework, but let us park that, because I have already talked about it, and it has been made clear that, where we see stronger earnings growth elsewhere, it still means that our budget is being reduced.

You mentioned the north-east of England. Of course, it does not have tax devolution. There will be an impact on its position and, more generally, we know that there are some inequalities there, but we also know that particular sectors in Scotland have been hit hard by Covid. I talked about the oil and gas sector, which contains some of the highest earners in Scotland. It has been through a tumultuous time and we have seen big challenges there, so I think that we need to understand that more.

I will move on to the solutions. You talked about labour participation, and I will bring in Lucy to comment on that. One of the keys here is to understand precisely where the challenges in the Scottish economy are and are not. There are some difficulties in relation to economic activity, and we are looking at how we can get more people into work. There are good reasons why many people are classified as economically inactive. For example, they may be carers, stay-at-home parents or students. However, there is another cohort who are economically inactive due to long-term sickness or for other reasons. We have invested intensively in things such as the no one left behind approach in order to bring those people closer to the labour market, although it is an incredibly expensive process, because the individuals need a lot of wraparound help and care.

I will stop at this point, if you do not mind, and invite Lucy to comment, because she is the expert on all things tax related, and particularly the aspects that get to the nub of the problem that we are discussing.

The £620 million is obviously for future years, but it was based on assumptions of funding that had been announced but not allocated. That is all baked into next year.

The first £220 million was not a direct overlap, but announcements had been made that we had already baked into our budget; we had not assumed that we would get funding. For example, the £145 million relating to material change in circumstance, which the UK Government previously announced for businesses, was included in the £220 million, as well as in the £620 million. That illustrates that there is considerable overlap between money that the UK Government announced as new but which is already very much factored into our budgets, and between what the UK Government is saying will come this year and what we have assumed will come next year. Whichever way we look at it, it is not new money.

The additional £220 million that was announced on Sunday night appears to contain new funding. I again remind members that we only get funding consequentials from UK Government spend, so that money is based on funding that the UK Government intends to spend between now and the end of the financial year, but which it had not told us that it intended to spend. Basically, we have had an advance on any future announcements between now and the end of the financial year of new UK Government spend that generates consequentials.

It is complicated. I do not know whether you want me to expand on that, but I hope that it answers your question.

My assumption that funding will be allocated is rock solid. Both Governments have agreed that a transfer to the Scottish Government is due, and they have agreed the methodology. When it comes to the transfer, you are right that the dispute dates back to 2017-18. There is some disagreement about the quantum of funding that should be transferred.

It is £200 million—£100 million for self-isolation and £100 million for business support. We have gone through the whole budget and identified whether portfolios can contribute or allocate additional funding. I sought to identify funding in my own budget, and funding has been identified from other portfolios. Therefore, we have looked right across the board and identified funding on a portfolio-by-portfolio basis for that £200 million.

You are right: the report by the Institute for Fiscal Studies is very helpful in giving an independent perspective on some of the risks that we have identified.

At the moment, I have no reassurance at all about what the UK Government might do to provide either additional funding or additional flexibilities or guarantees. We know that the UK Government has made an additional £220 million available. That is based not on known announcements but on what it thinks might be spent between now and the end of the financial year. If the funding is less than £220 million, or less than the overall £440 million, we will have to repay that funding. We still do not have the minimum guarantee that the report alluded to.

You asked about furlough. We would need HMRC to work with us to make anything specifically available on a geographical basis. That is recommended and suggested in the report that came out today, but I have no sense that there is any willingness or openness on the part of the UK Government to do that.