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Chamber and committees

Meeting date: Thursday, June 21, 2018

Meeting of the Parliament 21 June 2018

Agenda: General Question Time, First Minister’s Question Time, Motor Neurone Disease Awareness Week, Provisional Outturn 2017-18, World Refugee Day, Business Motion, Decision Time


Contents


Provisional Outturn 2017-18

The Presiding Officer (Ken Macintosh)

Good afternoon. The next item of business is a statement by Derek Mackay on the provisional budget outturn for 2017-18. The cabinet secretary will take questions after his statement.

14:30  

The Cabinet Secretary for Finance and the Constitution (Derek Mackay)

I welcome the opportunity to update Parliament on the provisional budget outturn for the 2017-18 financial year. The provisional figures that I am announcing today are set against a backdrop of unprecedented change in Scotland’s fiscal landscape. The Scotland Act 2012, the Scotland Act 2016 and the fiscal framework have fundamentally changed the sources of funding that underpin our spending, and have introduced significant new devolved financial powers.

One example of the changes is the new Scotland reserve arrangements, which were brought in by the Scotland Act 2016 to replace the previous budget exchange mechanism and cash reserve facilities. The new reserve supports the Scottish Government in smoothing all types of spending across financial years, thereby assisting management of tax volatility and determining the timing of expenditure. The Scotland Act 2016 also increased our borrowing limits to £450 million a year: we have made full use of that facility in 2017-18.

Looking forward, the Scottish Government’s “Scotland’s Fiscal Outlook: The Scottish Government’s Five Year Financial Strategy”, which is its first medium-term financial strategy, was published on 31 May. The MTFS explains the fiscal framework and funding arrangements that the Scottish Government now operates within. It outlines our approach to financial management and fiscal rules, and sets out a range of possible funding scenarios for the Scottish budget over the next five years. It also details our key policy priorities and approach to supporting Scotland’s economy. The MTFS does not provide detailed budget allocations—that will form part of our annual budget process—but I have set out in the strategy our responsible approach to financial planning and fiscal rules, which will allow us to invest in the economy and protect essential public services.

Alongside the MTFS publication, the Scottish Fiscal Commission published an updated set of economic and fiscal forecasts, which were used to underpin the modelling in the MTFS. Those forecasts show little change from those that were published by the SFC in February 2018 as part of the Budget (Scotland) (No 2) Bill process, but they show a downgrading of the SFC’s income tax forecasts across the period that the MTFS covers.

The new national performance framework, which has been launched, sets out our vision for a more successful and inclusive Scotland. The framework was developed following consultation of the public, trade unions, business organisations, local government and civic and voluntary sector organisations. The framework includes 11 key outcomes that we want to achieve for Scotland.

I turn to the 2017-18 provisional outturn. Under the current devolution settlement, the Scottish Parliament is not permitted to overspend its budget. As a consequence, we have consistently adopted a position of controlling public expenditure to ensure that we live within the budget control limits that apply. I can report that the provisional expenditure outturn for 2017-18 is £30.9 billion against a fiscal budget of £31.4 billion, which will result in an overall cash variance of £453 million. Of that variance, £358 million relates to fiscal resource expenditure and £84 million to fiscal capital. The remaining £11 million relates to financial transactions funding, which is ring-fenced to meet the costs of loans or equity investment to private entities outside the public sector.

I have already notified Parliament of my plans to generate underspends of £235 million to carry forward to 2018-19 as part of the budget that was approved by Parliament earlier this year. The total variance also includes £100 million that was allocated to the Scottish Government by Her Majesty’s Treasury one year earlier than expected. That relates to the new social security agency set-up costs and is carried forward to 2018-19 in full through the Scotland reserve. Taken together, the items that are already committed in the 2018-19 spending plans account for £335 million of the overall £453 million cash variance.

I turn to devolved taxes. I am pleased to inform Parliament that, for the second year running, income has increased. Total provisional income from land and buildings transaction tax and Scottish landfill tax is £706 million, which is £50 million above initial budget forecasts and represents an increase of £73 million, or 12 per cent, year on year. The £50 million surplus income from devolved taxes again forms part of the overall £453 million variance and will be added to and set aside in the Scotland reserve.

I am also taking a prudent approach to ensuring that, when the Government provides guarantees, the annual fees are set aside in the Scotland reserve as a contingency measure against calls being made on them. In 2017-18, the total was £2 million.

After taking into account social security funding, the planned carry forward for the 2018-19 budget, surplus tax receipts and fees for guarantees, there is a remaining underspend of £66 million that is not yet committed to expenditure. That modest sum, which represents just 0.2 per cent of the overall fiscal budget, will also be carried through the Scotland reserve and will be available to support management of future budget volatility, which is a key feature of the new world that we live in with the devolution of powers as set out in the Scotland Acts.

