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Chamber and committees

Meeting date: Tuesday, March 8, 2022

Finance and Public Administration Committee 08 March 2022 [Draft]

Agenda: Resource Spending Review Framework, Subordinate Legislation


Contents


Subordinate Legislation


Budget (Scotland) Act 2021 Amendment Regulations 2022

The next item is evidence from the Minister for Public Finance, Planning and Community Wealth, Tom Arthur, on the draft amendment regulations—the so-called spring budget revision.

Mr Arthur is joined by Scottish Government officials Scott Mackay, head of fiscal management and strategy, and Niall Caldwell, corporate treasurer. I welcome you all to the meeting and I invite Mr Arthur to make a short opening statement.

Thank you, convener, and good morning to the committee.

The spring budget revision provides the final opportunity to formally amend the Scottish budget for 2021-22. The budget revision contains the usual four categories of changes: allocation of the remaining Covid-19 consequentials, along with some other funding changes; a number of technical adjustments that have no impact on spending power; some Whitehall transfers; and some budget-neutral transfers of resources between portfolio budgets.

The supporting document on the spring budget revision and the finance update prepared by my officials provide background information on the net changes. The funding changes increase the budget by £1,428.3 million and comprise the majority of the Covid-19 funding, which has been allocated over a number of lines, as detailed in the finance update.

The technical adjustments are mainly non-cash and have a net negative impact of £357.3 million on the overall aggregate position. It is necessary to reflect those adjustments to ensure that the budget is consistent with the accounting requirements and with the final outturn that will be reported in our annual accounts.

Whitehall transfers total £131.2 million and largely comprise funding for the 26th United Nations climate change conference of the parties—COP26—along with a second instalment of the migrant health surcharge.

The final part of the budget revision concerns the transfer of funds within and between portfolios to better align the budgets with profiled spend.

At the time of the publication of the spring budget revision, we did not have final confirmation from HM Treasury on the amount of Barnett consequentials being allocated in the UK supplementary estimates. As a result, we were forced to base the budget revision on the best estimate at that time. There were further developments in the funding position following the SBR’s publication and my officials have provided additional information on the subsequent changes in the finance update.

That information, together with the background information provided, is intended to support the scrutiny process and to offer committee members more insight into the challenges of managing the budget position while the funding position is so volatile.

As we approach the financial year-end we will continue, in line with our normal practice, to monitor forecast outturn against budget and utilise any emerging underspends to ensure that we make optimum use of the resources available in 2021-22 and manage the necessary carry forward to meet additional spending commitments that are reflected in the budget agreement reached for 2022-23.

In line with previous years, my officials have included in the finance update for the committee an indication of the forecast outturn position. Provisional outturn figures will be announced in early June.

I am happy to take any questions that the committee may have.

Thank you for that opening statement, minister. Before we go any further, I note that committee members are extremely appreciative of the steps that you and your officials have taken to provide so much detail for this spring revision. It is more detail than we have ever had before and I think that it reflects well on the Government, which clearly listened when the committee requested additional detail, so thanks very much for that. That is the view across the committee.

I have a few opening questions. The first one is about paragraph 15 of the finance update, which comes under A.2.2. There is a £217.7 million increase in the justice and veterans portfolio and, in relation to pensions, there is

“£183 million of additional funding for Police & Fire Pensions in Justice & Veterans.”

That appears not to have been anticipated, but one would have thought that pensions can be anticipated well in advance and it is quite a significant sum. Can you give us a wee explanation of that?

As you will be aware from previous budget revisions, this has been routine practice in relation to where the budget for the pensions to which you refer has been allocated. I will ask Scott Mackay to provide some more context and background.

It is a demand-led budget. The forecast varies across the year. Historically, we have always topped up the budget quite significantly as later forecasts have emerged across the year. An initial flat budget is set through the budget bill and then it is augmented in line with the latest forecasts as we go through the year.

But in relation to pensions, you must know a wee bit in advance that folk are going to retire, surely? If it was a few million pounds here or there, I could understand—some people retire early because of ill health, for example. However, £217.7 million is quite a significant sum of money and one would have thought that a sum of that amount would have been anticipated well in advance.

Clearly it is a significant sum. The numbers who retire can vary quite significantly over the year, but I think that there is arguably a strong case for looking again at the baseline budget, and it is one of the things that will be considered in the upcoming spending review.

Moving on, I note the reference in paragraph 17 to

“£40 million released from the Affordable Housing Supply Programme due to ongoing supply issues and the effect this has on the pace of delivery.”

Is that because the pandemic has led to construction difficulties? Is it your hope that that money will subsequently be put back into affordable housing?

As you will be aware, a number of factors, one of which is the pandemic, are impacting on the availability of materials. Price is one implication of that, but issues with the availability and sourcing of materials due to supply chain and logistical challenges have inhibited the deployment of the money. We are committed to constructing 110,000 houses over the next 10 years as part of the Bute house agreement and consistent with our ambitions in “Housing to 2040”. We are absolutely committed to delivering the resource necessary to realise those ambitions but, as I think the committee will understand, our capacity to build houses—and, subsequently, to spend money on building houses—is constrained by the availability of materials. Of course, that challenge is not unique to Scotland or, indeed, the UK; it is global.

