Local Government and Communities Committee

Meeting date: Wednesday, November 29, 2017

Official Report 541KB pdf

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Draft Budget Scrutiny 2018-19

The committee will take evidence on the Scottish Government’s draft budget for 2018-19. I welcome Ronnie Hinds and Fraser McKinlay from the Accounts Commission; and Tim Bridle from Audit Scotland.

I invite Ronnie Hinds to make an opening statement before we move to questions.

I will not take up much time, convener. I hope that the report is self-explanatory. There is a summary at the beginning and there are key points in each of the sections. The only point that I wanted to make by way of introduction is that this is the second time that we have separated out the financial from the other aspects of local government resources and performance into two reports at different times of the year. The reason for doing that is that we think that it is most helpful to have this information in the public domain at this point in time when the budget cycle is in full flow. The report is intended to be informative and helpful and it is in that spirit that we are here today to answer questions about it.

Because of the complex nature of some of the matters to do with local government finance, if there is anything that we are unable to answer satisfactorily today, we will come back with further information after the meeting.

That is as much as I wanted to say by way of introduction, convener.

We will move to questions.

I thank the witnesses for coming today and for another excellent report. Their clarity in presentation and language helps us to make sense of a complex landscape. Earlier, some of us were discussing exhibit 4, which is an attempt to put in a diagrammatic and simple-to-understand form the funding formula, which some of us are still struggling to get a grip of.

You issue some stark warnings about the financial state of local government, notwithstanding the fact that you have issued no qualified audits on local authorities. How do you view the financial state of local government now in the historical context? Obviously, you can go only as far back as you have been working in this area but, looking at the past five, 10 or 17 years of devolution, where do you think we are now?

The point that you made about the absence of qualifications of any accounts is not something to gloss over. It is quite a significant achievement. It happens every year, but we should not take it for granted. It is an indication of the good stewardship of public funds that we continue to see in local government. I just wanted to say that because it is important.

Notwithstanding that fact, and the fact that, by and large, councils can live within their means taking one year with another, this year we can see an enhancement of the pattern that we have seen in the past few years, which is increasing challenges and difficulties facing councils. It is not uniform across the country—each of the 32 councils has its own story to tell—but there is a general trend of increasing difficulty.

The way that we have highlighted that in this report was picked up in some of yesterday’s media coverage. For the first time, we see a majority of councils dipping into their reserves to balance their in-year budget. There is nothing untoward about that. They are perfectly entitled to do it. However, we thought that it might be significant that a majority did that in budgetary and actual terms in the course of the year of this audit.

That does not necessarily mean that we are at some kind of tipping point. We do not believe that to be the case. It is far too early to make that kind of judgment. However, it might indicate that, faced with the choice between using their reserves and looking further into the service budgets to make the necessary reductions, they have chosen to use their reserves. As I say, a majority of councils have taken that view for the year that we are looking at, and that seems to us to be quite significant.

I have a question that I have asked before. Part of the issue is about the quantum of the resources that are granted by the Parliament through the vote on the budget for local government, which is a matter that will be before us imminently. Given the challenges for local government finance, what role could be played by structural change in the way in which local government is financed? I am thinking about things such as more fiscal autonomy, multiyear budgeting and fiscal frameworks. Those are the kinds of processes that could be put in place—there are others—to create more financial resilience in local government. As I understand what you are saying, part of the issue is caused by the fact that local government has very little means at its disposal to raise revenue and is dependent on another sphere of government, which creates tensions.

A lot of your question goes beyond the scope of the report and indeed the work of the commission, because it involves policy issues, so I will limit myself to the aspects that I can safely comment on.

We repeatedly make recommendations on multiyear budgeting and forward planning. As you see in the report, it remains the case that roughly half of councils do not routinely roll forward a three-year planning horizon every year for their revenue budgets, and they do not do it for capital, either. We recognise the difficulties with doing that, particularly when there is a one-year financial settlement for the largest part of their funding, which comes from the Scottish Government, but it is not impossible, because otherwise none of them would be able to do it. We continue to press for all of them to do that and to put their planning on as secure a basis as possible. That is one thing that could be done even within the current arrangements.

On the broader picture, we have just seen in the current financial year the removal of the council tax freeze, and the report touches on that and the way in which councils responded to it. That restores a degree of local flexibility that has largely been missing for a decade. It is not for us to say whether that is a good or bad thing, but we comment on the use that is made of it. One point that we make, which touches on Andy Wightman’s question, is that the council tax freedom, on which a 3 per cent ceiling is currently imposed, does not make much of a difference to the overall amount of money that local government spends. In the report, we compare it to the cost of a 1 per cent pay award for staff. It would therefore be wrong to get hung up on the idea that, by itself, council tax is necessarily the magic solution, even if the 3 per cent ceiling were removed.

It is for others to conclude whether there should be some continuation of the status quo or whether something else needs to be brought into play in the wider funding of local government. All that we can do is comment on the situation that exists.

I have one final question, which picks up on that point about council tax. I am interested in paragraph 68 and exhibit 19, which look at council tax in 2017-18 and the impact of the banding reform, the increase in rates and the removal of the discount on second homes. Paragraph 68 says:

“Additional income arising from council tax reforms to banding multipliers are also shown”—

those are the statutory reforms for the top three or four bands—

“but councils do not benefit from these increases as the Scottish Government funding mechanism has been adjusted accordingly.”

Let us assume for the sake of argument that the general revenue grant is £100 and the increase arising as a consequence of the banding is £10. Are you therefore saying that, were the banding not to have changed, the general revenue grant would be £110 and that, in other words, there is no net impact on the receipts to local government of the banding change? I want clarity on that, because the issue is obviously partly related to the bigger question about transparency of figures and numbers, which we talked about last year.

