Finance and Public Administration Committee

Meeting date: Tuesday, March 8, 2022

Official Report 664KB pdf

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Resource Spending Review Framework

Good morning, and welcome to the ninth meeting in 2022 of the Finance and Public Administration Committee. The first item on our agenda is our final evidence session on the Scottish Government’s resource spending review framework.

I welcome to the committee Emma Congreve, knowledge exchange fellow at the Fraser of Allander Institute, and David Heald, professor of public sector accounting at the University of Glasgow’s Adam Smith business school.

We will move straight to questions. Professor Heald, in your written submission, you say that the focus should be on enhancing

“the efficiency of public services ... Improving relationships with local authorities”

and

“Ensuring that ... financial plans are fiscally sustainable in light of the COVID-19 legacy and the demographic challenges”.

What does the Scottish Government need to do to enhance the efficiency of our public services?

That is a very big question, so I will obviously not be able to say everything that I would like to say about it in a brief response. I commend the Scottish Government for wanting to run a multiyear budgeting system. It is pretty obvious that, if public bodies, the national health service, local authorities and private and voluntary sector providers to those bodies are not given sufficient warning of the funding that will be available, inefficiencies will be built into the system.

The most important issue in the context of the committee’s inquiry is going back to multiyear budgeting. To a large extent, that has not been possible in recent years because of the timing of the United Kingdom Government’s spending reviews. In relation to giving certainty, my view is that people find it much easier to adjust to slightly lower spending totals if they know what the year 2 and year 3 numbers will be. That is by far the most important message.

When I was doing background reading for today’s meeting, I realised that, internationally, a “spending review” has a somewhat different meaning from the one that I attach to it. I very much think of spending reviews as being the Treasury’s periodic multiyear spending plans. It is preferable for such reviews to be done towards the beginning of a parliamentary session, so that the public expenditure environment for that period is set out. However, the European Commission and the Organisation for Economic Co-operation and Development seem to use the term “spending review” in relation to analytical work on priorities and on the efficiency of existing programmes in order to try to make savings and refocus expenditure.

What worries me about the spending review that we are talking about is that there seems to be an incredibly short timescale. The deadline for public evidence is 27 March, and the spending review will be published in May. UK Treasury spending reviews take between six months and a year. It is quite difficult to do analytical work on a very short timescale, so I hope that, behind the scenes, the Scottish Government is already doing a lot of the analytical work that will feed into the spending review.

I certainly hope so. I would be surprised if that was not the case.

In your submission, you say:

“The framework document never misses an opportunity to complain about financial constraints, as if these were wholly attributable to present funding arrangements. This tone diverts attention from constraints which might plausibly be relaxed.”

I quite like that phrase. What kind of constraints are you talking about? Do they relate to local government, for example? Where could constraints be relaxed?

In relation to what can be relaxed, having a multiyear spending review would make things much more straightforward for the devolved Administrations.

On the specifics, I do not want to get too involved in fiscal framework issues, but it is clear that resource borrowing powers and the rules about the reserve are not appropriate, given the level of volatility in tax revenues. I have made the point in print several times that, after the Smith commission, the Scottish Parliament traded substantial certainty about what funds would become available for tax discretion.

Despite the fact that Scotland has marginally higher income tax than the rest of the UK, tax revenues have come in below the block grant adjustment. There is a clear argument that there ought to be more resource borrowing powers and carry-forward. That is obviously linked to the reserve. There are negotiable things there that are achievable.

That is well put. Last week, John Mason pointed out that the University of Glasgow has got more in its reserve than the Scottish Government is permitted to keep in its reserve.

Emma Congreve, what is your view on the points that have been raised so far?

On the first question, Professor Heald made some important points about the analysis. When I read through the framework document, I was struck that there is not much discussion of how the analysis that will underpin the spending review will happen. Although I am sure that there is a lot happening behind the scenes, it is really important that the analysis and the evidence are transparent and understood by all of us on the outside, that they are not being done in a back room and that they are replicable.

There is the analysis of additional spend that may be decided upon during the spending review process, but there will have to be reprioritisation of spend. It is as important to understand the impact of removing spend from certain areas of the budget, or having real-terms cuts to areas of the budget, as it is to understand the impact of new spend. This is a review of spending in Scotland and it is really important that all of that comes together. I am not confident, from the framework document, that that will be done, and that it will be published and understandable to those of us who are scrutinising this type of evidence.

The framework talks about transparency and how the Government wants the process to be transparent. However, I feel that we may need a bit more on the evidence that underlies those decisions than will be forthcoming from the spending review process. Part of that will come down to the fact that there may not have been time to do this in the way that we would hope that it would be done.

My colleagues at the Fraser of Allander have talked previously about some of the issues with the fiscal framework and the borrowing rules. Thinking about the reserve is another part of that, and I agree that there will be a need to think about those issues in the negotiation of the future of the fiscal framework.

You talked about reprioritisation and removal of existing expenditure. Are there any areas where you think that that should be prioritised?

Fraser of Allander does not put forward particular positions on policies.

I knew it—okay, right.

We are very clear that we want to see consistency. We want to see what the Government is saying that it wants to do come through in budget lines, so that the links between the two are clear. Some of the priorities, for example child poverty and climate change, are clear in the spending review framework document. There may be disagreement on whether those are the right things, but that is not what I will cover. It is more that child poverty and climate change represent priorities that are spoken about in many other Government documents; indeed, they are in legislative targets. If we see that level of prioritisation being followed through and are able to link it to budget lines and can say how much has been allocated to tackling climate change or child poverty, that will be a step forward in transparency.

You will recall from last week’s evidence that having less money go into an area—such as higher education, for example—has implications, and might result in unintended consequences that may count against areas such as tackling child poverty. It is important to understand all those linkages. Policies usually go through a standard appraisal process and various impact assessments in order to work all that out. We would expect the Government to be doing that. We do not necessarily have particular views on what the money should or should not be spent on, but we are quite keen on seeing consistency across the piece.

