Finance and Public Administration Committee

Meeting date: Tuesday, August 31, 2021

Official Report 664KB pdf

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Cabinet Secretary for Finance and the Economy

In our second evidence session we will hear from Kate Forbes, the Cabinet Secretary for Finance and the Economy, and Douglas McLaren, deputy director, budget, pay and pensions, in the Scottish Government. I welcome our witnesses to the meeting, not least because the cabinet secretary has come straight from the Local Government, Housing and Planning Committee meeting and has already had an exceptionally busy morning.

Committee members have received a paper providing background information for the evidence session, but before I open the session to questions from members, I invite the cabinet secretary to make a short opening statement.

Thank you, convener. It is great to be with you this morning. I am sorry that I am not there in person. I had hoped that it might be the first in-person finance committee since the pandemic struck.

I want to continue to build on the open and collaborative approach that we had with your predecessor committee in the previous parliamentary session, and I am grateful for the early engagement that my officials have had with your clerking team.

I will raise a few issues at the outset. I am getting quite a bit of feedback from my microphone; I hope that you can all hear me okay.

First, I know that the committee will want as much early clarity as possible on the process and the timetable for next year’s budget. I would like to build on my experience with the past two budgets with regard to contending with the implications of, and uncertainty around, the timing of the United Kingdom Government’s net fiscal event and to move to early consideration, with the committee, of those implications. In light of the uncertainty around the UK Government’s budget, there are pros and cons to going ahead of, or waiting for, the UK Government’s budget. That debate has been informed by the SFC’s forecast last Thursday, and the Office for Budget Responsibility has now been requested by the chancellor to produce its forecast at the end of October.

There are several other areas that the committee will need to—[Inaudible.]—so I will make only one more point before I hand back to you, convener. Needless to say, we are producing Scotland’s first framework for tax for consultation—a new enhanced Scottish approach to taxation. We are setting out our programme of work on tax over this parliamentary session. I look forward to the committee’s views on that.

I will stop there and again make the point that I am getting a lot of feedback, so I hope that you can hear me and that I can hear you.

Thank you, cabinet secretary. I think that some members are having a wee bit of difficulty in hearing you clearly. Perhaps we can make some technical adjustments. If that is not possible, we will have to soldier on. Please bear with me for a minute.

I have been advised that broadcasting is trying to improve communications but that we should plough on in the meantime. I hope that you will be able to hear me, cabinet secretary. I will try to enunciate and to not sound as west of Scotland as I normally do in asking these questions, you being a poshie and all that. [Laughter.] You will probably be able to translate what Daniel Johnson is saying much more clearly than I could.

Undoubtedly.

First, has any progress been made on the review of the fiscal framework? There has been real difficulty in getting the UK Government around the table. Of course, we hope to have the review by the end of the year.

There has been progress in the sense that we continue to engage on an on-going basis with the UK Government. Obviously the fiscal framework is due for review in 2022, and that will be preceded by an independent report that will be presented to both Governments by the end of this year.

The committee will agree that the framework has been subject to some quite unprecedented stress testing, and we would not have anticipated the pressures that have been put on it when it was originally agreed in 2016. There is some disagreement on this, but my view is that the review should be quite broad in scope and that the report on it should consider not only the operation of the framework but how it can be improved.

The arrangements for the review require joint agreement between the two Governments. We have not been able to achieve that to date, but I will discuss the next steps with the Chief Secretary to the Treasury in the coming weeks. My goal is to get agreement and ensure that we meet the timetable, and I would really welcome the committee’s support in continuing to make the case to the UK Government for a broad-ranging review that is in line with the predecessors’ report on the fiscal framework. I hope that we can work together to achieve a meaningful review instead of just ticking the review box.

Politics moves very fast in Scotland, and we now have the co-operation agreement between the Scottish Government and the Green Party, with ministers, including Patrick Harvie, a former member of this committee, being appointed this afternoon. What work has been done on the implications of that for the public finances? For example, the number of affordable houses to be built to 2032 is to increase from 100,000 to 110,000, although that will happen at a time of labour and skills shortages; £500 million is to be invested in a just transition fund for the north-east and Moray; and there is to be a fair fares review to provide a realistic alternative to car use and increase investment in active travel and public transport. Given the likelihood of the funding for those measures impacting on other Scottish Government policies and programmes, can you take me through the process of how the agreement will work as you take the budget forward?

As you can imagine, I have been all over this—for want of a better phrase—to understand the financial implications and consequences. On housing, which you mentioned, we set out the budget for our original target of 100,000 homes in the capital spending review, and as a result of a number of different discussions—and in light of next week’s programme for government, which is a really important consideration—we will be considering that capital requirement. As for the core financial implications on the resource and capital sides, they will be settled in the budget-setting process. We have come to an agreement, and our responsibility now is to fund that part of the budget.

Secondly, I point out that it is a multiyear co-operation agreement, which leads us into the resource spending review. That review is where we had intended to cost and plan for multiyear commitments, and the co-operation agreement will now be factored into it. I am sure that you are all sighted on this, but, just to give you a little bit of history, we had hoped to carry out our multiyear spending review last autumn. However, we could not proceed with it, because the UK Government’s planned resource spending review did not go ahead last year. We are hoping—certainly the hints have been made and the intentions are there—that the UK Government will do its comprehensive spending review this autumn, and that will allow us to publish our own plans for our intended multiyear spending, which will include the co-operation agreement.

11:15  

A number of members, myself included, have raised issues with regard to tax and demography. One issue of concern is the need to grow the Scottish economy relative to the UK economy. We have real demographic challenges, and there is also a productivity issue. What steps will be taken on that?

As the Scottish Government recently pointed out, the UK has had the lowest economic growth of any north-west European state over the past 12 years or so since the financial crash, but Scotland does not seem to have done particularly well in comparison, as reflected in the block grant adjustment in some years. What can we do to try to increase productivity so that we can restore and improve the health of, and enhance, the public finances?

There is a lot in that question, so I will take each point in turn. The bottom line is that the primary way of increasing public revenue in order to fund our public services is through broadening and increasing the tax base. In order to do that, we need to maximise the number of people in fair, well-paid secure employment. I am sure that the SFC made that point in relation to its updated forecast.