I think that we need to keep an eye on that area. The Government has a commitment to build a certain number of houses, but at the same time construction inflation is at a very high level, and any budgetary reductions will militate against reaching that target.

An issue that a number of members have commented on arises in section A.3 of annex A of the supporting document. In that section, which relates to Whitehall transfers, you say:

“The largest of these”

transfers

“relates to a further instalment of the migrant health surcharge of £62.4 million.”

Can you tell us a wee bit about the migrant health surcharge?

Yes. I think that we discussed the matter at the evidence session on the autumn budget revision. That income is collected and administered centrally; although the process involved is analogous to that for the Barnett formula, it is not a Barnett transfer, and it is reflected in budget revisions as a means of allocating it to the budget. I do not know whether Scott Mackay or Niall Caldwell has anything else to add.

Scott Mackay

Only to say that the amount has been significantly stepped up post Brexit. It is now at a much higher level.

Given that we might be seeing a significant additional number of refugees coming in over the next few months, will that increase significantly? Will you be looking at Barnett consequentials as a result of that in the months ahead?

We will monitor the position very carefully. As I said last week in the chamber—echoing the First Minister’s comments in the local government finance order debate—we are ready and willing to play our part in Scotland. In the broader context of the crisis in Ukraine, we have been clear about what we would like the UK Government to do with regard to waiving visas and maximising the number of people coming to the UK. Should the UK Government make any funding available to support that effort, we will of course deploy it to maximum effect to support people coming to Scotland.

I found paragraph 30 of section C.1 of the supporting document quite interesting. You say:

“The minor differences between the Scottish Government underspend as reported in the Accounts (and discussed in detail by Audit Scotland) and underspend against HM Treasury budget aggregates arise through a number of reasons; differing accounting and budgeting treatment of capital expenditure, differences in the scoring of working capital for nondepartmental public bodies and different treatment of expected credit losses.”

Having what are, in effect, two different systems obviously makes transparency difficult. Have there been discussions about, or is any work on-going, to try to smooth over some of those differences to ensure that we have a uniform method of accounting?

That is a fair and reasonable question. With this not-so-brief guide to the spring budget revision, we have tried to provide as much context and information as possible, and as you have correctly identified, we reflect the respective practices of the Treasury and the Scottish Government. As for the potential for a more unified approach, we are happy to reflect on that.

Scott, is there any technical commentary that you would want to make?

11:30  

Some of the technical differences between the Treasury budget and the Scottish budget arise as a consequence of the Public Finance and Accountability (Scotland) Act 2000, which specifies how we must report. Moreover, our reporting of the accounts is covered by a different set of standards and separate Government reporting requirements, as opposed to the consolidated budgeting guidance, in which there are some differences in the way in which things are treated from an accounting perspective, and the national accounts, with their Office for National Statistics or European system of accounting and slight differences in treatment.

I recognise that that gives us challenges in transparency and consistency of reporting, but, as the minister has said, we are conscious of the need to improve transparency and are thinking about how we improve the Treasury reporting. There is no getting away from the need to follow the accounting requirements in the “Government Financial Reporting Manual”, but we can think about the additional information that we can provide on how things score against Treasury budgets and the differences in that respect.

I think that we will want to look at that a bit more in future revisions—perhaps in the autumn revision—to ensure that we are not comparing apples with oranges.

I have just one more question before I let in my colleagues, who I know have some questions of their own. On 3 February, the same day that the spring budget revision was published, the UK Government announced a package of cost of living measures with an associated consequential impact for the Scottish Government of around £290 million, which was incorporated into the Scottish budget on 10 February. It now transpires that that £290 million will not be coming forward. What are the implications of that for the Scottish budget in the spring budget revision?

You are correct to highlight the issue, convener. We had initial indications of resource supplementaries of £841 million. When the cost of living package was announced—which, if I recall correctly, was on 3 February, the day that the SBR was published—we had been led to believe and expected that to be additional resource on top of what had been previously announced. Subsequently, the resource supplementaries were revised down from £841 million to £827 million, and we also learned that there would be no additional money for the cost of living package. Instead, that money was to come from reductions in the previously announced tranche of money, which itself had been subject to reduction.

You are correct, therefore, to indicate that the money has to be found from the previously announced supplementary estimates, but we have an agreement to carry that money forward into next year’s budget, which means that it will not impact on the reserve.

As you will know, the spring budget revision takes place before the end of the financial year, so there are timing issues, in that, when we prepare the revision, which is normally at the end of January, the end-of-year picture has not fully crystallised. A great deal of uncertainty has been created, but with our monthly internal budget monitoring process and management, I am confident that, through a combination of devolved tax performance and emerging underspends, we will be able to meet the carry-forward requirement as set out in the budget.