No one ever tells us where we should disinvest; people only ever tell us where we should spend additional money. Then, when the Scottish Government says what it thinks money should be spent on, people criticise its expenditure priorities, despite the fact that no one ever says what the money should not be spent on.

Professor Heald, do you want to have a go at that? Should we disinvest in one area and invest more in another?

The important issue now is that Parliament has been going for more than 20 years. There was a lot of money around in the first decade of devolution. The Northern Ireland Fiscal Council has done a helpful analysis of where Northern Ireland spends above parity with the mainland and where it spends below parity with the mainland. There are very few instances of the latter.

In the 2000s, and to some extent because of English priorities on education and health, the Scottish Parliament was getting a lot of extra money. The above-parity spend in Scotland is quite high. Those priorities are not necessarily wrong, but they divert spending from other programmes because there are no Barnett consequentials coming in respect of some of those programmes.

This is the time when Scotland should take stock of where it is. One thing that I would like to see in the spending review is serious data on what the future spend on the above-parity programmes will be in the next five or 10 years.

There are some examples. Scotland has no student fees or prescription charges. It has no bridge tolls or hospital parking charges. I am not making any arguments around any of those; I am saying that we ought to know how much they cost on a consistent basis, so that we can see the extent to which we will have to divert Barnett consequentials to such programmes in future.

It is time to take stock. That goes back to my earlier point. The timescale seems incredibly tight for such an exercise, but the committee should be asking for that, even if it is not part of the spending review.

The Scottish child payment would be another obvious example, as would some of the reserved areas that the Scottish Government mitigates, such as the bedroom tax.

I will move on a wee bit before I bring colleagues in. In your submission, Professor Heald, you talk about UK public finances being “unsustainable on present policies” and about how

“tax measures, such as the health and social care levy, add to inefficiencies and inequities rather than resolving them”.

That clearly has an impact on what happens here. How do we get round that with this review? What can we do as a Parliament, given the bigger picture of UK finances?

There is a limit to what can be done. This is outside the executive powers of the Scottish Parliament, but the UK desperately needs to have a serious discussion about tax. The Mirlees review, which was organised by the Institute for Fiscal Studies in 2011, tried that, but it fell on fallow ground. Austerity dominated that decade.

The interaction of national insurance contributions with income tax creates totally perverse incentives. The UK as a whole needs to think about how big it wants the public sector to be and then show willingness to raise the tax revenue to fund whatever level that is.

10:00  

One of the difficulties with Scottish income tax is the issue of the interaction with the higher income tax threshold in England and the national insurance higher limit, after which national insurance goes down. There are completely perverse consequences around what I regard as a very sensitive part of the income distribution. One thing that we are learning about Scottish income tax is that Scotland depends very much on basic rate taxpayers and on the lower part of the higher rate tax band, as we do not have a lot of people on very high incomes paying the Scottish top rate.

The national insurance levy is simply a way, which was pioneered by Gordon Brown in the 2000s, of having a tax that is not called a tax. Strangely, it seems to be seen as better public relations, but it actually creates all sorts of complications. Within the devolved settlement, there are obviously relationships between what the UK Government does and what the Scottish Government does. However, I make the point in my written submission that national insurance contributions were completely the wrong instrument. I can understand that the Treasury wanted to send out a message that we cannot have higher public spending forever without having higher taxes, and I approve of that message, but that tax was the wrong tax. The circumstances that have arisen since then, with the growing inflation risk and specific issues about energy, have strengthened my view on that.

I think that national insurance is perceived more favourably because people think of it in relation to the old stamp, whereby the money went directly towards their pensions or whatever.

We all say that we are in favour of transparency, but it makes me worried when we exploit public ignorance.

Yes—I understand that. That is a good way of putting it.

I will ask Emma Congreve a question and then ask Professor Heald to wind up on it. After that, we will move on to questions from colleagues around the table.

Emma, Professor Heald says in his submission:

“An important feature of the 1999 devolved fiscal settlement was the relatively clear distinction between functional expenditure which was devolved and that which was reserved. The aftermath of Brexit is blurring this distinction”.

He says that that

“weakens lines of accountability”.

Do you agree?

It certainly feels like more of a grey area now, in some cases, than was previously the case. I suppose it is difficult to know the extent of the threat at present, because the pockets that have bubbled up over the past few years have been relatively small. There have been city deals, which have had funding from both the UK and Scottish Governments. Since Brexit, as Professor Heald says, there have been changes to the way that some of the funding is distributed, with money coming directly from Westminster.

Part of the problem is that it becomes very political very quickly when we start to look at this. We need to understand the scale of the issue and the amount of money that is involved, and to keep it in context in that way.

We already have a very confusing state of affairs, given the way that the fiscal framework operates, the way that budgets operate, and the reserved and devolved spend. There are grey areas in the social security world, given what the Scottish Government can do on devolved policy and the spillovers into reserved areas. It has become a lot more complicated, and the move to more direct funding from Westminster to Scotland is adding to that. All of that threatens our being able to understand comprehensively where all the money is coming from, and all the implications of Scottish Government decisions on spending in Scotland.

It is an issue. I am not entirely sure whether there is an answer to how to make it simpler. We just have to find our way through the matter and understand that many of the decisions will have a political angle to them. We have to understand it from a fiscal perspective rather than getting too caught up in the politics of the matter.

I will resist the temptation to try to provide an answer myself.

Professor Heald, you say in the same paragraph that the situation encourages

“games of credit claiming and blame shifting”

and

“makes it more difficult for the Scottish Government to set priorities”.

Yes. My political position is quite clear. I have always strongly supported devolution. The division between reserved and devolved matters was sensible and blurring the distinction is not a good idea politically or in terms of accountability.

The other point is that English local government has been plagued by being part of a bidding culture. Basically, the block grant gets taken away and local authorities have to bid for lots of different parts. On a practical level, the structure of 32 Scottish local authorities does not fit well into some of the bidding. The problems that we have in Scotland are not confined within a particular local authority area. There are jokes about putting union jacks everywhere rather than European Union flags, but the situation makes it much more difficult for the Scottish Government to articulate clear priorities within the devolved areas and be held accountable for them because there will be other pots of money.

