Meeting of the Parliament (Hybrid)

Meeting date: Thursday, June 23, 2022

Official Report 1246KB pdf

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Provisional Outturn 2021-22

The next item of business is a statement by Tom Arthur, the Minister for Public Finance, Planning and Community Wealth, on the provisional outturn for 2021-22. The minister will take questions at the end of his statement, so there should be no interventions or interruptions.

13:54  

I welcome the opportunity to update Parliament on the provisional outturn against the budget for the financial year 2021-22.

The provisional outturn demonstrates once again that this Government has prudently and competently managed Scotland’s finances. This has been another exceptionally challenging year. The Scottish Government has had to respond quickly and decisively to significant challenges: in particular, the on-going impact of the Covid-19 pandemic, the cost of living crisis and the tragic, illegal war in Ukraine. However, our effective and prudent financial management has meant that every penny received by the Scottish Government has been channelled to where it was most needed.

In 2021-22, we spent more than £5.7 billion in relation to Covid. That includes just over £2.6 billion to support health and wider public health initiatives, and around £1.5 billion in business support and self-isolation grants. Part of that business support was a £375 million package that was announced to support firms impacted by the unexpected spread of omicron. Proportionately, that was significantly more than the chancellor announced for the United Kingdom as a whole. We also continued to roll out a highly successful Covid-19 vaccination programme, including those vital third booster doses to combat the unexpected omicron variant.

We spent more than £3.5 billion on social security benefits, including £57 million as we started the game-changing Scottish child payment.

We also committed an additional £4 million of Scottish Government humanitarian aid as the first part of a contribution to support the Ukraine crisis. That supports those in Ukraine affected by the conflict; it also supports vulnerable people while in transit as they are displaced from Ukraine

Looking forward, the Scottish Government remains committed to ensuring that we as a country continue to effectively manage the on-going recovery from Covid and provide stability and support against the impact of the cost of living crisis.

Responding to the pandemic, sharply rising inflation and the cost of living crisis has, once again, put a spotlight on the challenges that we face in managing such volatility within the narrow, restricted fiscal powers that we have. We face the same interrelated challenges as other Governments across the world, but we currently do so without the tools and levers that other Governments have at their disposal.

The current fiscal framework is inadequate and leaves us with an imbalance between the risks to which the Scottish budget is exposed and the levers that we have to manage those risks.

We have uncertainty over our UK Government funding. The UK Government did not confirm our final funding envelope until six weeks before the end of the financial year, and materially changed it, with no prior warning up to that point. That limits our ability to do long-term, optimal planning, and makes efficient and effective deployment of late funding changes extremely challenging.

That is an important point and links directly to the management of the budget and spending well. The total resource funding that was confirmed so late in the year was more than £1.1 billion. Some of that was expected but large elements of it were not. We want to make the most of that funding, and doing so requires managing programmes of spending across our year-end cut-off. That is not underspending; it is maximising the effective use of our budget.

The challenge of managing the volatility in our funding envelope is compounded by a funding model that means that our carry-forward budget between financial years is tightly restricted. Our priorities need to be managed using a multiyear model because, unfortunately, those challenges do not stop at the end of a financial year.

Within strict limits, we also have to manage how much, and for what purpose, the Scottish Government can borrow, which leads us to be overly dependent on UK Government policy. That has been compounded by the UK Government’s decision to remove necessary Covid consequential funding at a time when we undeniably need to continue to provide additional support to our public services.

That is why, until such time as the people of Scotland choose a different constitutional path, we will also continue to make the case to the UK Government for more proportionate financial powers to help manage pressures and volatility in Scotland’s financial position and allow the Scottish Government to respond fully to its priorities. The forthcoming fiscal framework review must take place in that context. A narrow, technical review of the framework will not deliver what the people of Scotland need or want.

I turn to the 2021-22 provisional outturn. Under the current devolution settlement, the Scottish Government is not permitted to overspend its budget. At the same time, the carry-forward of budget between financial years is very limited, meaning that phasing of expenditure between financial years is extremely restricted. The UK Government does not constrain its economy and businesses to manage its finances to one single year, so why does it expect a devolved nation to do so? That is the situation that we currently face in Scotland.

Therefore, a balance needs to be struck to ensure that we maintain spend within our budget limits but do not generate high carry-forwards between financial years that would risk breaching our reserve cap and result in the loss of funding. However, we have, once again, managed to maintain that balance under those strict fiscal constraints. I can report that the provisional fiscal outturn for 2021-22 is £47 billion, against a total fiscal budget of £47.6 billion.

