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Chamber and committees

Meeting date: Wednesday, December 14, 2016

Local Government and Communities Committee 14 December 2016

Agenda: “Local government in Scotland: Financial overview 2015/16”, Brexit (Implications for Scottish Local Government)


Contents


“Local government in Scotland: Financial overview 2015/16”

Good morning. Welcome to the 15th meeting in session 5 of the Local Government and Communities Committee. I remind everyone to turn off their mobile phones. Meeting papers are provided in digital format, so members might use tablets during the meeting.

We have received apologies from Alexander Stewart.

Agenda item 1 is an evidence session on the Accounts Commission report, “Local government in Scotland: Financial overview 2015/16”. I am delighted to welcome from the Accounts Commission Ronnie Hinds, who is the deputy chair, and Fraser McKinlay, who is the controller of audit; and, from Audit Scotland, senior auditor Martin McLauchlan. I invite Ronnie Hinds to make a short opening statement.

I had prepared some opening remarks, but the committee will be pleased to hear that I am not going to stick to them. I will make one or two brief observations and then we can devote our time to the questions that you want to ask.

At the risk of stating the obvious, local government finance is exceedingly complex. I say that because I want to sound a cautionary note in relation to everything that we have said in the report. We departed from our previous practice—which, as the committee will know, has been to produce an annual overview report that covers not only local government finance but other aspects of local government services, governance and so on—precisely because the issue is complex. We thought that it would be better to try to devote some dedicated time and space to an exposition of some of the more obscure but important aspects of how local government is funded.

The timing of the report is no accident, either. We took the view that, at this time of year, a piece of work that tries to shed some light on some of those issues in the context of the annual debate about how local government is funded and how the money is spent would be of great use to the public, the committee and other interested parties.

With that in mind, we are more than happy to answer questions that the committee might have about the report.

You say in your summary that

“All councils face future funding gaps”.

What do you mean by “funding gaps”?

At a later section of the report, we set out the nature of the gaps that local government is likely to face. I will make one or two brief remarks, then Fraser McKinlay and Martin McLauchlan might want to say more.

There is a limit to how much crystal-ball gazing auditors can undertake, but what we are doing is making some assumptions based partly on what we have seen in the past but also on current trends about what is likely to happen in local government funding over the next two to three years. The reason why we think it likely that there will be funding gaps is that there have been funding gaps already. A similar standpoint taken two, three or five years ago would have shown that pattern emerging, although perhaps not quite to the same extent.

I caution that the term “funding gaps” might be interpreted by some people as meaning that there is some kind of black hole in local government finance. That is not what we are saying. We are saying that, at this point in time, councils that are looking at a two or three-year horizon will not have managed to anticipate how they will square off the budget, as they have to do under statute, by reconciling, on the one hand, pressures that they have in relation to service delivery and demand and, on the other hand, a likely reduction in funding. As the report makes clear, we are using estimates and assumptions to try to get a picture of that.

The main point that we make is that even if nothing else were done, there is, generally speaking, good cover for the first couple of years, in terms of the reserves. We do not think that use of reserves is a sustainable way of closing the gaps and reconciling the difference between expenditure requirement and funding. However, in every case in recent years when there has been a gap, local government has gone back to the drawing board and come up with further options for savings. We fully anticipate that that is what will happen in the next few years; it is just that we cannot, at this point, identify what the savings will be in every case.

For clarity, your definition of a funding gap essentially concerns the difference between forecast income and likely expenditure. Is that correct?

Ronnie Hinds

Yes.

It might be useful to add that we are talking about expenditure reduced for the approved savings in 2016-17. We are saying that the funding gap is the difference between what will be spent, assuming that all the savings are made, and the income. In the model, we have shown that that is being funded from the general fund reserve.

You say that that is not a black hole, but that sounds like a black hole to me.

Well, it is not a black hole. Elsewhere in the report, we make the point that we strongly think that councils should take a long-term view in their financial planning, and we identify where that is happening and where it is not happening. We accept that it is more difficult to do when they have to deal with one-year settlements, as they have for the past couple of years. There is no way of knowing at this point in time whether that pattern will be repeated in the years that lie ahead. However, we think that councils should plan for the long term.