We are not saying that, but Tim Bridle can explain better than I can what we are saying.

We are talking about individual council level, where there is an equalisation. What we try to say in relation to exhibit 19 is that the councils that have a high incidence of higher banded properties do not benefit from that, and the income is equalised through the mechanism. We are not saying that the overall level of settlement has been reduced equally, if that makes sense. We are talking more about individual council level.

So, basically, when you say that

“councils do not benefit from these increases as the Scottish Government funding mechanism has been adjusted accordingly”,

you mean that individual councils do not necessarily benefit by all of the increase. If, for the sake of argument—this is probably correct—the City of Edinburgh Council has the highest yield from the top bands, it does not get all the additional revenue. The equalisation means that some of that flows to other councils.

Exactly.

11:15  

That was a very helpful question, Mr Wightman. As it happens, we talked about paragraph 68 just before we came into the meeting. It might be helpful to write to the committee to clarify that. We recognise that the wording of that paragraph could be a bit clearer on that specific point. We will be happy to clarify that in writing, but Mr Wightman’s description of the situation is correct.

That is grand. If it would be possible to create a beautiful graph like the one in exhibit 19 to illustrate that redistribution, that would be helpful, but it does not matter if you cannot.

There is an issue that I want to clarify, which I thought that I understood, until Mr Wightman started asking his questions; now I am not sure whether I do. Exhibit 19 says:

“Additional income from council tax banding reform £110 million”.

Is it the case that that is real money?

Yes.

The discussion that we are having is about how that is distributed among councils and how much each council gets, but councils are getting £110 million.

There is an added complexity, in that we do not know exactly what the figure will be, because that will depend on collection and everything else at the end of the year. If we work with the figure of £110 million, which is the anticipated figure, that is new money in the system at the top line. We have been discussing how that works through into individual councils.

It is new money—everything else muddies the waters. It will be interesting to see the details.

Is it correct to say that councils increasing the council tax by up to 3 per cent will generate £53 million of new money?

Yes. The light blue bar in exhibit 19 represents the decisions that the relevant councils have made on their council tax, and it equates to about £53 million.

We can look at the proportion of overall spend but, in theory, local government is receiving £163 million of new money because of council tax reform. I just wanted clarity on that, following Mr Wightman’s questions.

I have another short question. Were the councils that decided to raise the council tax in any more financial distress than the ones that decided not to do so? Were they any less likely to manage their finances well than the ones that did not raise their council tax? In looking at the policy decision that councils took on whether to raise council tax, I am trying to ascertain whether the reason for that was to do with their financial management, whether that was good, bad or indifferent. Was there a correlation there? Did you look to see whether there was a correlation there?

No, we did not, because it is difficult to exercise a judgment on councils’ financial management. As I said earlier, in auditing individual councils, we make judgments about their financial stewardship and so on, but there is a slightly more qualitative element to the judgment about how well or badly they manage their finances. It is a very complex judgment to make, so I do not think that we would be able to make such a correlation or to demonstrate that it does not exist.

The reasons for choosing to raise or not to raise council tax are many and wonderful. Some of them have to do with service pressures, but they have to do with other factors as well, including some political considerations. Prima facie, I would not expect to see a correlation between how well a council was managed and its decision about whether to raise council tax.

We would tend to look at the issue the other way round and make the starting assumption that, if a council did not have to raise its council tax, all other things being equal, the pressure on its budget ought to have been less acute, because otherwise it would have taken the option of raising the council tax. I would not expect the councils that were in most difficulty to have been the ones that chose not to raise their council tax, but we have not tried to make that correlation to find out whether it was the case.

That was helpful. I wanted to know whether there was a consistency in the reasoning of councils on whether to increase the council tax and whether that decision related to financial distress. It is clear that it is hard to take the political choices out of that.

In key message 4, you say:

“Councils’ expenditure and use of reserves often differed noticeably from that originally planned, indicating the need for budget-setting to become more robust and reliable.”

Does that mean that, where there is a big differential, they have just got the numbers wrong, or have local authorities made in-year policy changes and choices that were not factored into the budgets that were set initially? If a council had decided on a suite of closures of facilities or the restructuring of an organisation, and the political climate locally was such that it decided not to do that and it did not accrue the savings, that would show a differential from the budget that was originally set. I am trying to tease out whether what we are seeing is the result of councils changing their policy intentions halfway through a financial year, or whether it is just that their planning was poor to begin with.

That is an excellent question and I do not think that we have the exact answer for it, because it varies enormously, but you are right to highlight the detail of exhibit 9 on page 22. It is striking that the vast majority of councils do not use their reserves as planned. Some use more and some use less, and we think that that is an issue. In some cases, we think that it is about the budgets that are set at the start of the year. We had one report at the commission recently of a council that has routinely underspent its budget for the past five years or so, and has therefore increased its reserves in an unplanned way year on year. That council might argue that that is prudent, but our view is that it would have been prudent if that is what its plans had said. There will be occasions when something that has happened in-year affects a budget, but it is equally likely that either the budget setting is not robust enough or the financial monitoring through the year is not robust enough. That is a long way of saying that it is difficult to tell, but all the things that you have described will be in the mix.

I had looked at exhibit 9, but I got a bit of brain freeze when looking at it, to be honest. That was one of my reasons for asking the question. It seems to be all those things and none of the above at the same time. It is a mixed picture and it is difficult to tease things out. Would you never do a breakdown for each local authority to say that the variation from original plans was mainly because of policy changes or mainly because of weakness in the initial numbers?