The remaining budget of £650 million, which represents just over 1 per cent of our total budget, has been carried forward in full through the Scotland reserve. It is made up of £421 million of fiscal resource, £183 million of capital and £46 million of finance transactions, which, of course, can be used only for loans or equity investment in entities outside of the public sector.

It is important to note that there is no loss of spending power to the Scottish Government as a result of that carry-forward. As I have said, every penny has been allocated in full, which allows us to implement measures at the most optimal time, rather than being constrained to a single financial year. That is evidenced by the fact that the majority of the carry-forward has already been proactively anticipated in the 2022-23 spending plans that have been approved by the Parliament, including the £324 million that was anticipated in the 2022-23 budget, which was published on 9 December 2021, and the £120 million to support local government costs that was announced by the Cabinet Secretary for Finance and the Economy on 27 January during stage 1 of the budget bill process. Of that funding, £265 million is directly linked to late UK Government consequentials, which were finally confirmed only six weeks before the end of the financial year. The remainder represents just 0.4 per cent of our budget, and it is already built into our 2022-23 plans to fund expenditure in 2022-23, with the full budget allocations being disclosed to Parliament as part of our autumn budget revision process.

I highlight that the outturn figures for 2021-22 remain provisional because they are subject to the on-going audit process. Finalised figures will be reported as usual in the annual Scottish Government consolidated accounts, and a statement of total outturn for the financial year 2021-22 will come later this year.

To conclude, the provisional outturn demonstrates that the Scottish Government has maintained a firm grip on Scotland’s public finances in the context of a year with significant challenges. We have delivered on our priorities, maintained the balance of not breaching our fixed budgetary limits and ensured that we have sufficient balances to fund our 2022-23 spending commitments. That is despite the challenges and fiscal restrictions that the UK Government places on us.

I commend today’s figures to Parliament.

The minister will now take questions on the issues raised in his statement. I intend to allow around 20 minutes for questions, after which we will move on to the next item of business. I would be grateful if members who wish to ask a question could press their request-to-speak button now.

I thank the minister for prior sight of his statement. There is absolutely no doubt that this remains a very challenging fiscal environment, in which many factors are combining to make the path to recovery uncertain.

It is perfectly true, as the minister said, that the Scottish Government cannot overspend on its budget, but the whole of Scotland wants to know why ministers have not acted on the demands that they themselves have repeatedly made to ensure that both businesses and the public receive financial support as quickly as possible. That is exactly what the cabinet secretary demanded of the UK Government just a few weeks ago, yet, today, we learn that there is a large underspend of £650 million and, yesterday, we learned that the Scottish Government has still not decided, a month on, what to do with the £41 million that it received in Barnett consequentials from the household support fund.

I will ask the minister two questions. First, why, when we have businesses that are collectively struggling with debt, the recruitment crisis and rising costs, and many families are really struggling with the cost of living, is the Scottish National Party not releasing more money now so that it can deal with the current financial constraints?

Secondly, will the minister confirm to Parliament that the Cabinet Secretary for Finance and the Economy will make a statement prior to recess to announce how the Scottish Government will spend the £41 million of Barnett consequentials to help low-income families, which she has been sitting on for a month?

I trust that the member has received the provisional outturn briefing note for MSPs. I am sure that she will have familiarised herself with the annex to it, which details all our spending on Covid in the past financial year, including in business support.

Over the pandemic, we spent £4.7 billion on business support. That is £500 million more than we received in consequentials from the UK Government. As I said in my statement, all the money in the reserve will be disclosed to Parliament through the autumn budget revision process, which is a formal process for parliamentary approval. Ministers, as always, will appear before the committee as part of that process and be subject to scrutiny. As that concerns future parliamentary business, that will, of course, be a matter for the Parliamentary Bureau to determine.

I, too, thank the minister for early sight of his statement.

Covid and the cost of living crisis necessitate that the Government gets the money that it has out the door as quickly as possible. The minister has cited £5.7 billion of Covid spend, but that is £100 million less than was received in consequentials that year. Indeed, the total in consequentials due to Covid was £14.4 billion over the past two financial years.