One of the reasons why there is a difference between councils’ projected expenditure and their projected income is that we cannot, in every instance, see how councils would close those gaps based on the assumptions that they would have to make. However, we know that in every case in the past when that has been an issue, councils have squared that off, which you can see from the performance on the outturn. We say at the beginning of the report that councils have managed their finances well, even though two to three years ago they might have had funding gaps. In such situations, councils find other savings, so there is not a black hole.

When the report was published, the biggest piece of publicity about it was that it was not as bad as people thought it was going to be. It shows quite shrewd financial planning on the part of local authorities and the existence of robust reserves, although it also shows that there are quite significant challenges to be faced. The bit that has attracted some political attention concerns the on-going debate about whether local government has been targeted more or less than the public sector more generally. The report says fairly early on that the 8.4 per cent real-terms cut over the period is, by and large, similar to the revenue cut to the Scottish budget. That will be used by all political parties in Parliament and interpreted in various ways, but what would you say about it?

09:45  

I will ask Martin McLauchlan to give a detailed explanation of how we came up with the statistics on that. All that I will say is that we stand by the figures in the report. It depends on what question you are trying to answer. The question that we were trying to answer was this: in relation to the flow of funds from the Westminster Government through the Scottish Government and eventually down to local government, what is the comparison between the reductions that have been faced by the Scottish Government on the one hand and local government on the other? We asked that question with an open mind, not knowing what the answer would be, and the answer is what we say in the report. In coming to that conclusion, we have treated certain relevant flows of funds, including non-domestic rates, in a particular way. I will ask Martin McLauchlan to explain more about that and why we have done it.

That is helpful, because I was going to ask about non-domestic rates, so you have saved me from asking the question. It would be helpful if Martin McLauchlan could say how those have been accounted for.

Certainly. The easiest way of thinking about it is that we looked at the totality of funding for local government against the available Scottish Government budget, making the assumption that non-domestic rates will flow directly to local government. Taking the revenue grant funding, the non-domestic rates and capital grant funding, we get the cut of 8.4 per cent that we included in the report. We compared that to the revenue and capital DEL—departmental expenditure limit—elements, or spending limits, of the Scottish Government budget, in which there was an 8.7 per cent reduction.

As I said, we looked at the total against the available, so we excluded NDR from the Scottish Government side. The Scottish Government provides guaranteed revenue funding, which is from non-domestic rates and revenue grants. As we say in the report, in recent years non-domestic rates have been making up an increasing proportion of that total revenue funding. The figures in exhibit 2 and the paragraphs leading up to it can be used to demonstrate that an increase in non-domestic rates has offset some larger reductions in the revenue grant proportion of that funding. It really depends on what you compare.

I seek clarity on the cash flow from non-domestic rates. We looked at the issue when we considered council tax matters. The rates are retained by local authorities, but there is a revenue adjustment that takes into account what the Government calls a needs-based formula. The rates therefore appear in the income side for councils and not on the revenue support side from Government to local authorities.

If you like, the revenue support side is calculated as a total revenue support, and the grant is a balancing figure between the total and the non-domestic rates. If a council, for whatever reason, achieved an increase in its non-domestic rates over and above what was forecast, there would be a corresponding reduction in the revenue grant support. The totality of revenue funding is made up of those two balancing figures.

Okay. So, in essence, the rates are counted.

Martin McLauchlan

They are counted—

I am not an accountant. I am just looking for simple clarity.

In calculating the reduction in the Scottish Government budget, we have not included non-domestic rates. We looked at the departmental expenditure limits, on the capital and revenue sides, that have been set for the Scottish Government.

Right. It might be helpful, for my benefit if not for the rest of the committee’s, if you could send the committee a note outlining that in more detail.