I have been asked to report to the Accounts Commission on all councils in respect of their duty to achieve best value over the next five-year period, so when we get into the more in-depth best-value reviews of each individual council, we can get a more qualitative assessment of exactly what is going on. It is a big piece of work to get under the skin of why the situation is as it is, and those best-value reviews will allow us to do that.

The question was a good one, and I will add to what Fraser McKinlay has said by saying that we comment in our report on the deficiency, in some cases, of the management commentaries that councils are obliged to make under their public reporting duties. That is where, in the first instance, I would expect to see the kind of detail that you are asking about. The primary responsibility to give a clear and coherent account of why things have panned out as they have rather than in the way that was planned lies with councils, and they have a duty to do that. We criticise councils in the report for not paying sufficient attention to that, so we will continue to exercise sinew over that and to get councils to report that better in the first instance. As Fraser McKinlay says, we may have an interest in looking at the best-value aspect of council budgets to see what that tells us and how we can interpret and explain it, but the information has to come from the councils. They are the ones that will be taking the decisions as the year pans out.

Thank you for an excellent and fascinating report, as always. Exhibit 21 shows budgeted use and remaining levels of general fund reserves. We touched last year on the huge variance in reserve levels across local authorities; we see, for example, Inverclyde Council with about 26 per cent of its income and Dundee City Council with about 3 per cent.

You say in exhibit 21:

“Councils using more General Fund reserves relative to the amount remaining face greater challenges”.

You also point specifically to three local authorities—Moray Council, Clackmannanshire Council and North Ayrshire Council—and say:

“using General Fund reserves at the current rate is not an option for some councils—Clackmannanshire, Moray and North Ayrshire councils would run out of General Fund reserves within two to three years if they continued to use them at the level planned for 2017/18.”

I am the MSP for a constituency in North Ayrshire. Assuming that the Scottish Government distributes resources to local government according to the current formula, what will such constraints mean for the local authorities’ ability to deliver services?

Do you mean the ones that are closest to running out of reserves?

Yes, those three. They will not be able to dip in any more.

Given the situation that those councils face, I would be expecting them to set budgets for next year and the years ahead that reflect the fact that they have less buffer room in their reserves. For all I know, they might well budget to replenish those reserves—that is one possibility. Therefore, what I am saying is that the situation is not static. When we talk about what might happen if they continue to run down their reserves at the same rate, it is not because we expect that to happen; we recognise that other circumstances will come into play.

Secondly—and this has already been touched on in our discussion—what actually happens in the course of a financial year will not, in every instance, be what was planned for. The councils in question might plan to restore their balances. They might find their financial situation to be somewhat better than expected and that they are able to make savings faster and to restore those balances further than they had anticipated. We simply do not know. The only point that we can safely make is that, if nothing else changes, they might hit difficulties sooner than other councils, but it is difficult to say more than that.

I do not take the view that, because their reserves are getting close to some kind of deemed minimum, those councils are necessarily going to run out of reserves in two or three years. There are choices that they can make in that respect.

Yes, but my other question was about the impact on services if those councils seek to continue to have reserves and therefore have to do more rebalancing. Will they have to make deeper reductions in service provision than other local authorities?

That is one thing that might happen. We have not looked in any detail at the circumstances of each of the councils that you referred to, so I will make a general point by extrapolating from the specifics. All other things being equal, if a council is taking longer to make some of the harder decisions that other councils might already have made, some harder decisions will still lie ahead of it, unless its overall financial situation changes for the better. We have seen no indication of that happening. It might well be that some councils still have to make difficult decisions about services, and the situation might be compounded by their feeling that they have to increase reserves to give them greater longer-term security. However, those are all hypothetical comments; I would not know until we looked at the individual circumstances.

The level of reserves held by a council is a function of a number of factors. For example, some councils that we would regard as being relatively well run do not have high levels of reserves, but they are comfortable with that because they have confidence in their ability to manage their budgets. That is another factor.

They do not use their reserves.

In paragraph 28 of your report, you say:

“Councils delegated £2.4 billion of social care expenditure to”

integration joint board

“budgets for 2016/17 and NHS boards contributed £5.6 billion.”

However, you then say:

“The establishment and development of IJBs has been a complex exercise and will take time to mature. Their operation will be the focus of further performance audit work we have planned in 2018.”

Given the huge amounts of money that we are talking about, how can the work of the IJBs be made transparent?

As the report points out, on behalf of the commission and the Auditor General we are doing our second report on integration, which will probably be published around this time next year. We did a report at the outset of IJBs, and the second one will monitor their progress.

There is no doubt that it has taken the boards the past couple of years to get the basic governance arrangements in place. By that, I mean the operation of the board as well as budgeting, which continues to be challenging and difficult because of the different timings of budget cycles in the NHS and councils. We are very clear that the IJBs need to make progress with the nuts and bolts of how they operate so that they can begin to focus on integrating services on the ground. After all, the integration exercise is all about improving outcomes for local communities.

We will be doing an update report on that over the next 12 months or so, and we will be in a position then to say more about progress and the kinds of things that need to happen in future. However, my sense at the moment is that the IJBs are still struggling to get beyond some of the issues about how new organisations work; and that not enough time, energy and focus are going into integrating services on the ground.

11:30  

At the end of paragraph 22, a highlighted sentence says:

“Councils have been seeking to maximise the income available to them from charging for services”.