Will the minister confirm how much of that £14.4 billion cumulatively has been spent over the past financial years? Also, given the issues that have been raised by Audit Scotland, how much of it remains not just in Scottish Government reserves, but in local authorities, non-departmental public bodies, health boards and integration joint boards?

Finally, I ask the minister for clarification: £650 million is very close to the threshold of what is permitted to be held in the Scotland reserve. Given that the outturn numbers are provisional, is there any risk that that threshold will be breached?

On Mr Johnson’s last question, in terms of our management, we have headroom of £50 million. However, he raises an important point, which is the fact that the reserve limits are now out of date. A key issue that will have to be addressed as part of the fiscal framework review is that they are not indexed and they do not increase with inflation or with Scotland’s budget.

As regards the total money in the reserve, I will be happy to confirm it to Daniel Johnson in writing, but there is no carry-forward from any Covid funding into the reserve. The money that was spent in the last financial year has been detailed in the annex to the briefing note for members. Similar publications are available that detail the Covid funding that has taken place in previous years. That information is available, and I am happy to write to him to direct him to it, if that would be helpful.

I thank the minister for his statement. I thought it was very clear, yet we still have Liz Smith using the words “large underspend”, which I would suggest is somewhat misleading for the public. Can the minister confirm that the Government has to underspend because it is not allowed to overspend?

Yes. The member makes a really important point. That is the fundamental reality, and it would be faced by any party in government. We cannot overspend our budget. If I were standing here reporting that we had spent above it and breached our cap, I am sure that Opposition politicians would, rightly, be criticising me.

It is also important to look at the context. The actual underspend—the money that was not anticipated—was 0.4 per cent of the budget. I draw members’ attention to the fact that the outturn figures that we have for 2020-21 in the other devolved Administrations show that the Northern Irish Government had an underspend of 1.1 per cent and the Welsh Government had an underspend of 0.5 per cent. In England, which also has an underspend for this year, the figure was 6 per cent.

The SNP Government recently claimed in its spending review that tackling climate change was one of its key priorities for the rest of the parliamentary session. However, it has now emerged that in the past year there was a £511 million underspend by the SNP Government in that portfolio area. How on earth can the SNP Government claim to be tackling climate change, when it is not using all the financial resources at its disposal?

This Government is absolutely committed to tackling climate change, which is why we have introduced world-leading targets. The reality is that many projects have been impacted by a combination of the pandemic, supply chain issues and workforce issues. If the member cares to receive it, I will give him an itemised breakdown of some of the challenges.

Part of the £123 million underspend in resource is ultimately a reflection across the net zero, energy and transport portfolio of improved rail passenger revenue. There was also underspend in relation to the northern isles ferries, due to lower fuel costs.

On capital, there was a significant underspend in energy. That is ultimately a reflection of the fact that all capital delivery programmes are demand led and have been severely hampered by continuing effects of the Covid-19 pandemic.

On financial transactions, a majority of the underspend within the NZET portfolio is in energy, where loan income was higher than anticipated.

As the minister has outlined, the pandemic caused considerable uncertainty in budgeting, with a need to respond quickly to rapidly changing circumstances. He mentioned the additional uncertainty caused by late notice—or, indeed, lack of engagement—from the UK Government in terms of when funding could be expected.

I note that, despite that uncertainty, Audit Scotland concluded in its recent report, “Scotland’s financial response to Covid-19”, that

“The Scottish Government ... managed its overall budget”

well. That said, can the minister advise what lessons can be taken from the experience of public spending during the crisis and what changes could be made to better manage such uncertainty?

The pandemic has brought into sharp focus the existing deficiencies in the fiscal framework. Unlike other countries around the world, we cannot respond quickly to emerging needs by borrowing. That leaves us overly dependent on decisions taken by the UK Government. I think that we can all remember specific moments during the pandemic when that posed very severe challenges. Being reliant on consequentials, with little clarity and certainty over their scale and timing, makes response and recovery planning extremely difficult.

Existing fiscal powers are also being eroded over time by inflation, as I touched on. Key borrowing powers and reserve limits within the fiscal framework are currently set at nominal cash values and hence are not protected in real terms from a growing tax base. As I said earlier, the fiscal framework review must consider the challenges that we face as a result of those fixed nominal limits on current borrowing and reserve powers, as their real-time effectiveness continues to deteriorate over time.