I want to ask whether other amounts were included. We want to understand the figures better but—local authorities will not appreciate my saying this—I am pleasantly surprised by the numbers, given the heat around local authority budgets at the moment. Did you include the £250 million that comes from the Scottish Government to health board budgets but that is transferred pretty much in its entirety to local authority social work services, irrespective of the delivery model for that?

No. We exclude that, because it does not appear within local government funding settlements and it does not appear within the portfolio that it is part of. It appears within the health budget. We have excluded that money because it is not explicitly within the local government funding settlements. However, it is recognised within councils’ accounts as a source of income.

Okay. I think I understand why you have treated the money that way: if it were to show up in both the health budget and the local authority budget that could be deemed to be double counting, I suppose.

The committee is still doing its budget scrutiny on local government, cost pressures and everything else. The Scottish Government has asserted on several occasions that the real fall is about 1 per cent in budgets if we include that £250 million. The money definitely alleviates potential cost pressures within local authorities’ statutory duties, but it does not show up in their funding. Would you consider doing a small piece of work so that we can see whether the Scottish Government is accurate in its assertions or what the real position is? It would be helpful for the committee to understand that better.

You might remember that we had this very discussion regarding the overview report that we presented to you earlier in the year. There was some disagreement between us and the Government about the numbers that we came up with. We did not come up with the 1 per cent figure—it was the Government’s number and we can see how it came up with it. For the reasons that Martin McLauchlan set out, however, that £250 million officially went into the health budget. Beyond that, there is a debate about exactly what then happened to that money. You heard some of that in the committee a few weeks ago, when you had what looked like a very interesting discussion with folk from local government.

I take the convener’s point about simplicity and clarity. We are trying to get to that, but the situation is very complicated, and is further complicated when Government says, “This money is kind of for local government but we are putting it into the health budget.” We are not including that amount in the numbers because, in practical terms, it was not there. As you know, at least half the money, or thereabouts, was taken up by the living wage element. For those reasons, we have excluded that figure from our calculations on the local government settlement.

Would you consider doing a piece of work on that? We are here as committee members, but we also sit as party members in plenary sessions in the chamber, and we latch on to such numbers to make the most convenient use of them during debates for whatever political party we happen to represent. It would be quite good from a committee point of view to have clarity on the impact of the numbers.

The Accounts Commission has already produced a report on health and social care integration, which is the first of three reports that we intend to produce. The second one, which is due in the next year to 18 months, will examine, among other things, what has happened with the new authorities—the integration joint boards that are in the early stages of their development. Part of that will have to be about what funding flowed to them and from where, how it was used and how effectively it was used. Was it used out of necessity? We will have to consider the questions that you are asking. All that we have been able to say about the joint boards at this stage is that they, too, are complicated, which is partly because of the governance that surrounds them; compounding the complications that we have already described around local government finance, we have the complexities of the governance of those bodies. Until that settles down, we will not know for sure how much money flowed into them and for what purposes it was used, but we will certainly be considering that as part of the next phase of that work.

I will move on.

The Scottish Parliament information centre has prepared a really helpful briefing on some of the numbers. I want to get a couple of questions on the record before I bring in my colleagues. How do you account for the transfer of police and fire service powers and the associated funding in 2013 to make figures comparable between different years? Does your approach in that differ from that of the Scottish Government?

Up to the point when the services were transferred from local government to central Government, there were elements in the local government funding settlement for police and fire services grant.

Our approach to using draft budget documentation has always been to remove the police and fire service budgets from it. We slightly altered our method this year because, as well as the overall grant for those services in the funding settlements prior to 2013-14, there were elements of ring-fenced funding—commonly referred to as top-slicing—for police and fire service pension costs. Therefore, to create a better distinction between the two funding flows, we have removed that from our prior year figures.

Our approach differs slightly from the work that I have seen from SPICe researchers in that they have taken the opposite approach. From 2012-13 onwards, they added the police and fire service funding back in in order to compare it on that basis. The two approaches are equally valid, but we take our approach so that it ties back directly to the settlement figures.

The key thing is that you exclude the figures, irrespective of where they appear in the budget line, so that we look at comparable figures throughout the years. Is that correct?