However, that does not seem to be the case. The Scottish Parliament information centre report, “Local Government Finance: Fees and Charges 2011-12 to 2015-16”, says that there has been a 4.5 per cent reduction in charges, from £569.7 million to £544.2 million.

The report shows that, for some councils, charges are on a bit of a rollercoaster—they seem to go up and down and round and about from year to year. For example, in the past year, West Lothian Council has increased charges from more than £4 million to about £11 million; Falkirk Council has increased charges every year for 11 years, from £17 million to £20 million, in real terms; and Perth and Kinross Council has steadily reduced charges from £14 million to less than £7 million over the same time period. What is actually going on here?

First, as I understand it, that report is an analysis of information that has been submitted to the Scottish Government, which has not been subject to audit. We do not have a full picture, because that information is submitted through councils and, quite often, councils provide services through arm’s-length external organisations such as leisure services trusts and care trusts. Some of those ups and downs could be because there is a new ALEO and so the income is no longer shown on the council’s return to the Scottish Government.

There is also a bit of a data quality issue around the fact that, in some cases, transfers between councils feature as income, which is clearly not what we want to analyse in terms of charges to service users. I know that the Scottish Government is looking to address that issue and clean up the data for 2016-17. That information will be available in the new year, and it will be interesting to see what movement there has been.

The comment that we make is really off the back of what we see in budget-setting reports, which shows that councils are looking to maximise their income. That is not to say that they would necessarily increase their fees and charges by more than inflation but, ordinarily, they would increase their fees and charges to some degree.

Towards the back of the report, there is an exhibit in which we consider some of the budget initiatives for 2017-18. It contains some examples of the sort of things that are being done to increase charges and, in some cases, introduce new charges.

The SPICe report says:

“Income from fees and charges for Culture and Leisure services decreased ... from £42.6m in 2011-12 to £30.5m in 2015-16”.

It also says:

“10 councils did not consistently report income in every year suggesting that they will either be recording this income within different categories or, where income has not been recorded in 2015-16, new arrangements may have been introduced.”

I note that it includes an element about ALEOs.

In North Ayrshire Council, Aberdeen City Council and Angus Council, more than 80 per cent of the arts and culture budget is received in charges. However, in other councils, such as East Renfrewshire, 0 per cent of that budget is received in charges.

Even taking into account things such as ALEOs, the report suggests that there are significant inconsistencies, and I do not see any great evidence that local authorities are maximising the income available by charging for services, which they should be at this challenging time.

Will you respond to some of that?

The reason why we have worked with SPICe to produce the report, which I think is enormously helpful, is that we recognise the need to answer the question that you ask, which is: what is going on here? The subject came up when we spoke to you last year, which is why we progressed that piece of work. The SPICe briefing asks lots more questions about consistency and about how individual councils work in that regard. The point that our report makes about seeking to maximise income, which Tim Bridle talked about, is a more recent development, which we saw in the last budget setting. You are absolutely right to say that there has been a downward trend since 2011-12. What we are beginning to see, given budget pressures in other areas, is councils looking to reverse that downward trend, and we will want to track that carefully as we head into the future.

The basic point is that we need to understand what is going on here. A couple of years ago, we produced a report that set out some principles around how to go about setting fees and charges and the kind of things that we would expect to see in the interests of ensuring that the setting of fees and charges is not a kind of finger-in-the-air exercise and is instead planned so that it is in line with priorities and so on. We want to keep a close eye on that area, and the SPICe briefing is a really good starting point for that.

Mr Wightman has a question—but only if it is on the same issue.

It is a brief follow-up question on fees and charges. SPICe notes that the level of income from those is falling. Is that because councils are charging less or because a lot of people are choosing not to use the services because they cannot afford them any more?

I do not think that we are in a position to say that, although we might want to get into that kind of analysis in the future. At the moment, at least we have a better picture of the current situation.

Good morning. Many councils see themselves as being in financial crisis, and your report highlights those councils that find themselves in a more difficult situation. Each council has a short, medium and long-term financial plan, which Audit Scotland looks at in the round before telling it whether it has strong financial planning, strong financial management and that kind of stuff. Many councils have a borrowing strategy to manage the situation. At the moment, we have quite low interest rates and many councils use that to give them a buffer when they are borrowing. Going forward, the situation might change and that buffer might be removed, along with others—as you have indicated—if the reserve is not being managed effectively. What is your view on that? If the reserve strategy and the borrowing strategy are not going to progress, where does local government find itself in the process?

I would dispute the assertion that, across the board, we are looking at reserves and borrowing strategies not progressing or not working. A significant amount of money continues to be held in reserves—not by all 32 councils, but across the piece—which continues to represent some kind of buffer, as you put it, against the vagaries of what funding and other matters might hold for councils.

The situation with borrowing is comparable, although interest rates have recently gone up and it is anybody’s guess—mine is no better than anyone else’s—what that might mean in the longer term. It might turn out to be a step on a journey, or it might be a one-off that could be reversed—we do not know. What we do know is that councils have, by and large, pretty good treasury management strategies that include the amount that they borrow. In the report, you can see the extent to which they make use of the various devices that they have at their disposal to ensure that they are not exposed unduly to things such as fluctuations in interest rates. Therefore, although for you and I, if we have a mortgage, an increase of 0.5 per cent might have a real impact on our pocket the day after tomorrow, that will not necessarily be the case for well-managed councils, because they will have negotiated fixed interest rates.

Councils also have other strings to their bow; they can decide when to borrow, for example. If their crystal ball is a little clearer than mine—they will get good advice on what might happen to interest rates in, say, 12 months’ time—they could decide to borrow now to avoid a possible rate rise, which would give them a further cushion. Our view is always a holistic one: we look at how well councils manage their finances in context, across the piece, rather than at how exposed they might be to one-off changes in interest rates and so on. Therefore, we do not have overwhelming concerns about that.