Finally, and in addition to that, there is a provisional non-cash underspend of £123 million. The non-cash budget is used for technical accounting adjustments such as depreciation and impairments, and cannot be used to fund public services. Of course, that represents no loss of spending power to the Government.

I move on to Scotland’s economic outlook. The potential economic impact of Brexit will be a factor in the tax revenues that are likely to be raised in Scotland, and in future spending decisions. The uncertainties surrounding what the final Brexit deal will look like, specifically in areas such as future access to European Union funding programmes, are hampering economic growth and further investment in Scotland. The Scottish Fiscal Commission is clear that Brexit will have a negative impact on the Scottish economy by reducing productivity, trade and migration. According to all independent forecasters, Brexit uncertainty is the key factor affecting economic growth forecasts. The pace of growth over the next five years is expected to be below historical trends, with gross domestic product growth of between 0.7 per cent and 1.4 per cent in 2018, although it is expected to increase in 2019.

However, Scotland leads the way on many key economic indicators, having the fastest productivity growth in the United Kingdom, more foreign direct investment than the rest of the UK outside London, and growth in research and development spending and international exports. Scotland also has the highest proportion of employees being paid at least the living wage, and it outperforms the rest of the UK on female and youth employment.

There is also good news regarding future tax revenues, with the Scottish Fiscal Commission forecasting that land and buildings transaction tax revenues will be £26 million higher in 2018-19, at £614 million, and that they will increase over the life of the medium-term financial strategy. Landfill tax income is forecast to rise next year by £8 million, but it will fall over the next five years due to our commitment to move waste from going to landfill to being incinerated.

Despite the challenging economic environment, we have more than £4 billion of infrastructure investment planned for 2018-19, which will support 22,000 jobs directly and up to 40,000 in total, and we have an ambitious programme worth £20 billion for the current session of Parliament. We will use that funding to invest in key infrastructure projects, including £1 billion on city region deals across the country, £340 million of initial capitalisation for the Scottish national investment bank, superfast broadband being brought to every home and business by 2021, and a 70 per cent increase in research and development investment.

The annual Scottish Government consolidated accounts and a statement of total outturn for the financial year 2017-18 against the final budget for the Scottish Administration as a whole will be provided to the Scottish Parliament later this year. All the figures that I am reporting to Parliament today remain provisional, as they are subject to change pending completion of the 2017-18 audit.

In conclusion, the 2017-18 provisional outturn results show that, once again, this Government has prudently and competently managed Scotland’s finances. The prudent management of our 2017-18 budget and the new financial powers have been delivered against the backdrop of uncertainty around the UK’s exit from the EU and the UK Government’s continued austerity measures. I commend the figures to Parliament.

Murdo Fraser (Mid Scotland and Fife) (Con)

I thank the cabinet secretary for advance sight of his statement, which shows an overall underspend of £453 million. The finance secretary is, of course, anxious to stress what an insignificant sum that is, but it is worth noting that it is higher than the total cost of setting up a new independent state, according to his party’s growth commission report.

The Office for National Statistics has today advised that the UK deficit for 2017-18 was just 1.9 per cent of GDP, which is the lowest level since 2001-02. That is testament to the success of the UK Government’s fiscal policy, which has been opposed at every turn by the Scottish National Party, which said that the policy would never work. It has been proved wrong.

Moreover, that record at UK level stands in stark contrast to the situation in Scotland, in which the Scottish Fiscal Commission has downgraded its forecast for tax revenues by £1.7 billion over the next four years, and by nearly £400 million in the current year. Unless the situation improves, that will leave a black hole in the current year’s budget that will have to be filled in the financial year 2021-22. In that context, the finance secretary’s decision to transfer £66 million to the Scotland reserve against that contingency is prudent, but it comes nowhere near filling the gap that is forecast by the commission.

What additional steps will the cabinet secretary take to ensure that his successor in office in three years does not have to carry the can for this Government’s failings? Does he accept that, if the economy were to grow at even the same rate as the rest of the United Kingdom’s, there would be hundreds of millions of pounds extra to spend this year instead of resources being diverted to fill up reserves as the cabinet secretary is having to do?

Derek Mackay

I thank Murdo Fraser for his vote of confidence that I will at least get through the next three years and the next three budgets, and continue in office. I welcome that vote of confidence, which is the nicest thing that Murdo Fraser has ever said about me.