Martin McLauchlan

Yes.

That is simple and clear for me. I like that answer.

Why is the figure for the revenue reduction since 2010-11—deemed to be 6.8 per cent—different to the figure that is cited in the local government overview report that was published in March 2016, which mentioned 11 per cent? That is not from my reading of the reports, but from information that was prepared for the committee. It has been pointed out that there is a difference, so an explanation of that would be helpful.

For the reason that I just outlined, where we have made a further adjustment for the ring-fenced funding that is primarily for police and fire service pensions, that has had the net effect of reducing what we classify as local government funding for 2010-11 by approximately £300 million. If you compare the current year to 2010-11, that follows through, and the corresponding percentage reduction is reduced.

Although the funding settlements are comparable across the years, there are elements of funding—for ring-fenced national priorities, for other ring-fenced priorities or for any other priorities—that are included. Although we treat it as total local government funding, there are discrepancies in what is included each year. We felt that this year, in order to better separate the impact of police and fire service funding being reclassified, we would look again at our earlier figures and adjust for the top-slicing.

Welcome to the committee. Mr McLauchlan, you mentioned the ring fencing and, in paragraph 15 of your report, you talk about funding to support the implementation of national policies. Is that included in the 8.4 per cent—it is mentioned in paragraph 14—that the Scottish Government gives to local government for national purposes?

Martin McLauchlan

Yes, that would be included in the totality of the funding. In paragraph 16 of the report and in the footnotes to exhibit 2, we outline some of the larger elements that perhaps do not appear in each year.

I will leave that sitting as I know that Mr Wightman wants to come in; perhaps you could come back to us with a note on that. It made me think about the national and local priorities. We have the £100 million attainment fund that will be raised each year. That is a national priority that is raised locally, but education is a statutory duty of local authorities. It is not always clear what is national and what is local. Coming into the mix, we also have city deals with support from Westminster and from the Scottish Government. Some of that could deal with projects that local authorities have already commenced, so financial pressures elsewhere could be alleviated.

It is becoming overly complicated to look at the local authorities’ financial position. Government, by definition, tries to make the position look as strong as possible for local authorities, while local authorities, by definition, try to make the position look as bleak as possible. The committee wants to look at the specific figures as best as we can, and you guys are best placed to do that job. Please answer if you want to, Mr McKinlay; some information in writing would also be helpful.

We absolutely agree. One of our reasons for doing the report was to bring some clarity to the situation. Now that the report is out, we will gather people together in the early months of next year for a wider conversation about how best to present that stuff. SPICe does it a bit differently, we do it a bit differently and well-respected organisations such as the Fraser of Allander institute produce stuff, too—those reports all have slightly different numbers. The Accounts Commission can bring together all those people and have a conversation about how we can best present some of this very complex data in a way that is consistent and which might provide a bit of clarity. We can try to influence that over the next few months.

10:00  

That is helpful.

I thank the witnesses for coming. I was about to make the very point to which Fraser McKinlay has just responded. All the internal advice that we have had in respect of funding for local government vis-à-vis the Scottish Government shows that local government has suffered a disproportionate cut. To this day, I simply do not understand—notwithstanding Martin McLauchlan’s explanation—how non-domestic rates can be included on one side of the equation but not on the other. However, I will leave that issue for now—we can revisit it. It would be helpful for members and the public to have one set of data with figures that could be understood, given that what we are seeing today is different from other sources, although you have addressed that issue.

I move on to fees and charges, which now account for quite a large portion—£4.8 billion—of local government’s income. Have you investigated the extent to which those fees and charges have grown, and in which services that growth has occurred?

The short answer is no; we have not done so as yet. One of the reasons that we thought it would be worth our while to do a separate piece of work was that—as I described earlier—it allowed us an opportunity to peel away the layers of the onion. As you said, fees and charges are a significant component.