In summary, you are correct to identify that the money in question was not new but had been previously announced, and even that quantum was reduced. However, because of better-than-expected devolved tax performance and emerging underspends, we are in a position to meet the carry-forward requirements, and the money that will be allocated for cost of living measures and which will go to local authorities to be administered will be part of next year’s budget. We have been allowed to carry that forward with the reserve.

I am interested in what you have to say on that, because the Scottish Parliament information centre said in its briefing for the committee that

“On the Resource (day-to-day spending) side the Scottish Government must find £98 million by 31 March to meet commitments for the next year budget year starting on 1 April”

as a result, in effect, of not receiving that £290 million.

Yes, that is correct. To touch on that point, I am confident that we will be in a position not only to ensure that we are within budget but that we are able to take that carry forward into the reserve, which was part of the budget process. That resource will be found, as I mentioned, from a stronger than forecast performance of devolved taxes and emerging underspend in some demand-led areas. As it stands, we are confident that we will not only be able to spend within our budget limit but will have that carry forward in the reserve to meet next year’s budget requirements.

It is interesting from the committee’s point of view that ministers always say in every budget that every penny is committed, but when we end up with such bumps in the road—the UK Government reneging on £290 million is a significant bump—the money is still somehow able to be found to smooth them over.

Again, ultimately, there is an element of every penny being committed, but as we touched on a few moments ago in relation to affordable housing supply, events such as slippage in capital projects can take place, or, in relation to resource, there can be lower than forecast demand in demand-led programmes of funding. That is what has ultimately allowed us to manage this particular position, which, being at year-end, is challenging.

The situation has been compounded by the overall volatility of the late notifications from the UK Government, the complexity caused by the omicron variant and initial indications of resource funding that did not necessarily materialise or were misleading.

However, we are now in a position where we are confident that, due to those forecast underspends in demand-led areas and the stronger performance of devolved taxation, we will have not only the resource to make sure that we spend within our budget limit but money to deploy in the reserve to carry forward.

I will pick up on that point. We are four weeks away from the end of the current financial year. I understand what happened with the cost of living payments—there was not the funding that was expected. Nonetheless, table C2.1 sets out clearly that you will overspend by £98 million against budget in order to meet those commitments in the current financial year, although there will be £511 million for next year’s budget from this year’s budget.

I struggle to square those two things. I understand at a high level what you say about devolved taxes and underspends in other areas. I could accept that statement if we were in quarter 2 of the financial year, but we are four weeks away from year-end. Could you provide a bit more detail so that we can have a bit more confidence? I hope that you know where the £500 million is coming from, because that is quite a big sum.

Certainly. I will ask Scott Mackay to come in to give a further breakdown on the elements of devolved taxation and the underspend that is emerging in demand-led areas.

It is important to realise that expenditure was constrained after the announcement that that £296 million for cost of living was not additional. There had been additional planned expenditure in health that we were going to overspend, against the spring budget revision limit. That involved thinking about profiling the health spend across this year and next year and trying to relieve some pressures. That expenditure had to be constrained to the budget that was added at the spring budget revision. Clearly, we were planning for an underspend, because elements of that were embedded in the 2022-23 financial position.

There is a combination of that additional constraint on health not overspending against its budget limit and emerging underspends in areas such as self-isolation support grants, where the demands are now likely to be significantly less than the budget that was allocated.

There has been an adjustment to pensions that is a bit less than the money that was added at the spring budget revision on the latest forecasts and a significant uplift in tax receipts.

It is important to realise that expenditure was constrained after the announcement that that £296 million for cost of living was not additional. There had been additional planned expenditure in health that we were going to overspend, against the spring budget revision limit. That involved thinking about profiling the health spend across this year and next year and trying to relieve some pressures. That expenditure had to be constrained to the budget that was added at the spring budget revision. Clearly, we were planning for an underspend, because elements of that were embedded in the 2022-23 financial position.

There is a combination of that additional constraint on health not overspending against its budget limit and emerging underspends in areas such as self-isolation support grants, where the demands are now likely to be significantly less than the budget that was allocated.

There has been an adjustment to pensions that is a bit less than the money that was added at the spring budget revision on the latest forecasts and a significant uplift in tax receipts.

SF

The convener—quite rightly—puts me under pressure as an Opposition spokesperson to say where the money is coming from. I think that that is a fair challenge. However, I would say the same thing to you. We have numbers that suggest that you are overcommitted by almost £100 million in this year’s budget and there are just four weeks to go. I hear what you are saying about pensions, but is that pension adjustment £500 million?

Scott Mackay

No.

Where else in the budget are we going to underspend in order to generate the £500 million? Why is that not reflected in the spring budget revision itself? You are basically saying that the spring budget revision is not right and that we have overestimated costings by £500 million. Where is it?

On the numbers, £160 million of health expenditure was constrained as a result of that reduction, although health is not underspending against the limit set out in the budget document—it was a planned overspend. The tax receipts are £250 million more than the original forecast. Arguably, they could have been reflected in the spring budget revision, but there is also a question about how the block grant will change and, as you will be aware, the reconciliation process for that will not be finalised until September.