There are primarily two ways of doing that. My primary concern is an economic subsidy over the next 10 years that deals with the structural challenges of productivity and maximising the number of well-paid jobs. In addition, although we are—I hope—heading for significantly lower unemployment than we perhaps feared, a lot of businesses are saying that they are struggling to recruit. Many of them formerly relied on European Union labour. Without the staff, most businesses cannot grow and develop, and individuals are not earning and are therefore not paying income tax.

First, therefore, we need to ensure that our economic strategy for the next 10 years has a laser-like focus on the areas where we want growth and development and economic recovery, and secondly, we need people. First, we need to focus on ensuring that as many people as possible who are already resident in this country have the right skills for those jobs, but we also need to ensure that we have an attractive immigration policy. So many sectors just cannot recruit right now because of their previous reliance on EU labour, which is no longer materialising.

In terms of what I am actually going to do, those are the answers. First, we need a long-term economic strategy that deals with structural issues such as productivity; that is what I intend to do in the economic strategy that is due to be published in the next few months. The second focus is immigration and attracting to this country a workforce that is able to fill roles in order to allow businesses to trade profitably and to enable people to pay income tax.

I agree with your comments. However, the UK and Scotland have the same immigration policies. What can Scotland do to improve its position relative to the rest of the United Kingdom? The block grant adjustment and taxation are obviously major issues in future budgetary considerations.

I will take a short detour, as you talk about block grant adjustments. One of the areas of the fiscal framework that needs to be reviewed concerns income tax and the associated methodology. The SFC has detailed that in its own reports. We are conscious that the methodologies that apply to income tax for our tax base are probably not as helpful as they could be, in that we have a different tax base from the rest of the UK. For example, we need to maximise the number of people who are paying, and broaden the tax base at the upper end because of the way in which tax is calculated. There is currently a question around the methodologies that are applied to the tax base and the way that the block grant adjustment is calculated. However, I shall leave that to one side.

With regard to what else we could do, it is clear that we are more exposed to the impact of what happens with oil and gas. The committee will have seen that in the forecast that the SFC published last week.

When there is a reduction in demand for oil and gas, that has implications for individuals who are working in that area, and therefore we are more exposed to the income tax implications of that. My view is that we need to diversify, and that is why the point of the economic strategy is to focus on the opportunities that there are with alternative emerging technologies, renewables and the just transition. Different countries around the world are grappling to get the competitive advantage that new and emerging technologies offer. I want to ensure that it goes to Scotland—that the supply chains in Scotland are creating new jobs as a result of pioneering research and development. That is one area where I think that we can have a competitive advantage, if we get it right. None of this happens automatically, without us intentionally trying to ensure that we capture the opportunities here in Scotland.

Thank you. I have a final question before we open up to questions from committee members. The Scottish Fiscal Commission noted that the Government has not guaranteed any additional funding for Covid-19 for 2021-22, and that there are currently no arrangements for deferred funding. It has said:

“Large changes in COVID-19 funding late in the financial year may create difficulties for the Scottish Government’s management of its budget.”

I asked the SFC about that, but can you also say what kind of difficulties that could create for the Scottish budget?

It is one of my greatest headaches, because last year we were deeply concerned that the UK Government could go right up or down with the funding that we receive. Bear in mind that consequentials emerge only from the money that is actually spent, and not the money that is announced.

Last year provides an important comparison. If the UK Government were to announce X hundred million pounds for the Scottish Government to spend on business, we would immediately be under pressure to spend it, but that amount from the UK Government could then be changed, after we had given the money over to business. Therefore, midway through last year, the UK Government implemented the guarantee, which was just to say that the amount would not be revised downwards. Unfortunately, that guarantee has not been extended to this year. That means that money that is announced could actually be clawed back, and, in the past, it has often been clawed back, as late as February or March in the financial year. Because I have to balance my budget to the penny, by February or March I will already have confirmed that, for example, teachers or businesses will get a certain amount of money. I am then left having to repay some of that money to the UK Government late on in the financial year. Clearly, I do not have the capacity in a fixed budget to suddenly create more headroom, once we have already confirmed that that money is being spent.

That happened the year before Covid. In February 2020, we got confirmation that, despite all the money that had been announced for us during the year, the money that we were going to get was less. That meant that I would have to repay some of that money—and that meant that it was capital—very late in the financial year.

I cannot afford to hold money back—businesses need it and public services need it. Our citizens need that money to be spent in the health service and in remobilising the justice system. Equally, in the back of my mind, I have the fear that money that is announced will be revised down, as has already happened in education; I think it was £25 million pounds that had been previously announced that was clawed back in May.

It is easier to handle that if it happens earlier in the financial year, but if it is in February or March, it is almost impossible. We cannot borrow—we cannot suddenly create additional money to pay it back.

Thank you. I open up for questions from the committee.

Following on from the convener’s remarks at the beginning of the meeting, we can agree that we both have excellent diction and enunciation.

I want to follow up on some points that have already been raised. I am clear that you have read the SPICe report and the Fraser of Allander Institute piece looking at the outturn reports and comparing them with the tax plans. In the 2019-20 budget, the Scottish Government expected its tax plans to raise an additional £500 million, but, based on the outturn, they have raised only £148 million. I understand what you were hinting at with regard to the block grant mechanism. However, it is clear from both of those bodies that what that difference fundamentally tells us is that income tax per capita has not grown as much in Scotland as it has in the rest of the UK.

First, do you agree with that assessment? More importantly, and given what you were just saying about the need to expand the income tax base and to make sure that people are earning more within that, what does that say about the policies that you have been pursuing? What policies will you pursue to ensure that people are earning more so that they pay more tax, which we can all agree would be a good thing?

On the first point, about the outturn report, I understand the premise of your question but it is important to reflect that our income tax policies raised £148 million over and above the block grant adjustment. That £148 million would not have been secured for the public purse if it had not been for the change in policy.

I will make two additional points. First, we have been clear that our income tax policy is endeavouring to do two things. We are seeking to achieve two results. The first is security of public revenue. In order to say that the health service will get £X billion over the next year, I need to know that that money is coming in. We need to be sure that we will raise it. However, we are also trying to ensure that the policy is fair. We have been clear that we intentionally made changes to maximise the progressivity of income tax. It is not perfect, but we have powers only over rates and bands, not over the personal allowance, incentives such as gift aid or the interaction with things such as pensions. It needs to be seen in that context.