The hypothesis might be that, in light of other funding pressures, councils have increased fees and charges in order to avoid cutting services, but at this stage it would be only a hypothesis—we do not have the evidence to show whether that is the case. As a result, we are minded to do a dedicated piece of work as part of our performance audit programme, or to look at the area in more detail at an overview level, perhaps as early as next March when we produce the overall report on local government. We think that fees and charges are an interesting issue.

As an aside, we know that south of the border—where the funding pressures on councils are, if anything, more extreme—there has been a significant increase in fees and charges as a way for councils to avoid some of the worst cuts that they face. At this stage, there is no way of saying whether that is happening to any extent north of the border, but it would be an interesting area to look at.

Our sister organisation in Wales has taken a detailed look at how fees and charges in local government have been treated there. That has raised many interesting questions, not only in respect of the level of the increase—if there has been one—but on the policies, strategies and so on that inform those fees and charges. We think that that area is worthy of investigation, but at this stage all that we can tell you is what we say in the report—namely, that fees and charges are a growing and significant component but that we do not have a breakdown.

The other key point that we make in the report is that, from our point of view, the current way of counting for fees and charges is less than wholly satisfactory. It is difficult to pull fees and charges by themselves out of the local authority accounts because there are other elements of funding that we would not regard as fees and charges but which are accounted for in that fashion. We would like to see some changes to that, because it would help with our work and it would help the public to understand what is happening with fees and charges in their area.

Thank you—that is useful. For me, and for many of us, the worry is that fees and charges are, in a sense, a regressive flat tax.

I have one final question, which I raised with you at a previous meeting. What are your thoughts on the establishment of a fiscal framework for local government funding, similar to that which exists between the UK Government and Holyrood, in order to provide some certainty? You have identified a funding gap, but one of the problems for local government in planning its finances is that it is never entirely sure what the consequences will be of the actions that it takes at its hand vis-à-vis the national policies that Government may want to implement. In my view, that leads to a degree of uncertainty. Have you had any further thoughts on that question?

As we said previously, it is clearly for the Scottish Government and local government to decide whether there should be a version of a fiscal framework. We would say that anything that helps with clarity and the ability to plan for the long term is a good thing. Whether that would be a framework or a set of assumptions is up for debate, but anything that helps, in this instance, councils—we say the same thing about health boards in other parts of our work—with that longer-term and more strategic financial planning has to be a good thing. We absolutely recognise the challenge of doing that in a world where we have annual settlements but, if anything, that makes it even more important that councils can plan for the medium and long term.

Can we go back to fees and charges for a moment, please? Overall, the report seems to indicate—as you said at the beginning, Mr Hinds—that the state of financial health of councils is perhaps not as dire as might have been thought previously. However, is that due to councils managing cuts by looking at things such as the loss of staff? If a council loses staff, it faces big costs at the beginning but it may save money further down the line. However, people will lose their services, because a big part of what local government does is providing services through the people that it employs. Is that part of what you will be looking at?

Ronnie Hinds

As part of a review of fees and charges?

Yes. Will you be looking across the whole state of council finances? I presume that fees and charges have to fit in with that whole picture.

We have not yet sat down and specified the piece of work that I described earlier, so I cannot say for sure whether we will include workforce issues as part of it. However, they are significant and largely distinct elements of what councils have to do, not just to set their budget every year but to address the reductions that they have had to make in recent years.

The lion’s share of the reductions that we see councils making impacts directly on the workforce. We have commented on that in previous reports and we touch on it again in the report that we are discussing today. Our line on that is that we fully understand why it has to happen. Over 60 per cent of the costs of local government are the costs of paying staff, so there is no way of making the savings without making staff reductions. However, we would like to see a more consistent approach to workforce planning accompanying that.

The concern might be that, without that consistent approach—this is a parallel to what Fraser McKinlay said about taking a long-term view in financial planning—we will find ourselves in a situation where the ways in which we have to deliver services because of the transformation programmes and the changes that we have had to make to address funding do not fit the workforce. We might end up with square pegs in round holes, if you like.

It is all very well to take a long-term view, plan for scenarios and adjust the workforce down the way because that is the way that funding is going, but we want to ensure that we are left with a workforce that is fit for purpose. To the extent that that touches on fees and charges, I agree with you, but they are a separate sphere of the budget process and we will probably want to focus on them because they raise interesting questions in their own right.