There is a significant underspend on the self-isolation support grant against the estimates that were provided in the run-up to finalising the spring budget revision. From memory, I think that that is about £60 million. There is a £30 million reduction on pensions against the figures that we were discussing earlier. We obviously added a budget adjustment in the spring budget revision based on the forecast that we had in the run-up to finalising that. There has been a subsequent revision to that and now it looks like there will be a £30 million underspend against that. In the last round of monitoring, on aggregate, there was about £30 million in underspend emerging across that.

That is all on the resource side. Aggregating all of that, we get the level of forecast underspend that we are talking about as being necessary to support the 2022-23 budget.

I would make three points on that. First, a lot of underspends are going to emerge towards the end of the financial year—that is just the nature of the year end. Secondly, Mr Johnson made reference to there being four weeks until the end of the financial year, but this is not a reflection of the four weeks—the spring budget revision was not published today. It is a very intense period: we are talking about eight weeks—not even a whole quarter. Thirdly, there were significant announcements on demand-led expenditure towards the end of the financial year in response to omicron. All that has created this particular set of circumstances.

As Scott Mackay said, we can see devolved tax forecasts and performance and we can anticipate where that might go but we cannot be certain because of how subsequent months’ performance will outturn, as well as the implications around block grant adjustments. I appreciate that it is a complex matter and perhaps difficult to articulate. I would be happy to reflect on that ahead of next year’s spring budget revision to see whether there is a way in which information can be presented more clearly to assist the committee.

I hope that what Scott Mackay has said and what I have tried to articulate offers members some understanding of how we are in this position, which I appreciate, prima facie, may seem counterintuitive.

I have two things to say about that. First, I understand the how. Secondly, it is not about the information that you have provided, but is about how the situation presenting that information is being managed. That is the critical difference. I hope that minister accepts that it is a good illustration of the point that Audit Scotland and others have made that it is incredibly difficult to track and manage from the budget through to announcements through to outturn through to consolidated accounts.

11:45  

As somebody who has run a business, I recognise and am very familiar with the difference between budget forecasts and cash management. However, when they are so far apart, it always causes concern, and that should be investigated. Do you recognise that as reflecting the broader point from Audit Scotland? That follow-through is the important point.

The level of delta was about £600 million—that is what we get if we add £98 million to the £511 million—which is 15 per cent, crudely, and that is quite a big variance between the budget and what you are saying the actuals will be.

The broader point that I seek to make is that we need to spend, as you are aware, and we cannot exceed our expenditure limits as set by Treasury. We have a reserve totalling £700 million. Looking at the quantum of the Scottish budget as a whole, we have that very limited space in which to land. We cannot go over. We cannot overspend and we cannot underspend beyond what we can take forward in the reserve—and I am sure that members would rightly be criticising why resource had been lost. That is an extremely challenging set of circumstances. The way that I and others have articulated it is that it is like trying to land a 747 on a postage stamp.

As we move into the latter part of the year we, then have fiscal events including the autumn budget and potentially more in-year funding announced. We then have supplementary estimates. This year, we did not have confirmation of what the supps were going to be until about three weeks after we published the SBR. That creates an incredibly challenging set of circumstances in which to operate, and that compounds the existing challenges that we are all aware of, which meet any government or organisation managing its finances towards year end.

I take the point that you make about needing to provide as much clarity as possible, and I am happy to reflect on that. As I hope the way in which we have presented this information would indicate, I am committed to doing as much as possible to aid transparency and understanding, and I recognise the points that have been raised.

Do you wish to add anything, Scott?

Just a couple of things. I underline the difficulty and volatility of the position this year. Looking across the timeline of the funding position, we were told at one point that we were getting £220 million of guaranteed funding to support the necessary actions in response to the omicron variant. That became £440 million, but with a clear instruction that, if that proved to be higher than the final supplementary estimate position, any surplus would need to be paid back. That was all the narrative before Christmas. Ministers were taking decisions on funding on the basis of that change in the funding envelope.

Very quickly, we came back in January and we found that the funding position was moving again. It was stepped up a few times until we reached the £841 million position to which the minister referred.

The cabinet secretary and the Cabinet are taking decisions on allocations—they are balancing things right across. All of a sudden, the position has changed again, post cost of living. There is a lot of volatility, and there is a lot of decision making across that time period. The £511 million includes capital and financial transactions, or FTs, of £118 million and £61 million.

I absolutely take the point, however. One of the reasons for the breadth of stuff that is included in the guide—some of the stuff on the reserve, in particular—was to illustrate how that volatility impacts on the reserve position as we go across.

Sure—but you do accept this, though. I understand how we got here; it is a matter of reconciling the budget from this year into next. What if we had not got the information that you have just provided orally, that there was a gap? In future years, we should be aiming not to require that narrative to reconcile one year’s budget moving into the next year’s budget. Is that a fair comment?

Scott Mackay

Yes. We are trying to give as much information as we can.