Having said that, I clearly want to secure the long-term sustainability of our income tax policies. In other words, I want to continue to ensure that we have the money that we need. We are currently undertaking a policy evaluation to better understand the impact of the 2018-19 policy reforms. We hope to publish the findings later this year on the precise impact of those policy changes. I am sure that that will be of interest. Covid excepted, we have continued to see growth in Scottish receipts exceeding that of the rest of the UK. This is the second consecutive year in which we have seen that growth and we want that to continue. We will wait to see what the impact of this Covid year has been.

I have a third point, which is around the risk that all of that creates. If we look at the reconciliations from the past two years, we can see that the existing borrowing and reserve powers in the fiscal framework are not sufficient to deal with the level of volatility in forecast error. I will stop there, but there are three implications of that. One is to ask whether it is important that we have more than one objective for income tax. Secondly, is it important that we continue to raise more than we would have done from the block grant adjustment? Thirdly, what is the best way of managing that level of risk and volatility? My view is that we need a broader review of the fiscal framework to ensure that it can deal with that level of volatility.

I agree that we need to get into the detail of the fiscal framework, but I do not think we have time for that this morning. However, there is clear agreement that we need to increase income tax on a per capita basis. Fundamentally, that would tell us that people in Scotland are earning more money, which is a good thing. Indeed, you summed it up earlier as more people participating in the economy and earning more money, underpinned by productivity.

In relation to some of the things that the convener was raising, my concern is that that sounds a lot like economic growth. I am very clear that economic growth is a good thing, especially when it is underpinned by growth in productivity, because it means that people are better off and are leading better lives. However, certain people who are about to join your Government think that economic growth is a bad thing. What is the Scottish Government’s view on economic growth?

11:30  

I can be very open and honest about my view on economic growth. Obviously, the co-operation agreement, which I am sure you have already read, had some excluded areas, including GDP growth.

My view is that we need fairer and increased prosperity. We cannot have economic growth without looking at fairness, because that would not secure the outcome that you and I are talking about. If we see a ballooning of income for the highest earning, with the tax revenue that comes from that, but we still see huge levels of in-work poverty, that is not a good result. Therefore, economic growth has to be fair and distributed.

In my view, we do that by ensuring that the focus of Government is on supporting businesses, industries and sectors that will bring more people into safe, secure and well-paid employment. We have seen the implications of that during the pandemic, because being in employment is a great blessing but, in and of itself, it is not enough to ensure that people are not in poverty. Employment has to be safe, secure and well paid. There are great opportunities in the Scottish economy when it comes to the just transition, the green economy, new and emerging technologies and alternative forms of energy. We must also ensure that each of our local economies is thriving because, to take a more regional approach, if Edinburgh and Glasgow are doing well, the national picture probably looks quite healthy, but I have a vested interest in making sure that the Highlands, the south of Scotland and the islands are doing well and that areas of deprivation are doing much better. Therefore, we must make sure that economic growth is fair, inclusive and sustained and not just economic growth for the sake of it.

Thank you—I almost completely agree with everything that you have just set out. We need growth because, ultimately, that should lead to greater fairness and prosperity for people. My only concern is that you and I might agree more than you agree with some of your new ministers. However, I will leave that there.

I have a final point. Earlier this morning, we were discussing the Scottish Fiscal Commission’s forecast. On one hand, the forecast is very encouraging, because it looks like we will return to pre-Covid levels by quarter 2 of 2022, which is a good deal earlier than we expected. However, our discussion with the commission’s representatives raised a number of risks. Indeed, one of the things that they said was that the forecast assumes that the current relative absence of restrictions is maintained. Given the events of recent weeks, we are all concerned about the levels of infections. Understandably, there has been talk of circuit breakers and the possibility, at the very least, of restrictions being reimposed. Within the Scottish Government, what work is being done to look at the impact of those measures and how they would impact on spending in the current year? Can you outline the fiscal consequences of a circuit breaker or any other interventions that might be required if the situation does not improve?

Thank you—that is a very good question. The SFC forecasts are cause for optimism. I do not think that we can downplay the difference between the January forecasts’ really tough outlook for the Scottish economy—which I had to base my budget on and which reflected the huge impact of the pandemic—and where we are now. They are but forecasts, which are based on various variables that the SFC would have gone into, such as vaccinations and lockdowns.

In terms of the fiscal impact, from a financial perspective, one of the biggest challenges right now is the fact that there has not been much additional consequential funding from the UK Government in the past few months. Right now, we are trying to remobilise the health service, the justice system and a host of different public services, as well as dealing with the on-going Covid impact, from a budget that has not been supplemented by additional consequentials from the UK Government in the way that it was last year.

At the moment, the pressures on the Scottish budget are such that we really need the structural support for businesses to be in place—furlough and self-employment income support. If we were to find ourselves going into another lockdown—at the moment, that is not what we are discussing; we are talking about trying to maximise the impact of the baseline measures—we have no certainty that furlough would be in place or that self-employment income support would be in place. I have no certainty that there would be any additional funding in place and I am not sitting on funds right now that I could deploy to support businesses. We would need additional help from the UK Government.

There is a bit of déjà vu here from last October, when furlough was due to come to an end and we repeatedly asked for it to be extended. It was extended at the last minute, but the Scottish Government’s resources are just not sufficient to help businesses to the level at which they need to be supported through furlough and self-employment income support. We would need to ask the UK Government for additional help, because funding would be required on a scale that we cannot provide in light of the need to balance and fix our budget. I cannot borrow for those emergencies that you are talking about.

One of the subjects that we talked about quite a lot with the Scottish Fiscal Commission was inflation. The commission now seems to be following the more recent Bank of England projection of 2.5 per cent, falling from the present 4 per cent. The commission seemed reasonably relaxed about inflation, in that, if we had to pay out more, we would get more in by way of tax and so on. Are you relaxed about inflation, and is it a concern for you and for the budgets?

Yes—those matters are always a concern, in the sense that they are among the many variables that we are dealing with as we try to manage our budget. I have said already that this year’s budget feels extremely challenging, because there is the need to remobilise our services, and there is the need to deal with the on-going Covid implications. There are a number of multiyear pay deals being negotiated, and we are also dealing with what is probably a more challenging outlook of funding from the UK Government, which will, we hope, publish a multiyear comprehensive spending review.

