Chamber and committees

You are right. The capital investments that we make are important for economic growth. That is why it is extremely concerning that the UK Government did not inflation-proof its capital budget, which has resulted in a 7 per cent real-terms fall in our Barnett capital funding over the medium term between 2023-24 and 2027-28. That has significantly impacted on our ability to deliver on the capital infrastructure commitments, and it will impact on it going forward. We are looking at the choices that we have to make. That alone, plus the fact that construction inflation was running at 25 per cent last summer, has an impact on the money that we have, what it can purchase, what it can build and how far it goes. There is a double whammy of less capital and that capital not going as far as it once did. That is a huge issue for us.

What do we do about it? I have set out in the MTFS and since then that we are revisiting our capital budget and our infrastructure investment plan. We will set those out alongside the budget for 2024-25. We are also looking at how we might be able to lever in some of the private finance that we talked about in relation to additional capital that is available from other sources.

We will leave no stone unturned as we continue to make progress on the infrastructure that we have. The Audit Scotland paper “Investing in Scotland’s infrastructure” identified all the issues and the challenges that are left in terms of the decisions that we have to make. As I said, we will have to make those decisions in a way that prioritises the projects that we think will have the biggest impact. That may slow down the delivery of some other projects over the next few years; there is no getting away from that.

I will bring Andrew Scott in with further detail in a second. First, public awareness is an issue. Some research that was presented to the expert group showed that the fact that there are two tax systems is not entirely understood. People’s awareness of what they get for the taxes that they pay is also an issue. The Scottish Government has attempted to lay that out in clearer terms in—

In answer to your first question, it is a big concern. I return to your point about perception and global capital flows. The danger for Scotland is in whether the difference in approaches between the UK and Scotland is understood. I am not sure that the difference is totally understood in the global context, so all that will be heard is the PM’s message. It is really important that we use all the available levers and communication channels to ensure that we give a clear steer and direction on our ambitions for renewable energy and state that Scotland remains absolutely committed to its net zero ambitions. We need to continue to do that. It will have an impact on our net zero plans. That is being worked through at the moment, and we update Parliament in due course.

On your point about the reform of public services, Audit Scotland’s comments on the single Scottish estate programme were helpful. There are 30,000 public buildings in Scotland. I do not know whether that will surprise you, but there are a lot of buildings. From a number of perspectives, a strategy must be delivered to make better sense of all that. Some of that will lie with local government, and some of it will lie with public bodies, but there is no doubt that we can get a number of wins from taking a more strategic approach to the estate. One measure is shared locations. In communities, there are great examples of services coming together to work out of one building to provide a better, more efficient and digitally enabled service to the public.

Everything is more complicated, but mainly from the point of view that local government is working through some of that. For example, there was initially keen interest in a rules-based framework, but when local government worked through the detail of what that would mean from its perspective, there was further discussion about the advantages and disadvantages of that, not least in respect of in-year support. Ian Storrie or Alison Cumming might want to come in on some of that, but let me caveat that by saying that a lot of detailed work is on-going.

The ring-fencing principles have been agreed in the Verity house agreement, but the financial triggers around what the fiscal framework will look like and some of those complexities around a rules-based framework, for example, have caused local government to say, “Hang on a minute. We need to look at the advantages and disadvantages of going down a particular route.”

—”Your Scotland, Your Finances”, but that research showed that people have an appetite for knowing more about how their taxes are spent. We want to take that on board.

There is then a question for us, and for the UK Government. Our tax position tends to go from budget to budget, partly because we do not have multi-year projections. We have the MTFS, but we do not know what the budget allocation will be, from year to year. The tax decisions that we have to make are seen through that pretty short-term lens. There is a need for us to take a step back, look across the range of taxes in Scotland—not just income tax—and ask what that medium to longer-term view looks like. It is not about trying to get people who, incidentally, have very differing views of what the Government’s tax decisions should be in the room; it is more about taking a strategic look at taxes. What is the balance? What are the issues that we need to take into account? What are the limitations of the current system? Again, it is about not just income tax but the basket of taxes across the board. The UK has never done that; it does not have any strategic approach to tax. It is not an easy thing to do. One of the reasons why the group was set up is that we need to look beyond the horizon of budget to budget to budget and look at the impact. Behavioural change is one of the issues that we will look at. We will look at the fiscal outlook and using those tax levers in a way that does not have unintended consequences. We will also look at what other levers we might wish to discuss with the UK Government in the future.