Bidding processes are expensive. The costs of them are often completely submerged but there are opportunity costs in diverting attention away from public bodies’ core activities.

I will stay on the same theme, Professor Heald. It is an interesting debate whether, from a philosophical angle, devolved and reserved matters should remain separate or whether there is an economic case to have a slight blurring to boost expenditure. In paragraph 10 of your submission, you say that such a blurring can affect transparency because it is not so easy to see where the money is being spent and, more importantly, how well it is being used. You mention “blame shifting” or “credit claiming” and say that it becomes too much of a political matter. Is there a philosophical argument for keeping reserved and devolved matters entirely separate?

Yes. One of the great strengths of the 1998 settlement, which was not generally recognised, was that clear division of responsibility. In federal countries, there is often big conflict between the federal Government and the state or provincial Government because of such issues. For example, the Spanish Government can spend in Barcelona and the Canadian Government can spend in Toronto, and that causes intergovernmental conflict.

I resist the argument that you are getting more money. The Treasury starts by having a spending envelope at the top so, if the money gets siphoned off into programmes for spending across the devolved nations, it will basically come off the total that we get from the Barnett formula. The Treasury sets a total limit, so it looks like extra money for the people who receive or bid for it, but there will be less money for the devolved Administrations because less money will come through the Barnett channel.

Is there then a case for revising the Barnett formula?

No. It is not Barnett relevant in any sense, because the money has been top sliced before you get to calculating Barnett. The formula applies only when there is spending in England. UK programmes that spend across the UK are outside the scope of Barnett.

That is correct, so can we take this a little bit further? In a Covid scenario, when we obviously want to increase the amount of money that is available to Scotland in order to get ourselves back on our feet—there has been additional money, which has been drawn from reserves—is it your view that the process of applying that spending has great difficulties if it is at the behest of the UK Government acting on behalf of Scotland rather than being held and disbursed by the Scottish Government?

I thought that the funding system during Covid showed a resilience that people might not have expected. The Barnett guarantee was a very sensible reaction to circumstances that nobody had envisaged, and I think that it worked. I understand perfectly why the Treasury wants to end the Barnett guarantee as Covid goes away, but it was a sensible thing to have in the circumstances.

I go back to my point that, if we do not keep the clear separation of reserved and devolved, then, for relatively small amounts of money, we will obscure accountability lines. One of the things that I hope that the Scottish Government will do in collaboration with the UK Government is to make it quite clear—by publishing clear data—where the additional money is going.

That is helpful. Let us take that down to the relationship between Scottish Government spend and local government spend, because the same argument that you have just enunciated for the UK and Scottish Governments applies to the Scottish Government and Scottish local authorities. Could something be done to increase transparency, particularly when it comes to budget line levels 3 and 4, about how well we spend money in local government, which is responsible for a huge number of public services?

Off the cuff, I do not have enough memory of the level 3 and level 4 structure of the budget to answer that question.

Generally speaking—if you said this to local authority chief executives in Scotland, they would give you a look—the Scottish Government has treated local authorities better than the UK Government has treated local authorities in England. There is evidence from the Institute for Fiscal Studies on that and, in one of its publications, David Eiser has a chapter that is specifically on Scotland. During the hard austerity period, local authorities were treated better, with some health consequentials going to them, but it has gone past the point when that can be done.

Like everybody, local authorities will have a very difficult few years. I cannot think of a time when there was so much uncertainty. There is political uncertainty about what the UK Government will do on its future direction for tax and spend—there are the consequences of Brexit and Covid, and now we have Ukraine. It is very difficult to see what the future direction of UK tax policy will be, but local authority roles could be made easier if there were a multiyear budget.

I very much agree with that. I raised the point because, as you said at the outset of your submission, if we are to improve the efficiency of public services, it is important that we are able to measure how well the money is being spent, and that is often quite far down the budget line.

Yes, but to some extent that is the role of Audit Scotland and the Accounts Commission.

And of this committee.

When the devolution legislation was going through Westminster, the then chairman of the Public Accounts Committee wanted the PAC to have control of Holyrood expenditure. Donald Dewar rightly resisted that. The accountability for devolved expenditure is the responsibility of this Parliament, and Audit Scotland and the Accounts Commission are valuable agencies.

10:15  

I thank Professor Heald for his submission, which is a useful insight into the context and purpose of the Scottish Government’s spending review. Professor Heald, my reading of your submission is largely that the review is the right thing to do but that the framework document that has already been published by the Government does not go into sufficient detail on the context and dynamics. Is that the correct reading of what you are saying?

Could you elaborate on the context that has been created by Covid over the period of the review? What are the dynamics of Covid recovery that the review should address, from the point of view both of economic scarring and of what public services will be dealing with?

It is still quite early to know how much economic scarring there will be. There are different views, but the general consensus seems to be that there is less scarring than people expected. However, Covid recovery will certainly have effects on the structure of economies.

One of the worrying things for Scotland—when you look at the income tax data, you will see this—is the significant effects of the decline of North Sea oil and gas. If we look at the parliamentary analysis that Her Majesty’s Revenue and Customs produces of which constituencies generate most income tax revenues, we see that they are Edinburgh South, which is the prosperity of the capital and financial services, and Aberdeen South, which is oil and gas. For the past few years, we have started seeing a decline in the index of per capita income tax revenues and that the north-east is suffering very badly. Given that Scotland does not have anything like the number of very high-income taxpayers as London and the south-east, we are very dependent on well-paid but not extravagantly well-paid people who are paying the higher rate.

On your initial summary of what my concern is, when I was preparing for this meeting, I read a series of Scottish Government documents on the medium-term fiscal framework and the long-term capital plan. It might have been better if those had been put in a single document with a longer lead time, but I can imagine the work pressures on Scottish Government officials and ministers in the context of Covid having dominated things for the past year.