The biggest impact of inflation lies in trying to understand what our costs will be and whether there is sufficient budget to deal with those costs. This is not to sound like a broken record, but I have limited powers to increase capacity when it is needed. For example, if inflation was to rise considerably, meaning that our budget does not go as far as it needs to go, I cannot suddenly increase it. To take our capital budget and the affordable housing programme that Kenny Gibson talked about at the outset, trying to budget for that and trying to understand what the costs will be is where I am most challenged. The UK Government or any Government around the world that is dealing with fluctuating costs of that sort can make the appropriate changes either to borrowing or to other areas, but all that I can do is to cut the cake differently; I cannot increase the size of the cake to deal with increased costs.

When it comes to pay deals, workforces will be looking for adequate recompense for their labours, and there will be inflationary implications. Inflation is a very important reference for pay negotiations. If UK Government pay is flatter, we obviously do not get additional consequentials from that either.

I am sorry that that was a very long and waffly answer, but there are quite a few ways in which inflation has an impact. We are monitoring the matter carefully.

I appreciate that. It is an important issue. I lived through a time of higher inflation some years ago, and it concerns me very much.

The SFC was also more positive about the long-term scarring effect of Covid. It had thought that the effect would be greater—it thought that the figure would be about 3 per cent of the economy, but it now says that it will be 2 per cent. Do you recognise and agree with those figures?

They are very helpful figures. For the past year, we have been in discussion with the chief economist about the long-term impacts of Covid. Probably as early as last summer, we were very much looking at a K-shaped recovery. In other words—I think that I spoke to the Finance and Constitution Committee about this—some businesses and sectors were doing comparatively well. New businesses were being created. The tech sector, for example, was obviously booming. However, other sectors were really struggling. That could have led to the SFC’s figures, which suggest that there will be less long-term scarring. Some sectors will probably be dealing with that scarring for longer than others. Although the national picture might be more optimistic, some sectors of our economy will probably need help for longer and will have longer-term scarring than others. There is a different picture when we break it down sectorally.

The SFC also made the point about different sectors recovering in different ways.

The SFC was slightly more negative about non-domestic rates. Its forecasts are lower than they were in January, showing that revenue from non-domestic rates will be £27 million lower this year, and £34 million then £48 million lower going forward. Is that inevitable? Is that just a result of Covid?

There has been an impact from Covid. We should also recognise the fact that we have maintained 100 per cent rates relief for a full year. We are tracking the situation. One reason why our guarantee to local government is so important is the fluctuations in non-domestic rates. South of the border, there has been a dip in revenue from non-domestic rates, and local government has been exposed to that, whereas there has been a guarantee that local government in Scotland will receive the income that we have confirmed.

Finally, I want to touch on social security spending. The SFC has forecast that the adult disability payment, which is replacing PIP, is likely to cost some £500 million more. It is warning that, if we put more money into social security, it will need to be balanced out somewhere else in the budget? Is the SFC being overly pessimistic? Do you have the figures in your budgets?

I will make two points. Whether or not I agree with the SFC, the value of its forecasts is that I have to live with them. I have to live within its forecasts, particularly for revenue but also for spend. That is another area in which there are impacts from higher inflation, which goes back to your earlier question, so we are monitoring that. We will continue to provide the support that we are, quite rightly, obliged to provide for demand-led payments.

11:45  

I do not want to sound like a broken record, but it is precisely because of that volatility that we need the requisite tools to manage it. After all, any demand-led payment creates a risk for the Scottish Government in managing it within our fixed and balanced budget. The SFC is right to say that I cannot increase the size of the cake, and if one slice of it is bigger than was originally intended, that increase needs to come from elsewhere in the Scottish Government. That is the level of risk and volatility that I have to manage within a balanced and fixed budget.

I am totally in favour of having a more generous social security system than that in the UK, but it will come at a cost. No matter whether we are independent, it will, to some extent, be demand led. Is it right to say, therefore, that it will be something that will always have to be managed?

That is right. I agree that it is by nature demand led. We make a big effort to promote uptake, because we believe that it is right for people to get the help that they need, but that clearly impacts on demand and the budget. We will fund that need and demand, because it is important that, as a fair and kind society, we protect the most vulnerable.

Good morning. Turning our attention back to economic growth, which we—with, perhaps, one political party exception—think is very important, I believe that, in your most recent budget speech and in your answers to some of the questions in the last parliamentary session, you said that business wants certainty and predictability in order to plan ahead and wants to know exactly where it is going. First of all, what plans does the Scottish Government have to work with the UK Government on access to cash and banking services?

I will work constructively with the UK Government on every issue of importance to the people of Scotland. On business and other support, the difficulty that we face right now is, to put it bluntly, a complete lack of clarity about what is happening. One example that has a direct impact on local areas is green ports and freeports—and I am saying this just down the road from the Port of Cromarty Firth—and our problem in that respect is not a lack of constructive engagement but the fact that we are just not getting a solution or any resolution. We, like the Welsh and Northern Irish, had been hoping for a resolution of the issue in the March budget, but it did not come. The same applies to the levelling up agenda and any funding that might come through that.

The issue is less to do with constructive engagement and nearly everything to do with a lack of clarity. A newspaper headline last week, I think, suggested that we had rejected millions of pounds, which was news to me. For the most part, there is just a complete lack of clarity or engagement. Indeed, if you have engaged with any local authorities, you will know that they find engaging with the levelling up agenda to be a bit of lottery. They do not know whether they will get money or even what the precise process is. I will engage constructively, but it helps to know precisely what is happening and not to get pulled in at the eleventh hour.

Some of the schemes such as the levelling up agenda, which you have just mentioned, are extremely important and can be Government led, but many businesses in Scotland, as in the rest of the UK, are facing a cash flow problem. This is not a political question, but what discussions are happening between the two Government on improving access to cash and banking services? After all, that will be absolutely critical to the survival of many businesses in the future.

Thank you for clarifying the question. There is quite extensive engagement on the banking issue through, for example, the banking forum where we engage with the banks and the UK Government.

With regard to the nitty-gritty of how it happens, I have had quadrilateral meetings with my counterparts in Wales, Northern Ireland and the UK Government. The agenda in the latter meeting included items on access to loan funding and on what the banks were doing or not that we would like them to do. We have direct engagement with the UK Government on banking through active face-to-face conversation.