On fees and charges and some of the questions that they raise, do you envisage looking at the changing nature of local government around that? We have perhaps moved away from the universal approach where local government took its grant from Government and drew in funding as it desired through its tax elements and then provided services universally. Now, we find that, if we take the example of community alarms, certain elements of the population are paying rather than there being a universal approach. Burial charges are perhaps another example. Will you consider that as part of your review?

Absolutely. If we do it, we will want to look at fees and charges across the board, because they cover a multitude of areas and they are all different. You mentioned a couple of examples. We will be interested in a range of questions. I will not detain you by covering them all, but one is the policies that the councils are employing.

Under one approach, a council will say, “Needs must—we have to avoid the worst of the savings, so we’ll increase fees across the board by the rate of inflation or some other figure.” That is a valid approach, but we would ask whether it sufficiently respects the differences between charges for one thing and fees for another. Another council could take a different, more forensic approach, looking at the different fees and charges in their own right and coming up with individual policies around them, and there could be different points on that spectrum. Those are the kind of questions that we would be interested in.

The report points out well enough why we would want to look at that matter, although that is a bit of a gleam in our eye at this point. Fees and charges are a significant part of overall funding. As other elements reduce, of necessity fees and charges go up as a proportion.

I think that the committee would be interested in coming back to that.

We could certainly consider that.

I endorse that. I would certainly be interested in coming back to that, and I am sure that we all would.

It really hits us between the eyes that the figure for service income, fees and charges is £4.8 billion. That is significantly higher than the housing and council tax income combined for local authorities, which is £3.3 billion, and is more than a quarter of the total income. We often hear that local government apparently raises only around 20 per cent or less of its income, but the graph in the report seems to suggest that it raises slightly more than 40 per cent when we include fees and charges.

In response to Elaine Smith, Mr Hinds talked about uncertainty. Paragraphs 72 to 74 of the report emphasise that

“Good financial planning and management are required to ensure the impact of spending decisions is fully understood”.

Those paragraphs say that it is “imperative” that councils have “long-term financial strategies” and that

“the absence of indicative funding should not prevent councils projecting future income and spending”.

They go on to point out:

“Three councils (East Renfrewshire, Glasgow City and Highland) do not have a financial strategy covering the medium or long term.”

What is the potential impact of not having a financial strategy in place?

If people have not looked far enough into the future to see what situation they might be faced with against the expectation or assumption that they have to make about their funding and the demand for their services, the risk is that, when they come to the annual budget-setting exercise, which is a highly pressured event, as MSPs will no doubt appreciate, they might not make the optimal decisions or might make decisions that, a year later, they will regret or seek to amend because of events that have transpired. We cannot say that we have evidence of that happening on an individual council basis, but that seems to us to be a prima facie risk. That is said in that section of the report.

We also think that the longer-term financial plans or strategies should ideally be aligned with a bigger plan or strategy for the council. Councils have those plans and strategies for themselves and as part of their membership of community planning partnerships. Therefore, the bigger picture of the vision and the strategies exists, but we find that they are not always aligned or joined with the financial plans. Sometimes they are out of sync because they have been produced at different times and they expire at different times, and sometimes the connections that could have been made are not made because they are treated as separate exercises. That seems to us to compound the risk that the savings that have to be made in an annual budget exercise will be the wrong ones or not the best ones, because they have not been looked at in the context of a financial plan that clearly marries up with the overall strategy. Those are risks.

I would not single out the three councils that were mentioned and say that they are more at risk in that regard, but we think that it is fair to point out that some councils are able to look beyond the one-year horizon, so there is no reason why they cannot all do that.

Given what you have said, it seems to me that those three local authorities would be at greater risk. Surely if there is no financial planning, that could mean, as you have indicated, greater pain than would otherwise be the case. It could mean a mismatch between the staff who are required, the resources that are available to pay them and, indeed, the service demands that are put on them. Surely we have to do more to encourage all local authorities to take forward medium-term and long-term financial planning.