That is correct. It is not about looking at income tax in isolation; a range of other taxes need to be looked at in the round, including local and business taxes. It is about how they all interplay around that longer-term strategic aim of optimising a sustainable system that delivers for the public purse. I go back to the point that I made about some of our decisions generating more than £0.5 billion of tax revenues that we would not otherwise have. We need to set that against making sure that we look more widely at the research and evidence on potential behaviour change and other taxes that might impact on the same groups of people. It is not a piece of work that will produce a report in a few months’ time. It is detailed and complex. There is a wide range of views around the table, some of which may not be entirely in agreement with one another.

Incidentally, the group is not there for the short term. I would like to see it use its collective knowledge to look at going beyond the current system. I go back to an earlier question: our starting point was amending the UK system, because that was the only starting point that we could have. Looking beyond that, what differences would we make, what other taxes might we look at, and how could those come to fruition?

Andrew, I do not know whether you want to add anything that is a bit more detailed or technical.

The changes to the fiscal framework were helpful, but I do not want to overegg the pudding. They are quite technical, and the extra borrowing powers enable us to deal only with negative tax reconciliations, which will be important next year, given that the negative tax reconciliation is not of the extent that we first thought that it would be. It is about half of what we expected. Increased borrowing powers of up to £600 million means that we can smooth out the negative tax reconciliation over the next few years, which helps. It is not a fundamental change, however. I know that we are going to have a session on the fiscal framework review, so I do not want to go into any more detail at the moment.

You asked about how to prioritise. The capital projects that will have the biggest impact on economic growth, net zero ambitions and sustainable public services are key to the decisions that we make. However, we cannot fit all those into the reduced capital budget that we now have in front of us. That means that it will take longer to deliver some of those projects. As I said, we are looking at alternatives, such as levering in private finance, and how they might enable us to take forward certain projects in a different way.

As you will be aware, how and when the national care service will be done was fundamentally reviewed. That has an impact on the profile of spend going forward. We moved from where we were, with the requirement for funding to be made available more quickly in the system for the change that was required, to a more gradual process of delivering the change through the national care service.

Local government’s key ask, which we met, was that staff in the national care service do not move to a central agency but are retained in local government, and that changes the way that the service will be funded. We have made clear commitments through the programme for government, including paying £12 an hour to social care staff, which is a key part of the recruitment and retention of social care workers. That will be delivered from April next year.

Wider funding for the national care service, in this budget and budgets going forward, will inevitably be part of the negotiation with local government. We need a line of sight from where we are at the moment to where the national care service will have the biggest impact, which is through consistency of standards and quality. The national board, which will have representation from all the key parties, will be able to drive forward some of the improvements that need to be made. The funding needs to follow through on that.

I am concerned, as Neil Gray is, about the cost increase. As I understand it, Neil Gray stated in his letter to the Net Zero, Energy and Transport Committee, which is the lead committee on the matter, that officials are preparing to undertake due diligence, drawing on the value-for-money assessment that was completed earlier this year. The NZET Committee and the Public Audit Committee will be provided with further information on that when the assessment is complete.

These are difficult decisions. The rationale was about keeping shipbuilding in Scotland, and that remains the focus and the key objective. As we have said, delivering the two ferries is a key objective, but the yard’s future being secured in a private sector environment is also a clear objective. I will therefore not give some artificial ceiling and say, “There and no further”. We have said clearly to the Ferguson’s management team and to the chief executive and chair directly that they have to constrain costs and be acutely aware of their responsibility to constrain any further rises, and that they need to deliver both ferries as quickly as possible. They have had challenges with inflation and its impact on construction costs, with the availability of labour and subcontractors and with prices coming in way above what was expected. If, however, you ask any sector that is operating in Scotland or elsewhere, it will tell you that it is feeling the same impact on its costs. That does not excuse the situation, but there are clear reasons for the cost increases.

If you are asking me whether I am concerned, the answer is yes—I share Neil Gray’s concerns.

The value-for-money test is and continues to be important. As I said, due diligence is being done on the value-for-money assessment that was completed this year. There will be an update on that, and the committees will be furnished with it. That is the proper process to go through. However, the value-for-money test was in terms of how quickly both ferries could be delivered compared with alternative routes forward.