With regard to access to cash, we have made the point about extending some of the schemes that we think should be extended.

There is a general commitment to work together on supporting businesses. I think that it was the Scottish Financial Enterprise that said that businesses are facing a wall of liabilities right now, and we discussed that point at length with the Chief Secretary to the Treasury and my counterparts in the other devolved Governments in the last quadrilateral meeting.

On the infrastructure angle, to which you have previously referred, good quality infrastructure is critical to economic growth and to ensuring that business has some certainty and can plan. First, could you comment on the reports that, because of the new deal between the SNP and the Greens, some of the infrastructure planning to which the SNP was previously committed might be in jeopardy? Secondly, there was a report at the weekend that some money that the Scottish Government had been offered for road improvement infrastructure had not been used. Is that correct?

On the capital point, we knowingly published our capital spending review last year before the UK Government published its spending review, which is due in the autumn. It would therefore have been the case anyway that we would have had to look at our capital spending review and our multiyear commitment to infrastructure in light of what the UK Government publishes, and that will still be the case.

Clearly, we have to factor in what capital we receive and what our commitments are, but our commitments still stand. We have not rolled back on our published commitments when it comes to capital investment, but they are subject to what capital is allocated to Scotland as part of the spending review. Do you want to come back on that point?

Yes—it is interesting that you say that, because it is contrary to some of the reports that we were getting. As Cabinet Secretary for Finance and the Economy, do you feel that there is a strong commitment from the Scottish Government that the announced infrastructure projects will go ahead? Business and industry consider those commitments extremely important, particularly with regard to connectivity and accessibility.

As you know, we have had a huge fuss—nothing to do with the Scottish Government—about ScotRail’s commitments to changing services, and people are anxious about the lack of connectivity and increased journey times. The projects to which the SNP had committed were trying to address some of those connectivity issues. Can you give a commitment that those projects will go ahead? They are obviously extremely important to Scotland.

They are extremely important and my commitment to them going ahead is subject to a massive issue over which I do not have control. When we published our spending review last autumn, we said that we were publishing ahead of the UK Government’s spending review and basing those proposals on the best available evidence that we had at the time.

I really hope that the chancellor publishes his multiyear spending review in autumn—it still has to be multiyear, because we cannot lurch from year to year in our capital plans. What we did last year was in good faith and based on the best available evidence. When the chancellor publishes his capital review, I will look to ensure that what we are given can fund what we have committed to. We will need to ensure that there is money coming in for the amount to go out.

I understand that, cabinet secretary. I am just interested in whether, if the Greens said that one price of the deal was that one aspect of the infrastructure development might not go ahead, that could jeopardise any of those projects. That would be a big concern to many people, particularly in more rural areas of Scotland.

Everything that relates to the Green deal has now been published and we have not sacrificed our commitments. The A9 is still going to be dualled, and the A96 is referred to in the co-operation agreement in terms of the priorities for the next few years. As far as I am concerned, as someone who represents a rural area, there are no consequences for the projects that I, as a local MSP, am fighting for—I usually lobby myself, which does not work very well. I am fighting for investment in local communities, and that will continue to be the case. What I am trying to say, in a roundabout way, is that what makes the biggest impact is not deals but our having the cash—the actual, hard money—to invest.

I will pause there, because I want to talk about the report about our missing out on funding, about which I was quite confused. There is an irony at the heart of a report about the UK Government, in essence, using the United Kingdom Internal Market Act 2020 to try to spend directly in areas of devolved competence, which then says that we are not engaging sufficiently. It seems ironic that, after having joined the Welsh and Northern Irish in saying that the United Kingdom Internal Market Bill was an attack on devolved competence, we are being accused of not engaging sufficiently.

Our big problem with levelling up, the unionisation of spend and so on is that we are usually kept in the dark. Occasionally we are brought into the light to be told what is happening, but that is a rare experience, as far as I am concerned.

It is really difficult to prioritise our spend when another Government is spending in devolved areas. As far as I can see, all local authorities are considering whether to bid for things such as the levelling-up fund, so there is a big question for us. For example, fair distribution is at the heart of the Convention of Scottish Local Authorities’ methodology, to ensure that every local authority gets a fair share of the capital that is available, so if some areas are getting substantially more, directly from the UK Government, does that mean that we should compensate the other local authorities and give them capital that would otherwise have been shared fairly across local authorities? Where we are already spending on, for example, the key roles that were mentioned in the news report to which you referred, but some areas are now to get money directly from the UK Government, should we use the funding for other priority projects, which have not yet been funded? It is extremely difficult to determine how to use our limited capital funding as far as we can for hospital projects, roads and schools when the UK Government is making decisions about capital spend that we are not sighted on.

I think that it was David Duguid who made the comment about our missing out on money. I have certainly not rejected any money and I am not aware of ever having rejected any money. Scotland needs as much investment as possible. It seems a bit rich that we are being accused of not engaging by people who are trampling over the normal devolved processes for distributing funding.

Cabinet secretary, your comments lead neatly to a question that I have, which concerns an alarming statement from the Fraser of Allander Institute in its report for the Economic and Social Research Council, “Designing and funding the devolved nations’ policy responses to COVID-19”, which you will know about. It said:

“The effect is to circumvent not only the Barnett Formula but the devolved governments themselves.”

I was interested to hear you talk about the implications of spending coming in from left field. Have you given further detailed consideration to a range of scenarios in which that might have unintended and potentially undesirable consequences for your ability to control and manage your budget and your ability to deliver on your policy imperatives?

May I clarify that you are talking specifically about things like replacing EU funding and levelling up?

Yes. I am talking about the new funding streams on levelling up, community renewal, UK shared prosperity and so on.

I think that there are three issues in that regard. The first is the lack of clarity, which I mentioned. The lack of clarity on how some schemes are operating or will operate, and on how communities, local government and others will access them, is extremely unhelpful. Even before I get into the territory of saying that the UK Government should not interfere in devolved areas, there is the fact that we are faced with trying to prioritise a lot of infrastructure projects, such as hospitals and roads, which are important to communities, as I have already said.