To answer his specific questions in all seriousness, I say that we will watch the Scottish Fiscal Commission forecast. The commission will have more data and will revisit its forecast as we approach the next big fiscal event, which will be the Scottish budget following the UK budget. It is right to be prudent with our resources and it is right to invest in our reserves. There are limitations on use of reserves, but considering the volatility that we all now understand and the constraints in the fiscal framework, it is right to ensure that we have reserves to draw on in the event of forecast errors or negative effects.

Murdo Fraser also touched on efforts to stimulate the economy in my budget for 2018-19. That is what I have tried to do with investment in the economy, including the 64 per cent uplift for the economy brief and a range of interventions to try to stimulate economic growth. All forecasters and economists are pointing to Brexit uncertainty as being the main challenge to the UK’s and Scotland’s economies. The UK Government could remedy that, of course, by giving us greater certainty on the Brexit question; our respective positions are well rehearsed in that regard.

As to the further measures that I will take, prudent financial planning will ensure that we have the necessary resources, and I will consider what other levers we might require in the future, for example the borrowing powers, if there is such a requirement, through the fiscal framework, from forecast error. The Office for Budget Responsibility will revisit the forecasts, as will the SFC, based on the latest data and information, which should put us in a stronger and more informed position as we approach the next budget.

When going through the budget process, I was clear on what the overall underspend would be. Some matters came late in the financial year, including some Barnett consequentials, and there are other elements of budget-spend prudence, such as the request by HM Treasury to take the £100 million for social security implementation early in the financial year but not to spend it until it is required, which would not be in the previous financial year but in this and future financial years. I have taken all my financial decisions in a prudent and balanced way and will continue to do so.

James Kelly (Glasgow) (Lab)

I thank the cabinet secretary for advance sight of his statement.

The £453 million underspend that was announced today in the outturn statement is nothing short of a scandal. The outturn statement shows a gross mismanagement of the budget by Derek Mackay. It is Mr Mackay’s job to spend Scotland’s budget to support Scotland’s communities. It is not his job to hold the money in the St Andrew’s house bank account. It is totally unacceptable that, just yards from the Scottish Parliament, homeless people are sleeping in doorways while nearly £500 million of available cash lies dormant in the Scottish National Party Government slush fund. Will the cabinet secretary apologise to the 30 local communities that have had their libraries closed this year, the many patients abandoned on waiting lists awaiting hospital treatment and the thousands of local government workers who have lost their jobs?

Derek Mackay

There are a few key points there. I appreciate James Kelly’s attempts to put some colour into the outturn report. Unfortunately for Mr Kelly, while it is true to say that every penny of the underspend that is planned to be carried into the next financial year will not be lost to Scotland, that was not the case under previous Labour Administrations, which handed money back to the Treasury. I am not handing money back to the Treasury.

The statement shows prudent management of our finances. Mr Kelly made poor choices in the examples that he gave. There is no underspend in the homelessness budget. Local government had an enhanced settlement, in part because of the negotiations that other parties—specifically, the Greens—engaged in constructively. Similarly, the national health service had an uplift in the settlement, taking it to record amounts.

I have been very clear about the managed underspend. I am surprised that James Kelly did not welcome the fact that we have collected more tax than we were forecast to do, and so were able to apply that to the Scotland reserve, too.

All of that represents the strong budget for which I got approval in Parliament. That is in sharp contrast to the incompetent, incoherent Labour proposition that could barely be called a budget, which unravelled before Mr Kelly had barely found his feet.

The Presiding Officer

I have 11 more members wising to ask a question on the statement.

Patrick Harvie (Glasgow) (Green)

Given the way in which the fiscal framework operates, and the tax reconciliation process in particular, we need to stop viewing the annual outturn statement as a stand-alone snapshot of one year in isolation and start to view it as showing the picture in the context of the years ahead. Given that and given the cabinet secretary’s emphasis on the tax policy generating more revenue than was predicted, we will have to ensure that, as more use is made of devolved tax policy, we are identifying and mitigating the risk of tax avoidance, particularly if we are to ensure that future annual outturn statements show tax policy generating the revenue that is needed for public services. What action is the Government taking to identify the risks of tax avoidance and to prevent it?

Derek Mackay

We require Revenue Scotland to do that in relation to the devolved taxes and we work closely with Revenue Scotland on that. Revenue Scotland has particular policies and enforcement action in respect of tax avoidance and has been very proactive in relation to land and buildings transaction tax and landfill tax.

We rely on Her Majesty’s Revenue and Customs for income tax. That has been discussed in committee. We have a service level agreement. There is also a general avoidance rule. I would like to see that rolled out to domestic rates, too, and we will be making proposals on that.

I agree with the spirit of Patrick Harvie’s comments. We have plans in place to tackle the issue, although we continue to rely on HMRC.