I appreciate that.

Scott Mackay

The position continues to evolve as we move towards the year end.

This is a really important discussion, and I very much welcome the committee’s interest in this area. Ultimately, the way to remedy the situation is to recognise that the current arrangements that exist are beyond sub-optimal. I do not say that as a partisan or constitutional point. I think that any fair-minded person would recognise that that is the case.

The way to get beyond that and to provide greater transparency is through a revised process. There is an opportunity through the quadrilateral discussions that are taking place among the respective finance secretaries across the UK and through the fiscal framework review, in which I know the committee is taking a keen interest.

I would echo the comments of the convener, that it is extremely helpful to have this additional information that we have not had on previous occasions. I also thank you, minister, for the letter that you sent me on 16 November 2021, when I asked various questions regarding the autumn budget revisions, particularly on the education front.

I will stay on the education theme for a minute. One of my colleagues wants to ask you about this in a bit more depth, too. Could you interrogate the figure for student loans? It seems to be pretty high.

This is an important point, and I will ask Scott Mackay to come in on it.

Scott Mackay

Is this the change in the student loans?

Yes.

The change relates to what is known as the resource accounting and budgeting or RAB charge, which is a technical assessment of the level of impairment that needs to be applied against student loans. There is quite a complex model that calculates that impairment. It is an assessment of the likely level of future write-offs and the level of subsidy inherent in the loans, which needs to be recognised up front when the loans are issued. There are a number of economic determinants, including a discount rate that is applied in establishing that figure. The adjustment reflects a change to some of the economic determinants that are used in the model that calculates the level of impairment.

Are those Covid-related changes? Obviously, there may be more students who are—

Scott Mackay

To an extent. They are over the lifetime of the loan, and that loan can extend right out to 30 years in Scotland. There are longer-term assessments of the likelihood of the full amount being repaid.

I am sure that my colleague will come back on some of the details of this, but I am interested as to what the changes are in the economic determinants. It is quite a substantial figure.

I do not do the detailed modelling myself, but my understanding is that the main reason for the change is a change in the discount factor that Treasury has asked us to apply in the model, which has reduced the level of RAB charge applicable in Scotland. That is my understanding.

If you are looking for real detail on how that modelling is calculated, we might be testing the limits of my understanding.

It would be helpful to the committee if we could get a little detail. As you say, it is obviously very technical. I am sure that Michelle Thomson wants to come in on that.

I have another couple of questions, Michelle, so if you want to come in on that bit—it is up to the convener.

Thank you. There is a bit more detail that it would be useful to have about how things are working specifically. I am aware that there has been a lot of reworking of the determination of the loan book at UK Government level. It has been through a number of iterations, and there is some sleight of hand there in accounting terms, which I am aware of, too. That is probably a technical term that I should not have used.

In some respects that does not matter. What interests me is why we should care. In other words, what, specifically, has this got to do with the Scottish budget? Why are we having this technical change of £298.7 million appearing for us—given that it is a loan book—while we do not have student loans in Scotland? That is what I do not understand.

We have some student loans in Scotland, but obviously the level here is significantly lower than in the rest of the UK. This change is distinct from the policy changes that have been made at a UK level on student loans.

As I said, as part of the way in which we are required to budget for student loans, we have to recognise up front the idea that we will not get the full amount of all those loans back. The level of impairment is calculated using the model that I mentioned. The level of impairment in Scotland is significantly lower than in the rest of the UK, as a result of the fact that the loans here are proportionally smaller and payment is more likely. Part of what has driven the policy change at a UK level is a recognition of the very high levels of write-off that were being reflected against the English loan book. That is not the same in Scotland. The repayment levels are higher in Scotland—

I suppose that that is what I wanted to explore. I apologise for using the term “sleight of hand”—what I meant was that, in my understanding, there is an accounting mechanism to reflect that the loans are not truly loans in a traditional sense, and the public accounting of them is slightly different.

Notwithstanding that, I still do not understand the direct relevance to the Scottish budget of that treatment, which has been applied across the board. I would also like to know how, specifically, it is being applied to the Scottish budget. Are those real numbers, in a technical sense? Are they really based on Scottish loans or are they an apportionment based on population share? In other words, is the number that we are discussing real, and what does it really mean for us?

Yes. It is a specific calculation on the Scottish loan book. It is not an apportionment of a level of impairment across loans. As I said, the model is quite complex. It tracks repayment rates in Scotland and factors those in to come to an assessment of what the likely repayment will turn out to be. As I said, the repayment level has historically been much higher in Scotland, which is a direct function of the level of loans here.

I get that. I have a last wee question, because I am aware that my colleague wants to come back in and explore this area.

With regard to the loans themselves, I note what you are saying about the historical situation in Scotland; that applies to Scottish loans simply because they run over 30 years, as I understand it. It does not have any relationship to Scottish students who, for example, studied in England and have now come back and become Scottish taxpayers. I am assuming that it is simply a picture of the loan book at a point in time when those loans were taken out.