In the report, we do say that, for the year that we have just audited, there has been a significant shift in the overall amount of debt that local government has, and the key question is what that means for affordability. We say that, broadly speaking, something like 10 per cent of general fund expenditure is committed to repaying debt and the interest that goes with it. However—Tim Bridle will keep me right on this—although that 10 per cent is not an insubstantial figure, it is actually a reduction on the figure for the year before. These things move around a bit, and the fact that there has been an increase in interest rates over the past few months does not mean that local government budgets will commit 13 or 14 per cent to debt repayment next year.

We will have to keep an eye on the issue in the long term, and we work with councils to ensure that they have good strategies behind what they do, but I would not be concerned that the borrowing trend that we have reported for the past year and the movements in reserves mean that councils are more perilously exposed than they were.

In reality, they might find themselves to be less exposed, because they have a strong financial management process that they can tap into, which gives them an advantage over other organisations in the field. We can see that how that is interpreted and how each local council plans to manage its finances over the next three to five years is an important process for them. In the report, you identify councils that perhaps do not have as strong a view on that or as strong a process to ensure that they do not find themselves in a more perilous situation. The idea of trying to coordinate and manage the finances is important.

Councils are looking at the long term, with new demographic difficulties and IJBs and so on coming into the mix. The way in which they spend their money is changing, depending on what they are trying to manage within the process. They do not have flexibility on some of those, because some things are statutory and are left to them to do, so they must spend money on those before they can deal with other services, which they might have to reduce or might have to increase charges for.

What is your view on that situation, which exists for many councils?

If what you are referring to is the comment in the report about the differential impact of the savings that have had to made across the range of services that councils provide, we feel that that is an increasingly important point, which is why we made it again in this report. In the early part of the new year, we will make it again in a different fashion when we look at the services themselves in the overview report.

Clearly, and not just because of statutory protection, degrees of preference or priority are attached to some services compared with others, and for perfectly understandable and justifiable reasons. Our view is that, although that is justifiable and it is up to councils to set their own priorities, sometimes in conjunction with the Scottish Government, setting priorities has to be done with your eyes wide open, and you have to be very conscious of the impact on other services.

We tried to set that out in the report in financial terms. We are not saying that the 12 per cent reduction over a three-year period in culture and leisure services is unsustainable; that is not our view. Our view is that that is quite clearly different from the level of savings that have had to be made in, say, the education service. Although councils are entitled to say that they want to protect education, and the Scottish Government is entitled to come to understandings with them on that, the consequences of that for other services have to be noted, and we think that it is part of councils’ best-value duty to make sure that they do that. We are pushing very hard to ensure that the impact of savings on other services is understood by councils, and we will say more on that in the report that we publish in the new year.

I have a very brief question on the issue of debt. You talked about local authorities being able to manage debt by borrowing and interest rates being low but, at the bottom of paragraph 53 of the report, you also said:

“PPP/PFI and indexed linked bonds include charges that increase with inflation.”

Surely that means that local authorities that have high payments for private finance initiatives, such as North Ayrshire, are more exposed.

All other things being equal, I agree with that. In the new year, we are going to do a bespoke piece of work on the various forms of funding for capital projects, including PFI and public-private partnerships. I will ask Fraser McKinlay to say more about that in a moment.

The work is not just driven by this issue, but you are right to say that, to a degree, there is a lack of flexibility with some forms of funding that might not apply to other aspects of capital funding. We have to make sure that that is considered in the context of the bigger picture that we are trying to paint, which is about how much of a council’s budget is given over, one way or another, to maintain the costs of capital investment decisions that were made in the past. That is not because we think that those decisions were badly made, but because the overall financial context in which some of those earlier decisions might have been made was very different from the context now. There is room for manoeuvre one way or another but, if it is decreased, the impact is greater on the council budgets.

Fraser McKinlay might want to say a wee bit more about the piece of work that we intend to do in that particular area.

There is not much to say other than that we have a plan to look at not just PFI/PPP, but all the alternative means of financing and funding capital projects, and we will get into some of those issues.

It comes back to the same central point about the importance of good medium and long-term financial planning. Councils should be aware of their exposure and we would expect them to carry out good sensitivity analysis that lets them understand what would happen if an interest rate were to rise or not, and to look to, as many councils do, actively manage and reprofile their debt accordingly. All of those factors are the reason for our banging the drum for better medium and longer-term financial planning.

11:45  

Good morning, panel. I have a question on paragraph 20, which is about universal credit. As you say, it has been rolled out across five council areas in Scotland. You say:

“Rent arrears across these councils increased in 2016/17 by an average of 14 per cent, compared with an average of 4 per cent across the remaining councils”,

and your housing benefit performance audit report highlighted that councils are finding that the roll-out of universal credit is having

“a detrimental effect on their collection of housing rental income.”

Is universal credit increasing financial pressure on local councils?

For housing authorities, it is fair to say that. There are pressures on rents in housing revenue accounts. We normally differentiate between general services, which are funded via general revenue grant and taxation, and housing revenue accounts, which are funded by rents. It is fair to say that, so far, the pressures for councils have been housing revenue account pressures caused by rent collection issues. There is a sense that some general fund pressures may be associated with universal credit, but it is a bit early for me to be able to comment on that.