I want to follow up on your point about the structure and composition of the income tax base in Scotland. In response to a question from the convener, you discussed the particular issues around the intermediate rate and how that works. You said that research had been undertaken. Could you point the committee to that research? This is a pivotal but underexamined point. Are there things that we should be looking at in relation to that issue?

There is a good discussion in the medium-term fiscal framework about the vulnerability of income tax revenues. There is also a policy document published by the Scottish Government about the performance of income tax revenues in the first year for which there was good data. There is also a very interesting HMRC study. In the end, the working assumption is that, if Scotland puts any more money on the top rate, the actual proceeds might be positive or negative—we do not know.

In the terms of the fiscal framework review, the big issue is that the composition of the Scottish income tax base is not the same as the composition of the rest-of-UK income tax base. Of course, one always has to make the qualification that the RUK income tax base is driven by London and the south-east and is not representative of what happens elsewhere in England.

In a similar area, examining the context again, I think that the whole committee was struck by the Scottish Fiscal Commission forecast of employment growth and wage growth, and what that was going to do for the medium-term outlook for income tax revenues and therefore the block grant adjustment. It looks as though, within the next five years, we will receive around £400 million less than we would do under the Barnett formula. The other aspect that sometimes gets missed in the commentary is our social security commitments, so the totality looks like a shortfall of about £700 million.

Do the documents that have been produced thus far have sufficient focus on that medium-term issue? Is there sufficient analysis of the linkages? That shortfall is not just an outcome; potentially, levers are available that could impact wage growth and the number of jobs in the economy. Are those sufficiently examined in the documentation that has been published so far?

If you put all the documentation together, the answer is yes, but not if you mean the spending review document. I can understand the difficulty of doing a major piece of work in the context of working through Covid, but it would have been nice to see everything in one place.

With the numbers that you cite, we now see that the Smith commission was a rushed undertaking. At the time, many people, including me, thought that Scotland got a pretty good deal with the index per capita method being used rather than the comparable method. We now know that it is more complicated than that, because of the drivers within the composition of the tax base.

Emma Congreve, I have a question for you about addressing child poverty, which is one of the explicit objectives of the review that is being undertaken. We also have statutory targets. Given that it is such an explicit and overarching objective, will you provide some context for how we are proceeding against those statutory targets and whether we are on track to achieve them, even with doubling the child payment?

You will be aware that, in the next couple of weeks, the Scottish Government will, I believe, produce its next tackling child poverty delivery plan, in which I expect it will make an assessment of whether it feels that it is on track to achieve the targets.

We have been thinking about the question quite a lot recently. Let us put to one side Covid, which we will come back to, and look at some of the policy drivers that have come about since the statutory targets were put into place. The Scottish child payment has been introduced and changes have been made to universal credit: there was the £20 top-up, which was temporary, and now there have been changes to the taper rate.

There is no doubt that those two policies together will have made an impact on the trajectory towards the targets. As we are, unfortunately, discovering even more, the answer depends on what model you are using to estimate impact. A number of assumptions underpin any model, which can give a slightly different results. Using the models that I, the Joseph Rowntree Foundation and others have access to, our best estimate is that we are not on track to achieve the interim or final targets. However, depending on what is announced in the next tackling child poverty delivery plan, our assessment of that might change.

My interest in the fact that tackling child poverty is listed as a priority in the spending review framework is that, in previous years, when the budget came out, it was impossible to understand how much money in it was put towards tackling child poverty. We have asked the question many times and tried to do our own calculations. The Scottish Government has been doing retrospective work to ask how much it spent on child poverty two years ago, but the spending review framework seems to suggest that it will make those links explicit, so we will be able to look at the spending review and see an amount of money that is allocated towards tackling child poverty. We will be able to see that in every budget document in the coming years. With that, we hope that we will be able to do the assessment that Liz Smith talked about of how effective the spend is, because we will know what money has gone where and can start to understand its impact.

That could be a good step forward in terms of what we have been complaining about over the past couple of years. It could provide the transparency to see whether we are on track and whether the spending priorities are the same as the legislative priorities as set out in things such as the Child Poverty (Scotland) Act 2017.

That is me, except to thank Professor Heald for name checking the Mirrlees review, which I have been recommending to colleagues in private session.

Professor Heald, you mentioned the need for a UK-wide discussion around taxation, which I absolutely agree with. I accept that most national tax powers are reserved. We do not have the power to create new national taxes in Scotland, but we do have powers over income tax, land and buildings transaction tax, non-domestic rates and so on. We can also create any new local tax that we wish to—we can create new taxation powers for local government. Does the resource spending review offer an opportunity to have a discussion about taxation in Scotland? That would perhaps not be as comprehensive as what you are looking for UK-wide, but should we attempt to discuss taxation in Scotland in the context of devolved constraints?

This is not the time for that, but there is nothing to stop Scotland thinking about its own taxes. It is obvious that non-domestic rates are under great threat from technological change—I am thinking about the growth of online sales versus high streets. The nature of capital in the economy is changing. Steelworks are an example of why non-domestic rates were attractive—such big plants are immobile. Non-domestic rates are now an issue. I suspect that it would be quite difficult for Scotland to make radical changes in non-domestic rates without that happening at UK level as well, but there is nothing to stop Scotland from trying to take the initiative.

I understand the politics of having a residential property tax to fund local authorities, and I strongly support that measure—it is an important part of local authorities’ legitimacy and autonomy—but to do that on the basis of 1991 values is utterly ridiculous and brings the system into disrepute. I understand entirely why Governments never want to tackle that thorn, but it brings the tax system into disrepute.

If, in the context of this more dangerous world of Covid, Ukraine and whatever else you want to mention, public spending is to increase—as I suspect that it will due to demographic pressures, which are enormous—we need to have a sensible discussion about tax. In the end, much depends on the UK Government of the day, but I still think that the devolved Administrations can also have a discussion. On that point, I mention that Wales and Northern Ireland have a slightly better record on domestic property revaluation.