Scott Mackay

Yes—it is an assessment of the complete loan book for all students who draw down loans.

So it really is just a technical thing. It is not—

Scott Mackay

It is a technical recognition. It is a non-cash estimate—those loans are not being written off at that point. It is just an assessment of what we think—

For what it is worth, I think that it is very good to have that. It is a positive, and I wanted to get the understanding of it on the record, so I thank you for that.

Mr Mackay is quite right—the matter is exceptionally technical. I am interested in the prediction that it will be more difficult in the years ahead to draw back as much money on student loans, because more people have gone through great difficulties after Covid. Is that really what you are saying?

Scott Mackay

Yes—it reflects the latest estimates, but they will change. The modelling changes every year, and there is a reassessment. If the economic circumstances change, the figures change.

12:00  

I understand that, but that aspect is very important because it has an effect on the numbers of students. We are trying to widen access, which we have made good progress on, so it has a big implication for future spending.

Minister, I want to ask you about your helpful table towards the end of your brief about the differences between the Covid and non-Covid spend on education. We had Alastair Sim at committee last week, who made the point that he is concerned that higher education is not sufficiently high up the Scottish Government’s list of priorities when it comes to future spend. The figure for higher education student support in that table is £15 million. I have asked about that before, but I ask again: specifically, what is that figure for?

Okay. Have you got that detail in front of you, Scott?

Sorry, it is in your table in paper FPA/S6/22/9/1. It is under your figures for education and skills. You have figures for central Government grants to local authorities, higher education, student support, Scottish Funding Council, learning and so on. That figure is against student support, which is all tied up in that support, so I wondered what that was.

If the convener agrees, I am happy for somebody to write to me about that.

I would be happy for you to write to Liz Smith on that, minister.

The broader point, minister, is that we can agree or disagree with Mr Sim about the future spend on higher education, but a serious issue has been presented to the committee from a lot of witnesses, which is that higher education really matters for the skills that we need if we are to address some of the problems in the economy. What is very helpful about the information that you have provided is that we have a better breakdown of that spending. I am interested in things such as student support, because that is an important aspect of encouraging younger people into higher education.

I appreciate the question—it is perfectly legitimate. If you are content, I would be happy to write back to you and send a copy to the committee.

Thank you.

There is one thing to point out. That is a conservative estimate of the Covid spend to date in the table that I think that you are referring to. There are some examples where we would be fairly sure that the final figure for spend to December or spend in terms of the full outturn will be significantly higher than that.

That would be helpful. In one of the briefings that Professors Gerry McCormac and Sally Mapstone from Universities Scotland presented not long ago, they were very concerned about getting over this Covid period and providing extra student support to help with that, so I am interested to know what that figure is for.

I would be happy to provide you with an up-to-date picture. As Niall Caldwell said, that is a conservative estimate. I would be happy to give you a rounded picture of the support that has been provided, if that would be helpful.

Thank you.

Minister, under section C, “Scotland Reserve and Funding Position Details”, you say:

“Despite this continually evolving, volatile position, reserve limits remain fixed. Those limits being a cap of £700 million with annual drawdowns normally restricted to £250 million for Resource and £100 million for Capital and Financial Transactions combined. As we are currently within a defined period of “Scotland Specific Economic Shock” (as set out in the Fiscal Framework) the annual drawdown limits are waived but the cap of £700 million remains.”

As I mentioned in the previous session, John Mason said only last week that the University of Glasgow has greater reserves than the Scottish Government is allowed to have. That gives some perspective. Can you tell us, because the previous witnesses were unsure when asked directly, when that three-year period of Scotland-specific economic shock will end?

It expires at the end of next year.

Basically, that is April 2023.

Yes.

What difficulties are the reserve limits creating for the Scottish Government in delivering on its budget?

There are a number of difficulties. There was a view that one of the reserve’s functions was to manage forecast error, but obviously there were borrowing powers to take into account, too. However, we have found that function increasingly difficult to deploy.

I referred earlier to underspends. Capital underspends, in particular, can emerge late in the year and, given that the reserve itself has a total limit of £700 million but an annual drawdown of £100 million in combined capital and financial transactions, there is a risk that, if a late slippage in capital occurs over a number of years, that will start to build up in the reserve. It will then become more challenging to deploy that money in the next financial year, because of the £100 million cap. If there is more capital than FTs in the reserve, the £700 million limit gives less headroom for resource. Beyond that, the reserve itself is not finalised until we reach outturn, and we need to maintain headroom for that.

The limits create a number of challenges. You are limited in the amount of money that you can carry forward, which creates particular problems if you get late allocations and supplementary estimates. It is helpful when the Government allows that money to be carried forward into next year’s budget, but that has been the exception rather than the rule, and we could find ourselves in a situation in which, if we were not able to carry the money forward via the reserve, we would not be allowed to deploy the resource in the most effective way. I am sure that we all want to get the best value for money, and with any supplementaries that come in very late on, we will want the maximum capacity either to deploy them immediately, if that is the best use of the resource, or to carry them forward, as we have done with the £120 million for local government. There is also, as I have said, the broader risk of capital build-up constraining the reserve. Moreover, as you will know, we are talking about a fixed amount that would have been calculated when Scottish Government budgets were, by dint of inflation, lower.