In any report we touch on a number of issues that we cannot really develop, of which that is one. It would be remiss of us not to make any mention of universal credit just because the primary focus of the work happens to be the council’s general fund. However, we are planning a specific piece of work on housing. We did a report on housing around three years ago, and we feel that it is time to look at a number of situations, including universal credit. I expect that that would be the opportunity to get into the depths of the issue. When we do that, we will know more. At the moment, we know only what we can report to you, which is not much.

By the time that we produce that report, I presume that we will be beyond the pilot stage with a number of councils and we will be able to look in greater depth at what impact, if any, universal credit is having on rent arrears. At the moment, we can see a pattern of correlation emerging, but we need to get under the skin of it and find out what is actually happening and whether it is something that is sustainable or is perhaps just a blip because of the difficulty of introducing a new system of benefits. We do not know at this stage.

You may not know the answer to this question either, but I will ask it anyway. The report talks about risk and uncertainty. A number of groups in my constituency in Fife are being supported directly by European Union structural funds. Such budgets are often administered via councils, and I know that Fife Council works closely with those groups. Do you have a view on how Brexit will impact local government finance? [Laughter.]

A nice easy question.

Yes, just an easy one.

I am very tempted just to pull up the drawbridge and say that we do not cover that in the report.

I thought that that was Brexit.

I cannot comment on that. What I can say with some security is that the picture will become clearer. The committee would be surprised if I were to say anything other than this: we have already identified Brexit as being one of the bigger landscape risks within which we have to operate. Our view is clearly focused on local government. Brexit pervades the economy as a whole, and other factors too. As we do our risk planning and come to decisions about which pieces of work we might most usefully do—a couple of which I have referred to already—Brexit is one of the risks that we are considering, and it is getting bigger.

The best thing that I can say is that when Brexit’s impact on EU funding for local communities, particularly via councils, becomes a little clearer, our thinking will be sharper about whether a piece of work on that might be useful. At the moment, anything that we did would be too speculative to add value.

This year, as we begin planning for the coming audit year, which kicks off about now, we have asked auditors to look specifically at how the bodies that we audit across the public sector—on behalf of the Accounts Commission and the Auditor General—are preparing for Brexit. We are doing work to check the extent to which individual public bodies understand its impact.

My feeling is that councils are really quite alert to that. They understand the money that comes via Europe and are doing what they can to prepare for Brexit. As we know, the challenge is that there is so much uncertainty on the topic that it is very difficult to plan in any detail.

Last year, when we were considering the matter, it was not very clear whether council funding was going down or staying the same. It was all very confused, as we suggested in our report. One of the factors in that confusion was the funding for integration joint boards. Are we any clearer now?

In paragraph 11 of your report you seem to include money from integration joint boards and state that there was a revenue cut in 2016-17 of 5.2 per cent in real terms. Last year, we struggled to reach a definitive figure. Are you any clearer on that this year?

I am looking for the reference in the report—there is a table that demonstrates the movements in funding. Are you asking about the movements over time in the funding for local government or have I misunderstood your question?

No. Last year, when we considered the budget, we struggled to ascertain a figure that showed whether money to councils was going down or not. One of the confusing bits was the contribution of IJBs and other factors. I am asking whether we are any closer to getting some clarity on that.

I hope so. Part of that greater clarity might be the result of the decisions that the committee came to on considering our report as well as evidence from other sources. I have seen the correspondence on that and some of the undertakings that the Government has made. We await with interest the budget figures that will be produced in a few weeks’ time to see what that will mean.

On the specific point about IJBs, at exhibit 11 we have tried to separate out the effect of the additional resource given to IJBs in 2016-17 and later we do that for 2017-18. I hope that that is helpful. We stand by what we said at the time about whether it is right to include IJB funding in an account of Scottish Government funding as a whole to local government: the money to the IJBs goes into the accounts of health boards, and as a consequence, we do not think that it should be included in the local government total. However, we recognise that some people take a different view, so we have tried to separate it out so that you can see for yourself. It is a matter of choice which line in that analysis you consider to be the right one.

That is as clear as we can be. The money for IJBs clearly goes into the accounts of health boards. What happens to it after that is part of the bigger picture of IJBs that we touched on earlier. Among other things, we will be interested in clarity about whether all that money finds its way into the budgets of the IJBs. However, at the moment, all that we can say is that that money does not go to local government and so, in our view, is not part of local government funding from the Scottish Government.

When we look at it, should we discount the IJB money that goes to health boards and just look at the money that goes directly to councils?

It depends what point you are trying to make. We are trying to make a comparison over a period of years to say what the position for local government funding from the Scottish Government is compared to the Scottish Government’s own funding. To make that comparison, you would use the statistics in one way. If you are trying to make another point, you would use the statistics in another way. It depends on what point you want to make, Mr Simpson.

I am not trying to make a point. Last year, we just needed to know the position. You have illustrated the problem.

It will always be difficult to get everyone to sign up to one figure that will answer the question of whether the funding is going up or down. That is why we have tried to separate things out in this year’s report. As the deputy chair, Mr Hinds, said earlier, this is the second time that we have produced the report and I am sure that we will be able to do more next year to bring further clarity and transparency.

I refer to our experience of reporting on similar issues, such as reserves. When the commission started reporting on reserves some years ago, that shone a spotlight on an opaque area of local government finance. The fact that we are now able to have a conversation about what is happening with reserves in individual councils is a sign of how the debate can be moved on a little. I anticipate this area being similar. As the deputy chair said, we will watch with interest in a few weeks how the cabinet secretary presents things. Rather than come up with a single figure, we are trying to be as clear as we can about the elements of that figure, after which, as Mr Simpson says, people will make their own judgments.