I am in my second parliamentary session. Your point about 1991 valuations reminds me that that tax system is based on valuations from a time before I was born. I hope that that illustrates how tragically out of date the system is, because I am not nearly as young as I once was.

In essence, you are saying that it would be useful to have that discussion about tax, but my take on the first part of your answer is that it should not necessarily be part of, or simultaneous with, the spending review.

That is a much bigger issue. Because of the political difficulties, that is clearly a long-term project.

Does Emma Congreve have any thoughts on how we could take forward a discussion on taxation? I ask that in the context of the significant challenges that we will have to grapple with in the spending review. I find it very hard to imagine how we can close the gap, as such, purely through savings—purely through cuts—so it is essential to have a discussion around taxation, either simultaneously with or perhaps in the immediate aftermath of the spending review. Therefore, it is just a question of the scope of that discussion. I would be interested in your thoughts on that.

10:30  

I was very struck by figure 3 in the framework document. The central projection is of a £3.5 billion gap between funding and spending by 2026-27. I agree that to deal with that through cuts would be a substantial undertaking—that amount is more than the current social care budget.

You mentioned local government taxation. I have worked quite extensively in that area previously. There are a number of ways in which local government could raise its own taxes, and there are additional taxes to consider as well—we are seeing things happen now with the workplace parking levy. There is the start of a discussion on that aspect. Clearly, the process is not straightforward, even if it is understood that there is a big gap between funding and spending.

On non-domestic rates, as well as the valuation structure of the system, there are also a range of reliefs, which is income foregone as opposed to income to spend. I have not been able to check this, but I believe that a report came out at 10 o’clock this morning, which is an evaluation of one of those reliefs—the small business bonus scheme—which some of my colleagues at Strathclyde have been working on. As I cannot definitely say that the report has been published, I will not say what is in it. However, the report might offer some areas for thought in relation to some of that income foregone.

I whole-heartedly agree with you on council tax reform. For many years, the question has been: if not now, when? Something has to be done; a Government needs to bite the bullet. It would probably need to be a Government in the early stages of the parliamentary cycle so that changes can go through and we can come out the other side before the next cycle starts—that would be very important, politically. I would ideally like that to be part of the spending review, but I do not believe that it will be. I think that we will just have to put up with the situation.

Thanks. I have just one final brief question. Professor, there is a line in your written submission that jumped out at me, which is that the resource spending review should be

“a planning ... not a bidding document.”

I understand that to essentially mean that—correct me if I am wrong—you are saying that the Cabinet Secretary for Finance and the Economy should ensure that all her Cabinet colleagues do not come back with a dozen different papers saying, “Here’s why my portfolio can’t be cut and needs more money”. If you were giving advice to the finance secretary on how to ensure that that does not happen, what would you say to her?

The convener has already said that people come only to ask for more money—nobody ever asks for less money. I really meant something quite different. There are places in the framework document that are just complaints about the constitutional settlement and the fiscal settlement. You do not want to have a spending review that is just a bid for more UK Government funding through Barnett or through some other mechanism.

One of the points that I make in my memorandum is that it is really important to think about the timescale of a four-year Scottish spending review; it will run beyond the next UK general election and beyond the present UK spending review. In the later years, there will be substantial uncertainty. That uncertainty grows all the time—for example, the inflation risk is much greater now than it was even when I wrote my memorandum.

There have been times in the past when the Treasury has kept a substantial contingency reserve. One of my suggestions in the memorandum is about establishing a substantial contingency reserve. You want to be able to tell health bodies, local authorities and all the other organisations that receive funding that you have pretty good certainty about the numbers for years 1 and 2 and, hopefully, for year 3. However, things will happen. This has been a period of remarkably unexpected events. It is important that the Cabinet Secretary for Finance and the Economy has a line in the spending review that will go up over successive years in the spending review cycle, that she holds back money and that she does not allocate everything.

I will refer to the great difficulty that we have, which, to some extent, Covid has been part of. I looked at the block grant transparency statement that the Treasury publishes, which shows that there have been nine fiscal events since 2015. In the past, in more stable times, the fiscal event tended to be a spending review, and there would also be minor top-ups at budgets and autumn statements. Clearly, it is now very difficult for the finance secretary to have any idea what future money or potential cuts will come. Therefore, you need a buffer.

I know that that is presentationally difficult, because the Government will want to say that health spending is going up, education spending is going up and so on, but if you do not keep a buffer at the centre, you will find it very difficult to cope with shocks. You do not want to start taking money away from people in-year because, if people think that they will have money taken off them, they will spend in less efficient ways.

Thank you. That is all from me.

I get what you are saying, Professor Heald, but there is another difficulty in addition to the political difficulties of putting money away at a time when there is huge pressure on budgets, as there is at the moment. In previous decades, we saw a tendency in UK Governments to have, for example, what were, as I remember, called election bribes. Governments would have a couple of years of really difficult and unpalatable policies and then, suddenly, at the end of their four or five years, they would have a big pot of money. They would say that that was because their policies were working and they would blow the money on a pre-election splurge.

The difficulty is that that would perhaps be a temptation for a Government that was building up such a reserve. If it was 4 or 5 per cent behind in the polls, for example, it might feel a need to oil the wheels a bit and say that all the difficult policies that it had enacted over the past three or four years were working so fantastically well that it had managed to generate additional funding. Therefore, there are real difficulties with the approach that you suggest not just from a presentational point of view; the money would be a temptation to Governments.

When I was on Glasgow City Council, I looked at rent increases. Every year for 40 years, the lowest rates of increase were in election years and the highest rates were in the year after an election. I do not think that Glasgow was alone in that.

That was a very eloquent statement on the political cycle. However, I still think that, despite those political difficulties, you do not want to get into a position in which you tell local authorities and NHS bodies what their funding plans are for four years and then have to start taking money back off them because of unexpected events. One of the things that we have learned over the past few years is that the unexpected will happen, but we do not know what unexpected thing that will be.

Okay. We have to think about the areas from which we are going to take that money and that is the most difficult decision of all.