The limits therefore create a number of challenges for end-year management and the most effective deployment of resource and capital. I know that the committee has taken an interest in this area, and it will be an important consideration in the fiscal framework review.

Did you want to add anything, Scott?

I think that you captured the points very well, minister, but perhaps I should emphasise that any decision to store something in the reserve to deal with any future reconciliation impact will further constrain the amount of headroom to address end-year volatility. It is a very narrow margin that we are balancing on.

Of course, inflation constricts things even more, because the lack of indexing means that what you can do with the reserve reduces every year.

I call Douglas Lumsden, to be followed by Daniel Johnson.

Hopefully I will be quick, convener.

I do not want to flog a dead horse, but I want to ask about the student loans situation. I am a new member, so this is all new to me, but have we seen this level of impairment in previous years or is it unique to this year?

Scott Mackay

We have seen high levels of impairment before, but I would just point out that, relatively speaking, the level is much smaller than that in the rest of the UK.

But we have seen this level of impairment in Scotland before.

Scott Mackay

Yes.

Following on from Liz Smith’s questions, am I right in thinking that this all comes down to our predicting the amount of money that we get back to be lower? If so, is that because our economic performance turned out not to be as good as we thought it might be? Is it fair to say that?

Scott Mackay

I would just say that there are a lot of determinants in that estimate.

In that case, I will move on. The convener asked—

I recognise that there is significant interest in this area. Would it perhaps be helpful for us to write to the committee with further technical information, given the considerable interest? I am also happy to arrange any follow-up sessions that would be useful. How the economic modelling is devised is a highly technical matter. If the committee would be content with that, I would be happy to arrange for that to take place.

Yes, I would certainly be happy with that, but I am not the one who is asking questions on this area—if Douglas Lumsden, Michelle Thomson and Liz Smith are happy, we can take that approach.

Yes, I would be happy with that.

I will move on. The convener asked right at the start about the £40 million reduction in the affordable housing supply programme. That programme involves partners such as housing associations and local authorities. Are they still bringing forward a long list of schemes and proposals, or have those dried up as well?

We work very closely with partners in delivering the programme. Earlier, I set out the broad, strategic framework. We are obviously considering the impact on resourcing in the context of the work that the Government is doing with partners to deliver housing, but the issue is not unique to Government. Private developers will be experiencing the same constraints around supply.

I reassure you that we have a clear commitment to our support for affordable housing, but the challenges that we are facing are ultimately outwith our control, although we certainly do what we can within the Government to help to address the issues around supply chains and logistics. However, as I am sure that you appreciate, these are broad, global issues that are impacting many economies across Europe and North America.

Absolutely. I just wanted to check that there are local authorities coming forward with plans and that the money is there.

Yes, but the issue is ultimately not one about having the resource to deploy; it is about having the materials to spend the resource on. This is a broad reflection of the challenges around supplying and sourcing materials, which are obviously impacting the construction sector.

Will that resource still be available in the years to come?

Yes, we are absolutely committed to our targets on affordable housing.

Just another couple of things—sorry, convener, I know that time is an issue.

Can you give us a bit more information on the £24 million reduction due to underspends in the young persons guarantee?

Yes, certainly. It was a combination of reductions in demand-led expenditure, so it comes back to my earlier point about demand-led areas. It was also about a number of efficiency savings. We have had some of the lower lines of the budget for the young persons guarantee, but the largest element related to the national transition training fund; some of the costs are being reprofiled into next year.

If it is demand led, are we not telling people that it is there? Is there something else that we could be doing to make sure that the money that has been committed is spent?

That is a fair point. We want to see the maximum uptake of any scheme, particularly in relation to employability. We can continue to reflect on that. Some of it has also been about delivering the scheme more efficiently and another aspect, as I referred to, is the reprofiling into the next financial year.

And if young people get jobs, they might not need to go on to such a scheme.

I just want to briefly correct myself. I stated earlier that the delta was 15 per cent. I should have said 1.5 per cent. I was doing my mental maths too quickly. The flipside of that is that the Government is doing better by an order of magnitude than I was trying to claim.

Thanks for that, Daniel.

I have quick question on something that has come up a number of times in a variety of these sessions about the budget process. I fully accept what you are saying—I think that most people would agree that it is somewhat inefficient. Do you collect any data about that? When I say “inefficient”, I mean these late changes at the 11th hour, where you think you that have spend, you allocate it and then you need to move it from budget pots or whatever—there is a whole variety of things.

Do you have any sense of the additional cost of doing that in terms of hours accrued, because that is a hard figure? You must be collecting days spread throughout all the departments that are working on it. Do you have any sense of that—apart from loss of hair?

I think that Niall Caldwell and Scott Mackay would agree with me that it is always a very busy and intense workload in finance but particularly as we get to this point of the year.