I might just follow up on that, because I have been pursuing that line of questioning for some time as well. If we focus on what has happened specifically to the revenue grant from the Scottish Government to local authorities over the years, that gives one set of statistics, but, given that we are doing budget scrutiny as part of this evidence session as well, could you outline what additional revenues from the Scottish Government, direct or indirect, go to local authorities to support the delivery of services? Exhibit 2 shows the significant difference in the numbers if IJB funds are included, which is helpful. With regard to the spending power or the liabilities of local authorities, do you not recognise that IJB funds have to be included, given that £125 million of those funds were used in the past year for living wage and wage pressures in the social care sector? Had those moneys not come through the NHS, they would have had to be found elsewhere.

I will rephrase my comment. It depends on your interest in the subject. The way that you have put it is helpful. If your interest is in seeing how much purchasing power there is to provide a range of local services, your eye would be drawn in exhibit 2, for example, to the bottom line, which says that the £250 million in 2016-17 that went into IJBs was clearly meant to buy local health and care services. That is the conclusion you would draw. If your interest is in which bits of the local government funding formula are properly attributable to councils as entities, you would look at something different. It is not the point that you are trying to make, but the interest that you have in the matter.

Does the general revenue grant include the £110 million generated by the change in the council tax bands and the multipliers on that?

No; that is very much local income that councils collect.

I will explain why I asked. Mr Wightman set the scene well at the opening of the evidence session. We are scrutinising local authorities’ spending power and their flexibility to raise revenue. Over the years, there has been a belief that local authorities have become too reliant on the revenue grant from the Scottish Government and, as other streams of revenue have become available to them, it would be helpful for those to be outlined in the same tables. I would have found it helpful if exhibit 2 had also included the moneys generated by the council tax multipliers, because there was a Scottish Government decision to give that money to local authorities. I would also have found it helpful to have the projected 3 per cent council tax increase included to get the actual revenue position of local government.

My frustration, which I experienced when the Convention of Scottish Local Authorities appeared before us recently, is that while I accept that the Scottish Government tries each year to make the financial position of councils look as good as it can and that COSLA tries to make it look as weak as it can, the truth lies in between. We await with interest the information that will be provided by Mr Mackay when the budget is produced. We have been clear about what the committee expects from him, but we will have to wait to see whether that transpires.

Would the commission consider in future revisions of its report the inclusion of those other moneys in exhibit 2 to give us a better feel for the actual position of local government?

12:00  

In the report, we show the figure that you referred to—the £110 million—in a different context. We are not disputing for a second that that is additional resource that local government has at its disposal. The question being posed now is whether that sits properly in the analysis on the page that we are looking at, underneath exhibits 1 and 2. We can take that point on board.

As I said, we are happy to provide further information to the committee as a result of this morning’s discussion, if you think that that would be helpful. We would be more than happy to put together the pieces of the jigsaw, if you like, in a response to you and set out as best we can where we think the relative sums of money sit.

In advance of doing that, I would say that the answer depends on what interest you have in the matter. That part of the report is looking at Scottish Government revenue funding to councils. It would be a significant misinterpretation of that to say that council tax—even a part of it—was Scottish Government revenue funding to councils. It might be funding that councils have at their disposal, but it would not sit happily under that heading. We would need to think about how best to present the information in a way that was clear and helpful.

That point is very well made and I fully accept it. I also accept that it is not your responsibility to do that; it is the Scottish Government’s responsibility to set out its figures clearly so that they can be scrutinised by you, us and others. Although we would find that helpful, the onus does not sit with your organisation.

I will ask a couple of questions about exhibit 23, then the deputy convener will ask some other questions. I am looking at exhibit 23 now—I thought that I understood it, but then I went off on a tangent, so let me look at it again.

We will find out shortly what the funding settlement is for the coming financial year. Does the potential funding shortage of £343 million refer to the overall money going to local authorities or just the revenue grant?

That is based on local authorities’ overall income from the general revenue grant and taxation, including council tax.

Does it include integration joint board funds?

That is a good question.

It is one that COSLA could not answer.

I do not think that it does. Those funds do not feature at that level. They come into the accounts at the higher level. Exhibit 23 deals with what we call net revenue expenditure, which is funded from the general revenue grant and taxation. The IJB money would come in at the higher level.

Your report says:

“In the absence of further savings, councils would use around £343 million in 2018/19 if expenditure were to increase by 0.5 per cent and income decrease by 1.5 per cent.”

It would be helpful to know whether that funding gap assumes that £250 million had already been given to local authorities via IJBs. Is the funding gap £343 million minus £250 million, or whatever the current figure is?

We will clarify that in the letter that I referred to. It will be another part of what I call the jigsaw that it would be useful to set out for you.

That would be very good.

So the £343 million is predicated on a revenue cut of 1.5 per cent from the Scottish Government. Is that right?

It is an overall reduction in councils’ income, so it is a mix: a reduction in their income from council tax, the general revenue grant and non-domestic rates.

So it is predicated on a reduction in council tax funds.

Yes.

I do not have any further questions on the table at exhibit 23. I just wanted to better understand it for when we do our budget scrutiny.

I should say—I am sure that you would have figured this out anyway—that we are not saying that that £343 million figure has any specific significance. We are setting out a range of possibilities. You will have heard from other parties where they think it sits in all this, and you will need to form your own judgment. However, in our supplementary letter to you we will set out more clearly the assumptions that underlie the reductions in income and the increases in expenditure.