The Scottish Fiscal Commission’s latest analysis of tax behaviours shows that its understanding was pretty accurate. We have to look closely at the advice on tax behaviours when setting tax policy. Enforcement and compliance are critical.

Willie Rennie (North East Fife) (LD)

The Scottish Fiscal Commission’s £1.7 billion downgrade must be causing the finance secretary sleepless nights, which is probably why he mentioned the reserve five times in his statement without telling us how much is in the reserve. I think that the Parliament will want to make a judgment as to whether purposely holding back £235 million is wise, so can he tell us how much is in the reserve?

Derek Mackay

It is £192 million unallocated.

Kate Forbes (Skye, Lochaber and Badenoch) (SNP)

I can say with greater confidence today than I could yesterday that I am the relevant parliamentary liaison officer. There has been much fanfare from the Tories about the £2 billion increase to the Scottish budget. Has the cabinet secretary had any confirmation from the Treasury that that is a net increase in funding, or might it be offset by cuts elsewhere?

Derek Mackay

This is further to the question that was asked at First Minister’s questions. On seeing the announcements, I have sought the figures from the Treasury. I have some indication of a number for the consequentials for NHS spending, but anyone who understands the fiscal framework will also understand that how the money is raised is a key factor, so I need to understand how that money is being raised. If it is being raised through income tax that relates to us, the increase may not be the £2 billion that has been announced. That is why I have sought more information from the Treasury. I have not yet got a commitment that there is £2 billion net for the NHS in Scotland, but I continue to pursue the matter.

Adam Tomkins (Glasgow) (Con)

The cabinet secretary talks as if Brexit is the biggest single drag on economic growth in Scotland, but Brexit is happening to the whole of the UK, not just to Scotland, so why is the Scottish economy continuing to underperform that of the UK as a whole? Just today, this Parliament’s Economy, Jobs and Fair Work Committee said in its new report that, in the SNP’s Scotland, GDP growth rates are marginal, productivity is low and wages are stagnant. How much of that is the cabinet secretary going to accept responsibility for?

Derek Mackay

The UK Government does not get to walk away from responsibility for macroeconomic policy. It has conceded the point recently, and after that concession it would be nice to see some actions on its part. I have outlined a range of actions in the medium-term financial strategy and in the Government’s economic policies on what we want to do to stimulate the economy. It is not just my opinion. The Fraser of Allander institute, the Scottish Fiscal Commission and many others—indeed all others—have said that Brexit is a huge issue.

On the point about disproportionate impact and subdued growth in Scotland, the oil and gas downturn was in large measure responsible for some of the effects on productivity and GDP. The forward look on productivity relates to working-age population and participation, and the critical issue is ensuring that we have appropriate numbers of people of working age to be able to contribute by way of output and taxation. That is why migration is so important.

There are many factors on which the UK Government can engage. On those for which the Scottish Government is responsible, we are taking action, but there is a range of factors that mean that the UK and Scotland need to do more on productivity. We are only seeking the powers so to do. I look forward to further economic forecasts that I think will show a more optimistic picture of the economy, as the Fraser of Allander institute has done just this week.

Stuart McMillan (Greenock and Inverclyde) (SNP)

What measures is the Scottish Government taking to provide certainty for our vital public services during the turbulent and uncertain times ahead as a result of leaving the European Union?

Derek Mackay

We are doing a lot of work in preparation. The Scottish Government has a clear position on staying in the single market and the customs union, and we are working on our own preparedness in relation to that. For me, stability, stimulus and sustainability for our public services all go hand in hand, to ensure that people can expect the best possible services in what has been, and will continue to be, a turbulent time, until the UK Government gets its act together on Brexit.

Iain Gray (East Lothian) (Lab)

Independent analysis this week shows that, in real terms, the SNP’s spending on education has fallen by 7.5 per cent since 2010, even when pupil equity funding is included, although it is supposed to be additional to core provision. How can the cabinet secretary justify hoarding an underspend on this scale when our schools are struggling for resources right now and our teachers are so demoralised by pay erosion that they are considering strike action?

Derek Mackay

I tried to explain the situation with the figures that I outlined. Some of the underspend was a planned underspend, some of it was the result of an increase in tax revenues and some of it was from other matters such as transfers between capital and resource. However, we have approved budgets that have allocated more to local government and more to education specifically. The most recent figures that I have seen show that education budgets are up because of the budgets that I have delivered in the Scottish Government. All those budgets were, of course, opposed by the Labour Party. That includes the £0.75 billion commitment to tackle the attainment gap. That was also opposed by Iain Gray and his colleagues in the Labour Party.