You are so cynical at times, convener.

I want to go into a bit more detail about the linkage between the resource spending review and the national performance framework. Professor Heald, you mentioned in your submission that there are 81 indicators and that the Government has to prioritise those in the spending review. Is that number too many, or is it the right number and the review just needs to focus a bit more on some of the key indicators?

It needs to focus on some of them. There is a distinction between saying that and saying that some of the 81 indicators are not worthy. You can have 81 worthy indicators, but in the context of a four-year spending plan in difficult economic circumstances, you cannot have every one of them as a priority. There has to be prioritisation.

Do you feel that there is not enough prioritisation at present? Do you feel that all 81 indicators are treated equally?

It is quite difficult to see how the budget documents and the spending review link with the national performance framework.

Does Emma Congreve have a view on that?

I echo the comment that it is very difficult to read between those three elements—the spending review, the budget documents and the national performance framework.

I am not sure that I would necessarily have a view on whether there are too many indicators in the NPF. You would expect people to be working to a range of different priorities, depending on which area of Government they are in. You need to have a broad range of priorities so that each area of Government knows what it is working towards and the outcomes that it is delivering.

Where we often have problems and why we cannot make a link between the budget documents and the NPF is that the finance teams that work on the budget are often not given responsibility for ensuring that a budget document links to the NPF. It is for the policymakers in the individual parts of Government to ensure that there is a link, but when the big decisions are being made in the finance teams, that link does not work.

The finance teams need to be held to account for ensuring that there is an understanding of how the decisions that are made running up to the budget—in those last few days, sometimes—link to the national performance framework and what impact they will have.

Within that, there are also statutory requirements to carry out equality impact assessments and fairer Scotland impact assessments. However, those are often carried out after the fact because it is not considered to be within the remit of the finance teams to do that. There is a disconnect between the finance and budget processes and the NPF. They are seen as two separate things when, actually, decisions that are made on finance will ultimately impact on the NPF.

What would you advise the Government to do, then? Should there be a document that explains the linkages between the spending review and the NPF? How do we get them better entwined?

That is a very interesting question. I sit on the equality budget advisory group that the Scottish Government set up, which is chaired by Angela O’Hagan. A lot of what we do is to try to figure out how such things can be done better.

At the moment, on budget day, the budget is accompanied by an equality and fairer Scotland budget statement, which does a lot of that linkage to outcomes in terms of the equality mindset. However, that is an after-the-fact document; it does not determine policy decisions in the budget.

The recommendations of the budget review group included the idea of moving to year-long scrutiny and ensuring that some of the decision making on the budget happens during the year so that such analysis can be done. However, we come up against the fact that budgets—and spending reviews, as we are seeing—are done in a very short space of time and there is not necessarily the time to do the required work, so timing is an issue.

Some of the budget review group recommendations have been taken on and scrutiny is more of a year-round process. However, when it comes to the big decisions being made on the budget and on the spending review, things are still very compressed and a little bit too siloed for that to happen.

Professor Heald, would you give the Government any advice on how it could better intertwine those things?

No—Emma Congreve’s reply covers everything that I would want to say.

I have another question, on early intervention and prevention. Professor Heald, you mentioned in your submission that housing, for example, will have an impact on health outcomes. How does the Government make that shift from spend being input based to being output based? Do you have any ideas on how it could do that?

Again, that is part of a standard policy-making process. Before making a decision, you go through an appraisal stage to understand the impacts of a range of options to meet a problem or an outcome. You do not have just one option for meeting an outcome; there are many different policies in different forms that you can use. When you carry out that appraisal, you find what the unintended consequences are.

10:45  

With regard to prevention, which features in pretty much every Scottish Government document—quite rightly so, as that is a very important issue—it is unfortunately the case that there has been a lack of investment in evaluation to give you that conclusive understanding of what is and what is not preventative spending. Do we understand now what the preventative impact of, say, our investment in free personal care might have been on health spending? I would say no, partly because we did not put in place a monitoring and evaluating structure that would have allowed us to undertake such an assessment over time and understand what that impact had been. We can say the same about a large range of policies. If you want to understand prevention, you have to figure out how to measure it.

Evaluation is a presentation of how spending some more money on, for example, local government can save you a lot on health later on. I guess that every Government wrestles with that difficulty, but it is something that has to be done eventually.

Absolutely. One potentially massive area where spending now will prevent spending down the line is child poverty, which is in the framework. There is evidence that links such poverty to poorer health outcomes as well as, of course, to poorer educational outcomes, so investment in that will link to lower spend in those other areas in future—and even in the present with regard to spend on the attainment gap.

However, when you look at the work on child poverty, you will see that there are no processes in place to allow you to work out what impact measures to reduce child poverty are having on, say, attainment. You just do not necessarily see those kinds of structures, and that is partly because of the silos that exist in Government. The child poverty section of Government is very different from the education section, and there needs to be more joining up in that respect. The framework document talks about joining things up across Government, but it does not say how it is will do that. That would be a key thing to understand.

Thank you.

Good morning. I have a couple of questions for Professor Heald.

I have to say that your comments on accountability were music to my ears, as I have raised the issue a number of times with different committee witnesses, not least Mr Gove, who recently appeared before us on behalf of the UK Government. I asked him specifically how Audit Scotland would be liaised with to check on spend that had been provided by the UK Government. I have to say that he was less than certain in his response, which I think—I am paraphrasing—was, “However they want.” Therefore, I think that you have touched on a very important area.

That said, the other important area is how, in efficiency terms, we attribute a cost to the bidding war that you have alluded to. Do you have any sense of the cost to English local councils of, as you describe it,

“bidding for UK-controlled resources in the way that has become dysfunctional in England”?

Can you furnish us with any figures on that?

I cannot think of any specific study in that respect, but what happened in England is that local authorities were under so much financial stress that some of them started doing totally irresponsible things such as borrowing from the Public Works Loan Board at subsidised rates and investing in commercial property outside their jurisdiction. I am astonished that the Treasury allowed such things to happen.