Ronnie Hinds

I agree. That is very much the message that we have communicated in the report and some of its predecessor reports.

There are a couple of issues that I want to ask about before we end this session.

The report talks about planned spending and underspends and overspends across various services in local authorities. I am interested in that, as I asked a similar question during our budget scrutiny about a £160 million reported underspend in nursery provision. Money was provided to local authorities, and the Government said that it had not been spent for that purpose. It is fair to say that one or two of the local authority representatives got a little bit prickly when I asked about that.

10:15  

The reason for asking about that was not to question why they had not spent the money; rather, it was to do with the dynamic around the use of money. For example, if money is given to local authorities for a particular function and the work can be done efficiently and the underspend can be transferred from one service to another, that would be a good use of resources. I would not quibble with that.

How should we read statistics on underspends or overspends in the report? Is a piece of work needed to follow the public pound—whether it is ring-fenced revenue support from the Scottish Government or otherwise—and look at the outturn report at a local level? It seems to me that if authorities do not hit their budgets on the nose, they might be worried that they would get less money next time. Consequently, they hit the budgets on the nose, but that does not necessarily encourage efficiencies in delivering the systems.

Do you have any comments on local authority underspends at a departmental level?

There are two slightly different issues at play there. One issue—this would require a specific piece of work—is the amount of money, which we have referred to, that the Scottish Government gives to local government for specific purposes and the extent to which that is then spent on that purpose, which might be an overspend or an underspend. Our report focuses mainly on the more general overspend and underspend position. If it would be helpful to the committee, we can write to you with a bit more detail about some of the individual service areas that make up the likes of exhibit 5, where we talk about the overall underspend and overspend.

The picture is complex. There are some patterns, but there is also enormous variation across the country, depending on which council you are in.

Our general observation is that the nature of the underspend or overspend is as important as its size. We are most interested in the extent to which it is planned or unplanned. If, at the end of the year, you suddenly discover that you have underspent your budget by 10 per cent, that would not be a terribly good thing if that was not the plan, because presumably that money had been earmarked to be spent on something. Equally, if you discover at the last minute that you will be overspent, that is not great either. If you plan to do the work as part of a longer-term strategy, that is quite a different set of circumstances. Therefore, a more qualitative assessment of the nature of the spend is needed. In the report, we were trying to give a sense of where councils are overall in relation to living within their means.

That is very helpful. I am sure that Mr Gibson, given his time convening the Finance Committee, will concur that, as legislation goes through the Parliament, there is a tussle—or negotiation—between the Convention of Scottish Local Authorities and the Scottish Government over what should or should not be in a financial memorandum and what the numbers should look like. However, we are not the Finance Committee; we are the Local Government and Communities Committee. I am quite interested to know what happens in practice in years 2 and 3. Any work in that regard would be quite helpful.

I want to mop up on another issue—my question is inspired by the deputy convener’s question on staffing. I met workers from Glasgow City Council’s information and communications technology team who were striking over an outsourcing dispute and their employment moving from Glasgow City Council to a private company. I will make no comment on the dispute, but they made the point that they would no longer be employed by Glasgow City Council if the plans were to go ahead. Would such a change show up in figures on staff cuts? They would still be employed, but they would say that that employment could have weaker terms and conditions—and therein lies the dispute. Across local authorities there could be examples of headcount not going down, but the number of directly employed public sector staff going down. Arm’s-length external organisations would sit within that, too. Do you have any comments on that?

Your reference to ALEOs is apposite. An issue that we have to contend with when trying to analyse workforce trends is that what first might appear to be a reduction turns out to be just what you are describing—a transfer. Ostensibly, the same number of staff could be employed, but by a different employer so they would no longer feature in a given council’s employment records. We always have to keep an eye open for that and make an adjustment.

That takes us back nicely to the opening discussion. It depends on the question that you are trying to answer. If the simple question is how many people the council employs, there is a ready-made answer to that. If the question is how many people provide public services, the answer would be different. You need to be clear about what it is that you are trying to demonstrate.