We are delivering competent, balanced and responsible budgets that will stimulate our economy and protect our valued public services.

John Mason (Glasgow Shettleston) (SNP)

Mr Kelly and Mr Gray seem to misunderstand what an underspend means. Will the cabinet secretary clarify whether he is free to spend the £100 million to which he referred on anything that he wants to spend it on or whether it is very much tied down and, in effect, ring fenced by the Treasury?

Derek Mackay

The Labour Party is now asking me to spend the £100 million on other things, but it would be interesting to see how we would equip a social security agency if the Labour Party wants me to spend that money on anything but a social security agency. I thought that I heard Labour members asking about social security payments at First Minister’s question time earlier. We need the infrastructure to be able to make the payments. The Treasury gave the Scottish Government the money early, and we are carrying it over to spend it in the year that it is required to establish the agency. That is prudent, responsible and within the agreement that I have with the Treasury. It adds to the underspend number, but the purpose has been clearly expressed.

Dean Lockhart (Mid Scotland and Fife) (Con)

The report that was published earlier today by the Economy, Jobs and Fair Work Committee, which looks at the Scottish economy over a six-month inquiry period, concludes that economic growth in Scotland is trailing behind that of the rest of the UK and historical growth trends in Scotland, and that it has done so for a decade, since well before Brexit and the drop in oil prices. Will the finance secretary follow the committee’s central recommendation and revise his economic strategy as a matter of urgency?

Derek Mackay

I am sure that Dean Lockhart, being a fair man, will give me time to read the report and reflect on it. I have not read it yet, but I will do so and I will consider its cross-party findings. Of course I will have a look at it and reflect on our economic policy.

We are making a range of economic interventions to support and stimulate economic growth. Unfortunately, most of those interventions were opposed by the Conservative Party in the last Scottish budget. When I asked the Conservatives which strategy they would like me to change, Mr Lockhart said that “inclusive” should be removed from “inclusive growth”. I suspect that that recommendation is not in the committee’s report, and I will not make that change.

Of course I will read and reflect on the report, and I will take forward what I think can assist our financial and economic strategy.

Ivan McKee (Glasgow Provan) (SNP)

To help the Labour Party to understand the issue, will the cabinet secretary confirm that no money is lost to the Scottish budget as a result of any underspend?

Derek Mackay

I again confirm that, unlike what happened in the years in which the Labour Party was in office and handed money back to the Treasury, not a single penny will be lost to the Scottish exchequer, the Scottish finance minister or the Scottish budget as a consequence of the actions that I have taken.

Neil Bibby (West Scotland) (Lab)

Today, with the SNP in power, we have learned that Derek Mackay has underspent the Scottish budget for 2017-18 by close to £500 million. That is a staggering figure. We often hear SNP ministers taking pride in having balanced the books, but the reality is that the SNP Government is mismanaging public finances and underfunding public services.

Earlier, Mr Mackay said that the NHS and local services are getting enough cash, but he is well aware of the effect that a lack of resources is having on hospitals such as the Royal Alexandra hospital and councils such as Renfrewshire Council, which are having to roll out parking charges and cut grey bin collections because of a lack of funding. How can Mr Mackay justify that major underspend when services are being underfunded? What lessons will he learn in order to manage our finances properly so that our services get the resources that they need when they need them?

Derek Mackay

Mr Bibby is of course scaremongering, as usual, so I will take what he says with a pinch of salt. The underspend is a fraction of the overall fiscal resource. By law, I cannot overspend, so we have to manage our resources very carefully. Not a penny will be lost to Scotland. Over the course of the budget negotiations, we discussed how the underspend would be spent in the current financial year. In addition, under the budget that the Government voted for but which the Labour Party voted against there is more money for local government and the health service. The budget also lifted the pay cap and included many other interventions. Renfrewshire Council, under SNP leadership, is delivering new and improved local government services. I am sure that Neil Bibby will reflect on his negative scaremongering once again.

Gail Ross (Caithness, Sutherland and Ross) (SNP)

Can the cabinet secretary outline what measures the Scottish Government is taking to support economic growth and to weather the economic disaster of being dragged out of the European Union?

Derek Mackay

The Scottish Government has expressed to the UK Government, with considerable vindication, the impact that Brexit will have on Scotland’s economy. The actions that we are taking include creating the most comprehensive package of business rates relief anywhere in the United Kingdom, increasing spending in the economy portfolio by 64 per cent, increasing investment in business research by 70 per cent, establishing a new national manufacturing institute for Scotland, capitalisation of the national investment bank and spending £4 billion on infrastructure. Those are just some examples of how the Government is investing to grow our economy in an inclusive way.