The minister knows full well the scale of the cost of living crisis and the misery that millions of people are living through at the moment. The reality is that people need that underspend money in their pockets, not sitting in a Scottish Government reserve being saved for a rainy day. Will the minister tell us why he believes that it is appropriate—or, indeed, fiscally prudent—for the Scottish Government recently to announce the potential loss of up to 30,000 public sector jobs during this cost of living crisis, while sitting on an excessive £420 million resource underspend? That money could be used right now to alleviate the hardship faced by millions of households across Scotland.

It is money that is going to be used. It was anticipated in the budget last December and the full process for disclosing how that money will be allocated to current and on-going commitments will take place, as it always does, as part of the budget process at the budget revisions. That is just how things normally operate in Parliament and that is what we will continue to do.

I want to work collaboratively and constructively on the cost of living crisis. We saw a great example of that in the debate yesterday afternoon, when we sought agreement among parties across the chamber—the agreement of not just one party, but most parties—on taking measures to help people.

The reality is that every penny in the reserve is committed to spending in this financial year. That is exactly the action that we will take, and we will disclose that spending, as we always do, through the budget revision process.

I thank the minister for the statement and the clarity regarding the substantial sums that were allocated to business support during the pandemic. It was clearly vital that effective systems were in place to detect and prevent fraud. In comparison, the Westminster’s Public Accounts Committee found that billions of pounds of taxpayers’ money would be lost to fraud and error as a result of the United Kingdom Government’s approach. Can the minister provide any further information about what assessment has been made of the effectiveness of systems that the Scottish Government put in place to detect and prevent fraud in its business support schemes?

The risk of fraud was mitigated through a number of control mechanisms that were built into the design and delivery of the business support schemes. For example, local authorities were asked to administer many of the grants that were based on non-domestic rates, given their existing administrative capabilities, including fraud detection and prevention. That meant that local authorities could use an existing, well-established and robust dataset and other information relevant to determining eligibility to enable a large number of businesses to be paid quickly, with appropriate checks in place to mitigate fraud.

In late 2021, the Scottish Government undertook a retrospective fraud risk review on 11 major business support funds that were administered by local authorities and other bodies. The review concluded that there was reasonable assurance in relation to the fraud risk for business support and that appropriate controls were in place. That work is reflected in our unqualified consolidated 2020-21 accounts opinion. The Auditor General for Scotland recognised that the fraud estimate was reasonable and he acknowledged the actions that the Scottish Government had taken to minimise fraud risk.

It is the delivery partners’ responsibility to recover payments that have been made fraudulently. The Scottish Government’s initial work on consideration of assurance in relation to fraud risk found comprehensive fraud prevention measures in place in local authorities, together with experience of managing fraud risk in areas such as local taxation and the application of exemptions.

There were high numbers of rejected applications in the larger schemes that local authorities delivered, which indicates proper scrutiny at the point of application.

With the crisis in our national health service and in social care, the cost of living crisis and businesses struggling to pay the bills, particularly in the aftermath of Covid, every pound needs to be put to work—and fast.

I echo the words of Liz Smith, who said that the Government could not afford to sit on that money: we need to get it out the door as quickly as possible. It is important that the Scottish Government properly account for how the Covid funding was used. We heard something about fraud detection in the previous answer, but lots of money will have been lost to fraud or mistakenly distributed by the Government.

Can the minister provide further analysis to the Parliament and an update on how much the Government has lost to fraud or error? Can he outline the steps that are being taken to reclaim the money and how many people the Government has working on the issue at this time?

As I referred to in my response to Mr McMillan, we utilised delivery partners, and recovery will be their responsibility. Based on available data and several other factors, we believe that the estimated level of undetected fraud was around 1 to 2 per cent of overall spend. However, the available data tells us that, of the fraud that was detected, a loss of around £600,000 was realised as of April 2021. The total spend for the largest local authority to deliver schemes at that time was £1.6 billion, so our estimate of 1 to 2 per cent would have put fraud at £16 million to £32 million.

We are currently working with delivery partners and Audit Scotland to improve our estimates based on an improved understanding and management of fraud risk; to improve consistency and quality in the capture of data on fraud and error; and to increase post-delivery testing of control effectiveness. The output of that work will form part of the Scottish Government’s 2021-22 consolidated accounts.

I understand that the UK lost £12 billion to furlough fraud alone.

The need for a fiscal framework review has been reinforced through the pandemic and now the cost of living crisis. The situation has clearly demonstrated how difficult it is for Scottish ministers to act without sufficient fiscal powers, often with late notice and a lack of engagement regarding Barnett consequentials.