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The lack of clarity means that some of these communities and local authorities do not know whether they will secure capital funding through these alternative routes. I can think of an example with transport infrastructure in my local authority area: the local authority is considering going after the levelling up funding and it is also lobbying us for funding. What do I do? Do I allocate that funding, not knowing whether it will get funding from an alternative source, but knowing that, if it does get funding from an alternative source, that money could be used for another community? That lack of clarity is making our financial decision-making process extremely convoluted, and it is not giving communities and local government the certainty that they need.

The other element of that lack of clarity is about fairness. Again, when it comes to local government, the point about fairness is right at the heart of the methodology. I cannot announce any schemes or funds without COSLA, telling me, rightly, that the money should be shared equally across local authority areas. If one local authority area is getting substantial additional funding through the levelling up fund, and the others are not, do I use the funding that I have to compensate the others, or do I still share it equally? Will those local authorities that have not secured funding be content with that?

The second issue, which is really important, is that, right now, it will not, in any shape or form, compensate for the loss of EU funding. The assumption that it will is totally flawed. I am speaking to you now from the Highlands—an area that has benefited disproportionately from EU funding because of its rurality, deprivation levels and transport distances. Levelling up funding and shared prosperity funding will not compensate for the loss of that EU funding. The additional complex routes to funding, where it is, in essence, a lottery, will make that even worse.

The third point is that I do not believe that that funding will be additional. In the last budget, the UK chancellor talked at length about the additional capital spend on infrastructure across the UK and, in the same breath, announced a budget for Scotland that saw our capital budget cut by 5 per cent. I posed the question—well, my counterpart in Wales posed the question—to the Chief Secretary to the Treasury, of whether all that capital will be additional or whether we will see a net decrease in our budget as it is redeployed to alternative routes. The silence has been deafening, but what we saw in last year’s capital budget was that the increase in UK-wide spend saw a decrease in the Scottish Government’s capital budget. That means that that money will be spent on pet projects or whatever the UK Government chooses to prioritise. There is an actual tangible impact on our capital budget, which we spend on schools, hospitals and roads.

Those are my three primary concerns: first, the convoluted process and lack of clarity are undermining the certainty with which we can make plans, leading to increased unfairness across Scotland; secondly, it is no compensation for EU funding; and thirdly, there will be an equal and opposite decrease in the Scottish Government’s budget, which goes directly on hospitals, roads and so on.

Thank you for those points. I will move on. I would like more information, which I think will be of general interest to everyone. In your letter to the committee dated 30 August—thank you for that—you mention that you plan to launch Scotland’s first framework for tax. It would be helpful if you were to share what additional information you can about that. I am generally interested in the discussion about tax that we had last week.

The new framework for tax supplements the Scottish approach to taxation, and forms our framework for how we make tax policy. It invites stakeholder views on how we can better design and deliver tax policy in Scotland. The devolution of income tax and other taxes is still relatively new, and tax stakeholders continue to tell me that engagement around and understanding of devolved taxes still need to be built and developed.

The framework is trying to put more flesh on the bones of our approach to taxation. It builds on what we have said before, but views and comments from stakeholders are also being invited on how we improve the design and delivery of tax. I hope that it might also raise broader awareness of those relatively new devolved and local tax powers.

There might well be a residual benefit in letting the larger public understand the dog’s dinner of the current fiscal framework, but that is by the by.

Local government faces very similar challenges with regard to its being confident about when money will appear and so on. On the review of capital accounting, which I believe you requested and which is being led by directors of finance on behalf of local government, are you able to express any view on the extent to which the focus should be on understanding service concession flexibilities to facilitate financial planning, or do you intend to wait for the outcome of the review before local councils can get some more certainty about what flexibilities they have?

Thank you for the question, as this is an issue that local government has raised with me quite frequently.

I want to make two points, the first of which is that we are waiting for the outcome of the review to try to provide local government with certainty now. There was a request that we provide additional certainty, and I have confirmed to COSLA that I am content to do so. COSLA had raised with us the English model, in which changes can be proactively and prospectively made to capital accounting, and we are already giving an additional two-year flexibility in that respect. I have also confirmed to COSLA that I am willing to extend that further in the same vein as the English model, in which councils have additional discretion on what is the best model to use.

It is still important that we carry out the review, because there are questions to explore about what the most prudent and sustainable approach might be over the long term and how we ensure that it is consistent not just with other public bodies but with our standards, too.

For my last question, I want to pick up on Liz Smith’s point about the debt burden on small businesses. When you have your conversations with the UK Government, could you impress on it the need to implore banks to have flexibility in certain loan schemes? There are some protections in place, such as no personal guarantees for coronavirus business interruption loan scheme loans up to a certain amount, but the fact remains that, post the 2008 recession, there was some really poor behaviour by banks, with small to medium-sized enterprises forced into very distressed circumstances and made bankrupt or sequestrated. Will you add your voice to ensuring that banks understand their obligations, particularly to the SME community?

Absolutely. Those issues have been raised with the UK Government, and I will continue to raise them. I will also raise them directly with the banks. We have a good and constructive relationship with the banks in Scotland, and I think that they have been quite helpful through this crisis. However, the real test comes now, as people face a wall of liabilities. The question is how banks will help businesses through the next few years when repayment of bounce-back loans, CBILS loans and so on will be required, as it is already being required.

The SFC is predicting a 17 per cent rise in revenue from non-domestic rates between 2022-23 and 2026-27. We have a revaluation next year. Given the changes to the retail and commercial sectors, for example, will that rise be achievable? A lot of businesses will be wondering where that money will come from.

I might ask whether Dougie McLaren wants to come in on non-domestic rates. To be clear, that does not indicate that there will be a 17 per cent increase in the tax rate. It refers to, I hope, the strength of the business community in terms of business survival rates and business growth. Right now, Scotland has the lowest poundage rate in the UK, which means that we are delivering a lower tax on more than 95 per cent of properties.

Over the next few years, we must ensure that we continue to provide certainty to businesses and allow them the headroom to recover. That was the reason why, this year, we extended the 100 per cent rates relief. Knowing that they will not be paying non-domestic rates will, I hope, allow businesses to recover and use the funding that they would have otherwise been paying in tax to invest in their businesses or to see them through the rest of the challenges that we face.