12:15  

It will always be challenging, just by dint of the fact that we are approaching end of year. We can perhaps remove some of the complexity and what can at times be the capricious nature of the arrangements by having a better process for how the Treasury and the UK Government engage, so as to provide a bit more certainty. We had a Barnett guarantee in a previous year, and that was enormously helpful. That allows us to plan with more certainty and—touching on the points that we have discussed regarding the reserve—increased flexibility. That, in turn, allows us to think about ways to deploy funds more efficiently, rather than having to make what can be an artificial end-of-year deadline to make the budget balance and to ensure that we still have enough headroom in the reserve and that we are not underspending to a degree where we lose the funding. It is an intense process.

As for quantifying the resource and the operational costs within the SG, I do not have the figures to hand. I do not know whether we have those figures available.

I do not have a figure for the extent to which we have put through a transfer that was subsequently revised. I can say, however, that we are constantly looking to improve budget management and forecasting. That is a key effort. It is vital, in maximising effectiveness in budget management decisions, to have good-quality management information. We spend a lot of time reflecting on the annual process and on how we can improve the quality of the forecasting, which feeds through to making the process as efficient as possible. However, it is hugely complex. There are so many budget lines. There is staff turnover. We are constantly trying to engage, ensuring that people have the right skills to provide the quality of management information that we are looking for.

It is worth emphasising that every single financial decision that we make with ministers in the last three and a half months must take into account the Scotland reserve. That includes borrowing decisions, which must be deferred until the very end of the year, where possible, to ensure that the limit is not breached. It is a risk with any volatility in relation to funding or spending decisions. That is the key frame, which adds a lot of time to the processes.

In asking this question, I acknowledge that the year-end processes are complex at this level across this number of budget lines. That is taken as a given. We get a lot of commentary that the way in which the fiscal framework works is inefficient, and that means that there is a cost to the public purse. I suppose that is what I am driving at: the constant changes—stuff coming in from left field—are incurring a cost, and that is inefficient for public sector expenditure. That is the reason why I am asking this, rather than any other reason.

That is a very fair point to make. I do not think that the current set of arrangements is optimal, and we can hopefully remedy that through the fiscal framework review.

I thank colleagues around the table for their questions, and I thank the minister for his evidence.

Item 3 is formal consideration of the motion on the Scottish statutory instrument. I invite the minister to move motion S6M-03069.

Motion moved,

That the Finance and Public Administration Committee recommends that the Budget (Scotland) Act 2021 Amendment Regulations 2022 be approved.—[Tom Arthur]

Motion agreed to.

I will now suspend the meeting briefly to allow for a changeover of officials.

12:19 Meeting suspended.  

12:20 On resuming—  


Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2022

Item 4 is an evidence-taking session with the Minister for Public Finance, Planning and Community Wealth on the Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2022. Mr Arthur is joined by Mr Robert Souter, senior tax policy adviser, Scottish Government. I welcome Mr Souter to the meeting and invite Mr Arthur to make a short opening statement.

The order specifies the standard rate and lower rates for Scottish landfill tax, consistent with the rates in the 2022-23 Scottish budget as published on 9 December 2021. It sets out that the standard rate will increase from £96.70 to £98.60 per tonne, while the lower rate, for less polluting inert materials, will increase from £3.10 to £3.15 per tonne. The proposed rates will come into effect from 1 April 2022.

Committee members will wish to note that the rates match landfill tax rates for 2022-23 in the rest of the UK, as confirmed in the UK and Welsh budgets. The Scottish Government is continuing to act to avoid any potential for what is referred to as waste tourism as a result of material differences between the tax rates north and south of the border. The increased rates also provide appropriate financial incentives to support delivery of our ambitious waste and circular economy targets.

I will conclude there, convener. I am happy to take questions.

As John Mason will remember, we have had quite a number of debates on waste tourism in previous years. I cannot imagine that we will delve into that today, but who knows?

I appreciate why the Government has decided to keep the rates the same as those in the UK, but surely they should have gone up by at least the rate of inflation. That would not have had many people trucking over the border.

It is a fair point, and obviously we will continue to keep the rates under review. However, we are on a journey towards banning biodegradable municipal waste by the end of December 2025, and we will consider the rates in the broader context of our actions to reduce waste and move to a circular economy. For the reasons that I set out in my opening remarks, we are continuing to ensure parity with rates elsewhere in the UK to avoid the risk of waste tourism emerging.

As the committee has no further questions, I thank the minister for his evidence.

Item 5 is formal consideration of the motion on the instrument. I invite the minister to move motion S6M-03203.

Motion moved,

That the Finance and Public Administration Committee recommends that the Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2022 be approved.—[Tom Arthur]

Motion agreed to.

I thank the minister and his officials for their evidence today. We will in due course publish a short report to Parliament setting out our decisions on both the spring budget revision and the order that we have just considered.

That concludes today’s meeting. The next item on our agenda, which is consideration of our work programme, will be discussed in private.

12:23 Meeting continued in private until 12:41.