Can the minister provide an update on the Scottish Government’s latest engagement with its UK counterparts with regard to the fiscal framework review and the changes that it hopes to see as a result of that review?

We are clear that the review should be broad in scope and should consider not only the operation of the framework to date but the balance of risk and whether further levers are required to grow Scotland’s tax base and support economic recovery. The review must ensure that the Scottish Government and the Scottish Parliament have the necessary powers to manage the risks that we face within our devolved responsibilities and to support that economic recovery.

I understand that the joint Exchequer committee will meet later this month and the Cabinet Secretary for Finance and the Economy will discuss further arrangements for the review with the Chief Secretary to the Treasury.

The pandemic and the cost of living crisis have had, and continue to have, extremely harsh impacts on the Scottish public sector and on our economy generally. Those crises show the need for reflexive fiscal powers to deal with the shocks that affect Scotland uniquely.

Does the minister agree that the outturn statement illustrates the increasing extent to which the fiscal framework and devolution settlement generally fail to meet Scotland’s needs? How would independence ensure that Scotland has all the fiscal levers and flexibility that it needs to invest in its own vision of a green recovery?

There is a really important point in that question. First, we have the upcoming fiscal framework review, as I referred to in my response to Mr Gibson. I will not repeat what I stated then, but it is clear that we need movement. When the fiscal framework was agreed, it was recognised that there should be a review—that in itself was an admission and an understanding that that would be a process and an event.

There are a number of areas on which, regardless of our constitutional views, we should be able to unite across the chamber, for example on expanding borrowing powers, expanding flexibilities around the reserve and ensuring that limits and caps move with inflation. Those are simple, straightforward measures.

There are further things that we could do to enhance the powers of the Parliament through the fiscal framework review, including full powers over income tax, full devolution of national insurance and devolution of VAT. However, Ariane Burgess is absolutely correct to say that the best option for Scotland, and the option that the people of Scotland will be presented with in the near future, is that of becoming an independent country.

We understand that the figures are provisional, but it is crucial that we get the detail when it comes to social justice, housing and local government. Will the minister comment further on how the spending will be broken down, given the tight financial difficulties that local government faces?

If Alexander Stewart is asking specifically about the outturn figures for local government, he will note that there is a £210 million overspend in resource. That was a reflection of money transferred from the finance and economy portfolio for a range of measures, such as business support and employability.

If Alexander Stewart is asking about the variance on capital spend, which is similar to the case for capital across the board, it is specifically focused on the affordable housing programme and is a reflection of the challenges in supply chains and workforce that have emanated from the pandemic and impacted the construction sector.

I hope that that provides the detail that Alexander Stewart was looking for on that portfolio.

Brexit continues to have a substantial economic impact on the UK and Scotland. Will the minister provide further information about the assessment that the Scottish Government has made of the impact of Brexit on Scotland’s economy? Will he say more about the steps that the Scottish Government is taking to mitigate the impact of Brexit on Scotland’s public finances?

It is six years to the day since Scotland voted overwhelmingly to remain in the European Union, and we are closer to rejoining the EU now than we were on the day when we were forced to leave.

We know that Brexit is contributing to the 19th consecutive monthly rise in prices that are charged by businesses in Scotland, and that it is causing UK food prices to increase by more than 6 per cent, hitting the poorest families hardest and contributing to the cost of living crisis.

According to the Organisation for Economic Co-operation and Development, the UK will have the lowest growth among G20 countries, apart from sanctioned Russia, and the Office for Budget Responsibility forecasts that Brexit will hurt our gross domestic product growth twice as much as the pandemic will have done. Brexit has direct implications for public finances through lowering our working-age population and GDP, resulting in lower Government revenues in the long run.

Since 2019, Scotland’s goods exports have fallen by 20 per cent, which has been largely driven by a decline in oil and gas exports. It amounts to a falling goods trade with the EU of 16 per cent, whereas trade with non-EU countries has dropped by only 4 per cent.

Even as Scotland tries to cope with the fallout of the reckless hard Brexit, the UK Government is irresponsibly risking a trade war with the EU over the Northern Ireland protocol. That, once again, reinforces the need for this Parliament and country to become independent.

Thank you. That concludes the ministerial statement on the provisional outturn 2021-22. There will be a brief pause before we move on to the next item of business.