I know that there was a lot of discussion about the revaluation. One of my primary reasons for scheduling the revaluation for when we have is to allow the impact of the pandemic to be seen in rental values. I know that the north-east has a particular reason for wanting the revaluation to be earlier rather than later, in the light of the big economic challenges that it faces, but the reason for my decision is to ensure that rental values have filtered down and that the revaluation is fair. Going for a revaluation too soon could have meant that the rental values had not changed. For example, people were waiting until after the pandemic to rewrite their tenancy agreements. My hope is that, after the next revaluation, the rateable values will take into account and reflect the impact of the pandemic, so a fairer amount in taxation will be paid.

I am happy to take any follow-up questions on that. That probably covers it—Dougie McLaren does not need to come in unless he really wants to.

I have a question about the NDR pool, which now stands at a deficit of £192 million. What impact will that have on businesses as we move forward through the pandemic? I guess that the money will have to be repaid back into the pool.

It is good to have a question on the non-domestic rates pool, which probably reflects your wealth of experience as a local councillor. The non-domestic rates pool should not have a direct impact on businesses; it is our way of managing the risks to public finances from non-domestic rates. We have had previous conversations on the matter, so you will know that, in relation to local government spend, we guarantee the amount of revenue from non-domestic rates that local authorities receive. In some years, that means that you and others in the north-east say that that is not fair. In other years, such as those during the pandemic, it means that local authorities can budget with certainty and security.

We manage potential fluctuations in revenue from non-domestic rates from year to year through the pool. It will not have an impact on business, and it does not influence or inform my view on what rate of taxation to implement. My interest is in ensuring that Scotland is as competitive as possible in relation to the poundage. Our non-domestic rates pool is just our means of balancing the account from year to year.

I imagine that, to balance it and pay off the £192 million deficit, the intake will have to increase.

It is a case of reconciling forecasts with outturn. At the beginning of the year, the SFC will forecast what it thinks we will receive in non-domestic rates. We plan what we will spend on public services on the basis of that forecast, but forecasts are just forecasts. The outturn—the amount that we receive in non-domestic rates—could be higher or lower. It is a balancing account, so we need to manage it and ensure that we can meet our commitment to spend £X million on the health service, for example. At the end of the day, it is just a forecast on which we base our budget, not the actual amount of tax take.

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If the estimate has been wrong for the past three years, how confident are you that it will be right for the next four years?

I am fairly confident, in that the SFC is good at its job, but this is clearly a time of huge uncertainty. Earlier, Daniel Johnson asked about whether other issues—such as a further lockdown, for example—need to be factored in. There are a lot of uncertainties right now in relation to the performance of our economy, and that clearly has an impact on tax take. Two years ago, I could not have foreseen that we would be implementing a full year of non-domestic rates relief at 100 per cent. There is quite a lot of volatility right now.

The SFC and others are very good at their jobs, and they produce the best forecasts that they can. I cannot deviate from the SFC’s forecast—I must spend within it, whether I think it is right or wrong. However, from year to year, the forecast will be out. No forecast is perfectly and completely aligned with the outturn, so there will be some addition or reduction.

I am happy to bring in Dougie McLaren if he wants to come in, but that probably—I hope—answers your question. The forecast will never be exactly right, but I have confidence that the SFC knows what it is doing.

I have nothing much to add. If I have understood Mr Lumsden’s question correctly, we have a shared understanding of the non-domestic rates pool. The forecast is just that—it will never be exactly right. Given that it is a balancing account from year to year, the end-year pool will be either in deficit or in surplus from year to year, and we try to balance it from year to year.

The SNP-Green deal was mentioned earlier. Cabinet secretary, do you see any consequences for the oil and gas industry as a result of the proposed deal? I know that a lot of people in the north-east in particular are very nervous about it, especially when we hear a future member of the Government saying that, if you work in oil and gas, you should be looking for a new job. That does not inspire confidence going forward. What is your view on whether people’s jobs in the oil and gas industry are safe? It is still a big piece of the Scottish economy.

Workers in the oil and gas industry have some of the most critical skills that our economy needs over the coming years. My commitment is to ensure that they have access to skilled work that reflects their talents and capabilities.

Around the world, every society and every Government is grappling with what a just transition looks like. In my view, a just transition means a fair transition in which we do not leave people behind. Right now, there are huge opportunities on the horizon as part of that just transition, including in renewables.

The oil and gas industry is already grappling with the issue. Irrespective of what I say or my Government says, we have seen 18 months of a global reduction in demand, which has led to a lot of people—including those in the wider supply chain, in which Douglas Lumsden will be more well versed than I am—being concerned about their jobs and what their future holds.

The Government’s job is to try to provide certainty by looking at how we diversify the economy, which has been impacted by issues that are outside our control. Nobody could have foreseen Covid or, perhaps, the renewed and intense focus on the climate emergency. Our job is to ensure that every individual who is working in oil and gas right now, with some of the most important skills internationally, continues to be able to use those skills in a meaningful and secure job. In so doing, we will ensure that the north-east continues to be a vitally important contributor to the national Scottish economy.

It was mentioned earlier that the social security bill was going to rise from £3.7 billion to £5.2 billion, and that is without adding in some of the SNP manifesto pledges. Does that rate of increase in a relatively short space of time concern you?

Trying to ensure that we have sufficient budget for commitments is clearly an issue that dominates my attention. Social security is no different. We must try to ensure that we are cutting the cake of funding in a way that is fair.

I do not think that anybody could disagree that, as we emerge from the pandemic, some individuals and sections of society have been more exposed to its impact than others. Inequalities have been exacerbated.

Just as my job is to try to help businesses through this tumultuous time and give them the support that they need, in the same spirit, helping families through is one of the reasons why we wanted to help local government to freeze council tax and ensure that there was more money in people’s pockets. Clearly, the social security system must help people who need help, when they need it, with a view to helping them to get back on their feet or at least to tackling child poverty.

It is not a concern, in that it is important to do, but we ultimately need to ensure that the funding is in place. When it comes to the budget—I am sure that I will be in front of the committee again in the not-too-distant future to talk about it—we have choices about what to prioritise. We cannot create new money, so what do we prioritise within the budget that we have?

I thank members of the committee.

I have a couple of questions to wind up with. One relates to capital budget. Raw material prices are growing by between 5 and 15 per cent a year. You said that the agreement with the Greens would not threaten the delivery of Scotland’s capital projects that are already committed to but, clearly, if there is significant pressure on the capital budget because of inflation, that may make it more difficult to deliver some of those projects. What discussions have you had with the UK Government regarding an uplift to the Scottish Government’s capital programme budget?