In general, bidding systems for small amounts of money can consume a lot of resources. If one surveyed local authorities in England, they would certainly say that; they often complain about the extent to which they have to bid through separate channels. I am a strong believer in giving block grants to local authorities. In general, it is much better, within a broad framework set by the Scottish Government, to fund through block grants than to start a lot of bidding. In the committee’s session with Mr Gove, he spoke about the use of objective criteria. The trouble is, however, that there are so many objective criteria that you can make your choice when it comes to allocating money.

To go back to the point about trying to apportion some amount to the loss as a result of that bidding, it strikes me that that might be a useful exercise, because I am concerned that it is happening more frequently.

I want to pick up on another point. You may be suggesting where the differences lie between funding from the UK Government to the Scottish Government and from the Scottish Government to councils, in that the Scottish Government, with its universal policies, is not subjecting local councils to bidding. It is simply saying, “This is a pot of money that has to be spent in the same way.” To go back to Liz Smith’s point, we are not actually comparing like with like, are we?

I am not sure of the answer to that question.

I am trying to explain that, from an accountability perspective, money that the UK Government provides to councils has to be bid for. We have already agreed that that process is inefficient, as some public expenditure is lost through days of inefficiency. It is not the same as money being set aside, with assistance on how councils should spend it from the Scottish Government, because that is done on a universal basis. I am just trying to confirm that my understanding is correct.

Essentially, you are talking about money being earmarked, rather than a bidding system.

Yes.

On the whole, I do not like earmarked money, but it is much better than having bidding wars.

Yes—I am trying to make that distinction. It is not like for like in quite the way that was set out.

I turn to my other question. I am interested in the point that you make at paragraph 13 of your submission. Can you give us a bit more flavour on disaggregating data in order to distinguish between employment activities that are in the public sector in Scotland but are not in the public sector in England? From the point of view of comparing apples with apples, that is very interesting, because the picture is quite opaque when we look at that per capita spend.

The framework document for the resource spending review has a diagram that shows higher public spending and higher public employment in Scotland than in the rest of the UK, but one has to be very careful with that, not only because there are activities in the public sector in Scotland that are not in the public sector in England—water is one example—but because one needs to consider the extent of contracting out. English local authorities have probably done more contracting out than Scottish authorities have, and those employees do not count as public sector employees. In addition, usage of publicly provided health and education in Scotland is higher than it is in England, so one would see the effect there.

I can understand why, because of the public sector pay bill, that is an important strategic issue, but one has to be careful in drawing comparisons. If the public sector is doing those things in-house and is doing them better than if the services were contracted out—if water were privatised, for example—that is not a bad thing, but one needs to understand what the comparators are.

Yes. I accept your point, because until we have the data, we cannot start to make that assessment. I do not know whether Emma Congreve has anything to add in response to my two questions.

I have one thought on the inefficiencies of bidding. I am aware that a number of local authorities have put out tender documents to get people to help them to put together bids. We are talking about considerable sums of money. There may be an argument that it is good for local authorities to review their evidence and data on some of these things, and it might help in other areas, but I appreciate that that does not come without a cost. The committee might want to look at that.

We have covered a lot of ground already. I will go back to a general question and will start with Ms Congreve. Previous witnesses have suggested that the whole spending review is at too high a level and needs to be more detailed. What is your feeling on that?

The framework document misses a lot of crucial information, as I have previously said, about how some of the aspirations that are set out in it will be achieved. I will mention a couple of areas that have not come up so far. What happens when priorities impact one another? For example, one of the priorities is child poverty and another is climate change. There are times when those two will rub against each other. Tackling fuel poverty is one such area, because in order to better heat homes you might want to subsidise gas boilers to improve energy efficiency in those homes, but that rubs against your aims on climate change. What happens when there is that kind of divergence in the outcomes of the priorities?

There are areas where that is laid out. While it sounds as though there are aspirations for transparency, there is no detail on how that will come into effect. What data and analysis will be published alongside the spending review? What analysis is being done, as we said at the beginning, to understand the impact of reducing spend in other areas? That is key.

How can you make sure that there is collaboration across different areas of Government so that you do not have silo working? I know that in some of its work, the New Zealand Government makes two ministers from different areas of Government sign up to budget policies to show that they meet outcomes in at least two different areas, and if that is not the case, they are less likely to go ahead with the spending proposal in question. It is that kind of detail that is missing, which is worrying, because in the heat of the spending review, if we do not have clarity on the process that will be followed, those details will probably be missed.

I welcome the intentions of the framework, but it feels like a wish list and I am worried about what we will see come May.

Professor Heald, you covered that area. The framework document talks about priorities and objectives. Am I right in saying that you argue that those are not the same things?

The priorities that are stated are too high level and too general. In the context of the next four years, the crucial things are to recover from Covid and, where Covid has had beneficial effects in terms of working patterns and so on and where there are benefits to be gained from what we have learned technologically from the response to Covid, to embed those.

Improving the relationships with local authorities—even though they are nothing like as bad in Scotland as they have been in England—is important, because local authorities are important delivery bodies for the public sector and are important democratically. That is particularly the case in the context of being able to give a multiyear settlement with a degree of certainty—obviously, that must be caveated by what we have discussed. Because of the demographic challenges that we face, the public sector has to become more efficient in the same way that everything has to become more efficient.

As Ms Congreve suggested, the three objectives—if we can call them that—could rub against one another a bit. Do we need to set a priority among those three and say which is the most important out of child poverty, climate change or the economy and recovering from Covid?

11:00  

I do not think that you can. There are areas where those objectives support one another, and areas where they come into conflict. For the Scottish economy, policy on oil and gas will obviously be very important. I have already mentioned the fact that lots of Scottish income tax revenues come from the north-east. There is already some sign of a decline in the revenues per capita that are generated from those areas. The further development of oil and gas rubs against the issue of tackling climate change, although there is a difference between not using oil and gas and depending on foreign sources of oil and gas.