Your evidence was very helpful. When COSLA gave evidence, it talked about a funding gap of about £580 million, but that was predicated on every worker being given a 3 per cent pay increase. We are getting clarity on whether integration joint board money was included in that mix. We are in contact with COSLA to confirm whether it was.

The COSLA figure included a 3 per cent pay rise and a 2.8 per cent increase, I think, in demand pressure, but it is not obvious whether that increase is due to an ageing population or whatever it happens to be.

Yes. The figures across the top of exhibit 23 are just changes in expenditure—we do not differentiate between rises in inflation and the increase in demand or anything. It is just a matter of picking a number that looks sensible and asking what that would mean in terms of the funding gap.

I think that exhibit 23 helps the committee in so far as it gives us a table of baselines to which we can add pressures or revenues to see how those all interact with each other. Now that I think I understand exhibit 23, I can see that it is of value.

Elaine Smith has been very patient.

First, I ask for some clarification on the same exhibit. You have picked out the figure of minus £343 million as an example. Is that just to show how the table works?

Yes.

It is not a real figure.

No.

Paragraph 17 of your report states:

“The Scottish Government and COSLA should assure themselves that the funding formula remains fit for purpose in a changing landscape for local government.”

Do you have an opinion on whether it remains fit for purpose? Who should look at it to see whether it remains fit for purpose?

This is the first time that we have ventured into this territory, but we have done so because we think that transparency and clarity around a very complex arrangement would be beneficial. The committee has also expressed that view in the past. We are not doing this because we think that we are experts in the difficulties of local government funding, let alone the complexities of the distribution process that this is just a high-level representation of. We are not sitting in front of you as experts; therefore, even if we had an opinion, it would probably not be of any great value to you. Nevertheless, having looked at the issue and having reported as we have, we think that it has been some time since there was a fundamental review of the funding formula.

At the top of exhibit 4, we point out the number of distinct elements that feed into the top part of the process in somebody’s spreadsheet, which eventually distils a set of figures that represent real funding for the 32 councils. Those elements are all quite different from each other, and the question is how coherent such a mixture of things can be. We are not saying that it is not coherent; we just think that the question is worth posing. We also think that the changes that have taken place over the 10 years or so since the formula was last looked at in a fundamental way have been not just changes in the financial context for local government but changes in policy and in other contexts—not only in local government, but in the Scottish Government as well.

Against that background, given the aspiration to deliver better outcomes for the people of Scotland, whether any funding arrangement—let alone one as significant as this—is absolutely fit for purpose seems to be a valid question to pose. We are not saying that we think that it is not; we are just saying that, after 10 years, you should look at it. A lot has changed in 10 years, some of which is spelled out in exhibit 4. We do not have an opinion on the matter, because we are not experts, but we advocate at least having a look at the formula for the sake of the transparency that the committee and other interested stakeholders need to see how it all pans out in local government budgets.

At the start of paragraph 17, you say that

“funding to expand early years’ childcare ... has come as ‘additional funding’”

but that it is

“specifically directed at delivering particular national policies.”

We used to call that ring fencing. Do you think that funding that is specifically for national policies should be looked at differently? Is that what you are suggesting?

No. We are asking whether the foundation of the process remains what it has always been—a needs-based formula to distribute resources equitably between 32 councils. If that remains the objective of the funding distribution, it is worth looking at the formula again to see whether the things that have been added to it over the past 10 years or so are genuinely needs based and whether it still produces the best outcome if the Government is trying to deliver resources to councils so that they can play their part in servicing their local communities and in delivering high-level policy priorities that both councils and the Scottish Government have an interest in delivering. The answer might turn out to be yes, but we think that the question is worth posing.

Our core question is a simple one. If there is a growing sense that we should be allocating money for particular purposes in different ways—for example, through the pupil equity fund or support for the early years—that raises the question of the core funding formula. If the core funding formula was designed to reduce inequality and improve outcomes, as the policy framework is now designed to do, it could be argued that we do not need separate revenue streams for additional funding and non-specific changes. The more that is added on to those bits, the more reasonable it seems to ask the question about the core funding formula. That is our core point.

Time is almost upon us. I apologise to Mr Wightman, but he will have to be brief. I hope that we can finish the evidence session by a quarter past 12.

I have a brief follow-up question. Your answers are helpful. I have been engaging with the process because of the proposed cuts to the funds for the City of Edinburgh music school, which were ring fenced in 2008. The concordat says that the funds are now wrapped up in the settlement, but where they are in the settlement is a little bit unclear. It would be useful to explore that in the future.

Exhibit 5 talks about “budgetary pressures” including the single state pension, the living wage for social care workers, annual increases in staff costs and so on. Is it your impression that those pressures are now significantly greater than they have been over the past decade or so? I would like to get an impression of the relative scale of the pressures that are now being faced.

Others might have a more coherent view than I have, but I would not say that. Financial pressures—cost pressures, to be more accurate—of one sort or another are an everyday and every-year fact of local government life, so we have not looked to see whether those pressures were more or less severe in 2016-17 than they were in previous years. However, I can safely say that they were not out of line—they were not extraordinary pressures. Therefore, even if they were consistent with the pressures in previous years, against a backdrop of reducing resources they were harder to deal with. That is the core point that we are making.

That is all. Thank you.

That was very brief, Mr Wightman. I appreciate that.

Members have no further questions. As always, the report is really helpful and challenging. It will enable us, as MSPs, to better scrutinise the budget when the numbers come out, so we very much appreciate that. We look forward to working in partnership with you in the months and years ahead. Thank you very much.

We move to agenda item 3, which the committee has agreed to take in private.

12:12 Meeting continued in private until 12:28.