I regularly engage with the UK Government, and I firmly believe that one of the most powerful levers that we have when it comes to economic recovery is capital investment in infrastructure. It creates jobs, it supports businesses and it is good for our local communities. It is a triple win as far as I am concerned.

Our primary source of funding is the UK Government. That is the primary means by which I am trying to secure additional capital, and capital is now one of the areas of greatest risk when we look at the future, because of the unionisation of spend under the United Kingdom Internal Market Act 2020. It is an area on which I continue to press for additional security and certainty, with a plea that we invest in infrastructure over the coming years as a way of recovering well and recovering better.

I asked a question about the possibility of deferred funding, and members asked about the impacts on a number of areas of the Scottish budget. You talked about how difficult it was, as did members, with additional funding coming in at a time when local authorities were agreeing their own budgets and the council tax settlement was being agreed. Should we get into that situation—I hope that we do not, because I hope that the UK Government will do as it has done previously and agree a carry-over if necessary—do you have any shovel-ready projects available that would allow you to provide additional support to businesses or other areas of the economy, so that that money is used effectively?

The short answer is yes, but the way we budget involves trying to get a sense for the full year. What we do not want for the budget is to spend and then have to save, save, save and get more money at the last minute because money is suddenly getting cut. That is an ineffective way of budgeting, so my team and I manage the year’s budget by trying to get a sense from every portfolio of what they want to achieve. Most of these projects are not just for one year; they are multiyear projects. Building a new hospital is multiyear. You cannot just turn on the tap for two months and hope that that delivers a project. We try to manage that demand over a longer period, because very few projects can be delivered with, for example, just a month’s extra funding in one year.

The key is being able to carry forward and being able to manage our money over several years. Having that arbitrary break at the end of the financial year and not being allowed to carry capital forward leads to very ineffective budgeting, because it causes you to spend an amount in one month that should be spent over several months in the next financial year.

That allows me to neatly segue to your letter to the committee of 8 July, in which you indicated that the Scottish Government had started work

“to support a potential multi-year Resource Spending Review concluding in the autumn.”

Where are we with that now? Is it on schedule, and will it be informed by the fiscal framework?

Yes and no, but the most important ingredient is the UK Government’s spending review. Last year, as I said, we proceeded with a capital spending review even though we did not have a capital spending review from the UK Government. There is a lot of inherent risk in that, because the UK Government is our primary source of funding.

When it comes to our own resource spending review, we are undertaking internal work right now to develop a sustainable, multiyear financial plan. I know that it is of great importance to local government as well as other bodies, including the NHS, to be able to plan on a multiyear basis, instead of lurching from year to year. For example, third sector organisations often want multiyear commitments from local authorities and cannot get them.

That internal work is on-going. We have not taken a final view on a publication timeline, because so much depends on whether the UK Government publishes its own comprehensive spending review in the autumn. Once we have more clarity on that, I will fulfil our commitment to set out a framework in advance of a spending review and to engage with the committee, as well as stakeholders more widely, to inform that final document.

The committee received a letter from you earlier this morning regarding a number of matters. The letter’s heading is “Process and timetable around Scottish Budget 2022-23”. In it, you touch on the delayed medium-term financial strategy and say:

“There is logic for publishing the MTFS alongside the Scottish Budget and thereby basing it on the updated SFC and OBR forecasts. Publishing it before the OBR October forecasts would mean having to use OBR forecasts from March, the effect of which would be to give a misleading sense of the fiscal outlook.”

When I raised the matter with Scottish Fiscal Commission representatives, they agreed with that.

Where are we in terms of the MTFS? Are we going to see it alongside the budget? Can you give us any further thoughts on the timing of the budget, given all the stramash that you outlined in your letter regarding the difficulty of not having confirmed timings for UK fiscal events?

I will start with the MTFS and then move on to the wider subject of the timetable. The original intention would have been to publish in May, but that was not possible, due to the election. I am interested in the committee’s view on that. There is on-going uncertainty because of the UK Government’s plan for a spending review. That spending review would be very helpful to inform our medium-term financial strategy. If we have it, we will be forecasting not on the basis of the best available evidence but on the latest data from the UK Government.

I think that there are no perfect timing options, given that the MTFS could not be published in May. It does not make sense to publish it in advance of the OBR forecasts. If OBR forecasts are published on 26 October or we have the promised UK spending review, it would be quite misleading to rely on OBR forecasts from the previous March. There continues to be a lot of movement in our economic and fiscal outlook, so block grant adjustments that were based on March forecasts would significantly overstate our budget.

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That is the territory that I am in just now. I am happy to take the committee’s view on how we can spread out scrutiny of the budget, the MTFS and the resource spending review in a way that allows you to give the budget the appropriate attention that it needs, and I would be open to your views on how I can best work with the committee on that. I would intend, certainly for the 2022 MTFS, to revert back to its previous publication timetable in May, in line with the written agreement.

I hope that I have given you enough information without concluding a position right now, and you can perhaps take a view on that.

On the budget timetable, we have obviously had two years of significantly delayed budgets. There is no perfect time. If the UK Government publishes its budget first, we have the best available evidence that we need but, if there are any delays to the UK Government’s budget, we are left in a position of choosing whether to take inadequate and inaccurate information and base a budget on that in order to give security and certainty to businesses and local government, or to wait, increasing the delay of giving that certainty to local government but having the best available evidence. I would very much like to revert this year to what we did formerly, which would be to consider a budget in late autumn.

You mention in your letter that

“the Chancellor has publicly asked the Office for Budget Responsibility to produce forecasts on 27 October”.

Does that mean that you believe there is likely to be a budget in mid-November or soon after?

That would be my hope, but we really need the UK Government and the chancellor to confirm that. Until he confirms that, I am working off hints, suggestions and indications, rather than anything more concrete.

We will certainly deliberate on that in our next private session, which is about to start in a few minutes, when we consider our work programme.

I thank both our guests today, particularly the cabinet secretary for answering so many questions in such depth, particularly after a session at the Local Government, Housing and Planning Committee. I realise that it has been a very heavy morning for you, so I hope you will have a wee break now before the rest of the day’s proceedings.

12:33 Meeting continued in private until 12:47.