The clerking team has helpfully passed me a note to say that I should remind everyone that, on 21 December, we will hear from the Cabinet Secretary for Finance and the Constitution and the Minister for Local Government and Housing as part of our budget scrutiny work. If the panellists want to provide any information, it would be helpful if we could get that—along with the additional information that we have already asked for—before then, although I do not want to put any pressure on you in that regard.

As this evidence session is pretty much concluded, I afford the witnesses the opportunity to add a comment before I suspend the meeting. We will then move on to the next agenda item.

I will raise a point that has not come up in discussion but which might be quite significant in the context of the report. The easiest way to explain this is to ask you to look at exhibit 4, where we try to demonstrate, on a net expenditure basis—we have knocked off the fees and charges that we talked about—a trend in relation to the impact of the reduction in spending over the five-year period.

I make the simple point that, as we have said, there is a debate about how much of the funding available to the Scottish Government is being dedicated to local government. When you get past that stage and into local government itself, there is then a debate about how best to spend the money—however much it is—including the council tax. Clearly, priorities come into those decisions, just as they do at the national level.

Exhibit 4 shows that—in a rough-and-ready sense—priority is being given to the preservation of some level of expenditure for education and social care. That can be seen in the diagram. However, because overall funding is on a downward trend, the impact on other services is commensurately significant. Furthermore, because those services represent a smaller proportion of the spending in the first place, any cut imposed is a bigger issue for them.

I will not say more than that at this stage, except to add that, if it is a five-year pattern that we are seeing and we anticipate that the next five years might look similar, that emphasises the point that we keep making about the importance of scenario and long-term planning. It would be better to go into the situation with one’s eyes open, to see how things might look for transportation, for environmental services or for leisure and cultural services at the end of the five-year period, rather than to go through that period and then look back and say, “This is an interesting place that we find ourselves in.”

I apologise to the witnesses who are waiting for our next evidence session. Given that an important point has been drawn to the committee’s attention, it is reasonable to allow Elaine Smith to ask a brief—I hope—follow-up question.

My question is on that issue; it is also on another issue—the debt—which has not been mentioned and which would affect the issue that has just been raised. We have not discussed the debt in any depth.

The report mentions the private finance initiative and the non-profit-distributing model in the same sentence. How do they fit together? In addition, Unite—I declare an interest as a member of Unite—has been talking about historical debt and how that affects local government finance. Do you have any opinion on that at all?

Ronnie Hinds

So the question is about the debt—

—and how local government services are squeezed, as shown in exhibit 4.

I will take the second part, and I will ask Fraser McKinlay to handle the wider question about the impact of indebtedness.

You are absolutely right: if you have to look at making budget reductions, your room for manoeuvre is a key consideration. On the face of it, there is less room for manoeuvre. That is not to say that there is no room for manoeuvre, but there is less in relation to things that look like fixed costs, such as the repayment of debt and the interest charges that go with it. There is an exhibit in the report that shows the impact of that. It would be a further squeeze on the services that I have described as being afforded relatively less protection, if I can put it in those terms.

I ask Fraser McKinlay to have a go at the wider question about indebtedness and the affordability of repayments.

I have nothing much to add, other than to say that the commission has asked us to look at those issues as part of the forward work programme. It will probably be into 2018 by the time that we look to publish that report.

We recognise that the historical debt that PFI, public-private partnerships and their predecessors have established is an increasingly important part of the story for exactly the reasons that have just been described.

Part of the debt that local authorities are struggling with might even be pre-devolution public debt from the Treasury. That debt might carry significant interest rates compared with current rates. That might reflect some of Unite’s campaign, which you may or may not be aware of. It might be quite good to have a look at that. I do not have to declare an interest, but I have met the union, so I just wanted to reinforce the deputy convener’s point.

I thank the witnesses very much for their time this morning. We have found their evidence very helpful, and I look forward to continuing the relationship.

10:24 Meeting suspended.  

10:28 On resuming—