Turning to another point, you wrote:

“Getting the balance of expenditures right is a challenge for all governments”.

When you talk about getting it right, are you arguing that there is a right balance between, say, health and local government, or are those purely subjective tastes?

They are not solely subjective, but political judgments come into it. “Right” in that sense is a bit colloquial, but the point is that there is always a challenge in how you decide.

We have not talked much about the performance of the Scottish economy, which will be vital to future tax revenues. The issues that we have with the block grant adjustment must be resolved technically, but there is an underlying issue around the performance of the economy.

One of the best ways of dealing with poverty and with child poverty is for the economy to perform well. People having well-paid jobs is good for individuals and households, and it is good for the Scottish budget.

Another challenge that you have raised, which is especially relevant in a time of fiscal scarcity, is the question of making new commitments against funding existing programmes. At the present time, given that money is likely to be tight for the next few years, should we be holding back on new developments and emphasising keeping existing things going? How do we get the balance right in that regard?

That is a political judgment. On the technical side, you need to understand the relationship between programmes and the extent to which they help one another. To come back to our previous discussion, when we get Barnett consequentials for health because England has spent more money on health, we should not assume that it automatically goes to the health service because, as we have already discussed, health outcomes can depend on all sorts of things, such as environmental spend and housing spend.

I have always been in favour of more transparency about how the Barnett formula has operated, and I have tried to contribute to that discussion, but we must not get fixated on England deciding to spend more money on X, so we have to spend the Barnett consequentials on X.

But you would accept that, politically, it is very difficult not to do that.

Politically, it is very difficult, but there is an educational task for the Government and the Parliament to do to persuade the Scottish people that, particularly given Scotland’s health record, “health” is not identical to the NHS. There are other kinds of policy to pursue: taking children out of poverty and getting rid of bad housing are important in improving the health and employability of citizens.

Ms Congreve, would you like to comment on any of that? Should we be focusing on keeping existing services going or should we be going into new areas?

I do not think it is right to say that uncertainty should make us stand still in looking towards outcomes that have already been legislated for and on which there is parliamentary consensus. Where there are understood problems, it is right that new ideas and policies are developed in order to move those things forward. I do not think that we can stand still on climate change or on child poverty. That does not feel like an appropriate response to the levels of uncertainty that we have.

This has to be about reprioritisation, understanding where money is being spent well and spent badly and taking forward that exercise, given the scale of the difference between the funding that we expect to come through and the spending that we expect to be required—which I think may get worse rather than better. That is the imperative, and I do not think that standing still is necessarily the right response.

I am a great believer in evolution and flexibility myself.

That concludes questions from committee members; I have one question about taxation. What do you believe is the public appetite for new local taxes? The committee has discussed the point that people who earn £43,000 to £50,000 will face a marginal tax rate of 54.25 per cent from April, when we add national insurance to income tax. From the remaining sum, people have to pay VAT, excise duty, council tax, fuel duty et cetera, so there is a significant squeeze on incomes. Further down the scale, people are also feeling the pinch.

Is it not the case that the Treasury has a bit of a surge in income at the moment? We have fiscal drag, and inflation is bringing in additional revenue. I understand that Rishi Sunak has £18 billion more than he anticipated that he would have at this time of year. We could even remove the care levy that is being suggested—that would be fundable.

What I am trying to say is that, given the inflationary pressures and the extent to which people are feeling the pinch, particularly from energy, food and fuel prices, do you feel that this is the right time to consider additional taxation of any kind?

You are absolutely right to emphasise the 54-plus per cent marginal tax rate on people on relatively modest incomes. That is a very serious problem, which is partly due to the interaction of the national insurance system and the income tax thresholds. I do not think that there is ever an appetite for more taxation, although some taxes are better than others.

Relying on fiscal drag is a serious mistake. Fiscal drag will bring more people into higher tax rates. Having big jumps in the marginal rate is extremely undesirable. The political problem is that, although the public appear to understand tax rates, they do not understand the effect of thresholds. If the Chancellor of the Exchequer put up RUK income tax rather than putting up national insurance, people would understand that it was going up, but people do not necessarily know about the freezing of the personal allowance, the freezing of the £100,000 level for the withdrawal of personal allowances or the freezing of the £150,000 bottom threshold for the additional rate. As I said, I do not think there is ever an appetite for more taxation.

There has to be a debate about spending pressures. People want more spending, just as the organisations that come and give evidence to your committee do, but people do not want to raise the tax revenues or to put forward tax proposals. That is very important, given the external uncertainty and the demographic challenges. Social care has been a major policy failure across the UK. There will be more demands.

That is the central conundrum that you point to.

Ms Congreve, you will have the final word. On the issue of fiscal drag, do you agree with what the UK and Scottish Governments have introduced for next year?

To come back to a point that Professor Heald made, it might be that advantage is being taken of people’s ignorance of how the systems work. I would much prefer us to be more straight with people about the implications of the decisions that are taken.

I agree that there is a generally held assumption that people do not want to pay additional tax—if you put the question like that, that will be the general impression—but we need to understand why people might need to pay more tax and why people in different parts of the income distribution are being asked to pay more tax. The cost of living crisis will affect some families to a huge degree, while it will not impact others very much at all. We need to understand that there are very different experiences across the income distribution. It is often felt to be quite black and white that putting up taxes is bad for everyone, but the spending that that will result in will have redistributive benefit.

Again, it is a question of education. There needs to be transparency; Governments should not try to hide decisions or their implications. We would all be a lot better off in the long run if we were all a bit clearer about why we are paying tax and how much tax we are paying.

Indeed. Of course, people are always quite happy for other people to pay more tax, even though they themselves are never so enthusiastic—with the exception of John Mason, who is always keen to pay more tax.

I thank Emma Congreve and Professor Heald for their evidence, which was extremely helpful. The committee will consider and agree a response to the Scottish Government’s consultation on the resource spending review framework at a future meeting.

We will now take a short break before we move on to our next item of business.

11:11 Meeting suspended.  

11:19 On resuming—