Chamber and committees

Thank you very much, convener, and thanks for inviting me to give evidence and for being so accommodating on the timing so that I could attend the Finance and Public Administration Committee meeting earlier.

The Scottish Government, along with local authorities and public sector bodies across Scotland, faces a very challenging fiscal environment. My statement to Parliament on 3 September outlined some of those challenges and highlighted the difficult decisions that we are taking to achieve financial balance this year.

The 2025-26 Scottish budget will also be challenging. The £22 billion shortfall in the UK public finances, as outlined in the Chancellor of the Exchequer’s statement at the end of July following the Treasury’s spending audit, will undoubtedly result in a difficult UK budget on 30 October. That will have significant implications for the Scottish budget, which will result in difficult decisions having to be taken.

Despite the severe financial challenges that are faced and the worst-case-scenario autumn statement last November, the local government settlement this financial year provided record funding of more than £14 billion to local authorities—a real-terms increase of 2.5 per cent—and local government received an increased share of the funding that was at ministers’ disposal. Independent analysis by the Scottish Parliament information centre confirms that local government’s share of the discretionary Scottish budget is not only higher in 2024-25 than it was in 2023-24 but higher than it was in 2013-14.

Through the Verity house agreement, we renewed our commitment to a relationship with local government that is based on mutual trust and respect, and we agreed to seek new ways of working together to ensure that the people of Scotland receive the high-quality public services that they expect and deserve.

The first year of the Verity house agreement has seen positive progress being made in the implementation of the agreement’s principle. Most notably, £1 billion was baselined into the local government 2024-25 settlement. Councils now have more powers and opportunities to raise their own revenue through, for example, the visitor levy, the workplace parking levy and changes to the council tax treatment of properties, and there is the joint delivery of pay uplifts to at least £12 an hour for children’s social care workers and childcare workers.

I remain committed to continuing to make progress against our shared priorities in partnership with local government and to ensuring that we work collectively to deliver sustainable public services across Scotland. I look forward to engaging with members today and answering any questions that the committee may have.

One area of agreement on the fiscal framework, which is at an advanced stage of development, was early budget engagement. I have engaged directly with COSLA and Katie Hagmann in particular on early budget engagement to set out the areas of common agreement.

There is common agreement against those priorities. We looked at how we could set out a timetable for engagement that would help us to get to a place that was always going to be about compromise but is the best place that we can get to within the fiscal constraints that there are. We both have that objective.

First, let me acknowledge the bleedin’ obvious—that local government did not like the council tax freeze. There is no point in me sitting here arguing that it somehow welcomed the freeze; it did not, and we understand the reasons for that.

The council tax freeze was deployed to support pressed households at a time of cost of living pressures—which continue, but which were particularly acute. We then got into a lot of detailed discussion around the quantum to settle on to meet the cost of the freeze, and in fact, we ended up increasing that quantum.

We are now into the discussions about 2025-26. It is important to get a balance of supports for local government. We are keen for local government to have more fiscal levers, and we have made some good progress on them. Ian Storrie outlined some, and others—such as the cruise ship levy—are in the wings.

Local government has an ambition to have more powers at its disposal, which I am very sympathetic to. Obviously, it needs to be within a due diligence prudent framework, but there is a very strong argument for that journey to continue.

There are various moving parts to what will be a package, which will be quantum of the settlement, powers, flexibilities and all of that, against a backdrop of an incredibly difficult fiscal environment. We have to manage all of that so that we can, I hope, get to a place that is a reasonable landing spot.

I think that it is evident to everybody that the reduction in the Scottish Government’s block capital grant from the UK Government has a profound impact on capital spending, whether it is our own capital spending or what we are able to deliver to local authorities for their budgets. I would emphasise the fiscal rules and the spending review. “Briefing” might be too strong a word, but there have been indications that there may be some openness to thinking about a more flexible approach to the fiscal rules around capital borrowing. Whether or not that will transpire, I do not know, and we cannot rely on it.

You mentioned housing. The point that was made to the chancellor was that it would be good to get an indication of what the UK Government’s approach will be to financial transactions. As you know, financial transactions underpinned the affordable housing supply programme, and they were cut by 62 per cent, which will have an impact. We were therefore keen to push the UK Government to have another look at the use of financial transactions. We do not know the answer on that yet, but we have been clear that we could use financial transactions effectively in the housing space and in the Scottish National Investment Bank space.

On being imaginative, given that we do not know where all that will land, we are exploring what we can do beyond traditional capital departmental expenditure limit—CDEL—funding. We are looking at things such as outcomes-based funding. For example, the school estate programme—the learning estate investment programme, or LEIP—was done through revenue-based funding and has transformed the school estate. We are looking at whether there is something in that space that we could do. We are looking at the growth accelerator model, which we have used in Edinburgh, Dundee and elsewhere as a way of releasing investment. We are exploring all those avenues to see how we can work together with local government to use all the potential levers.

There is also the private sector. The Cabinet Secretary for Social Justice, Shirley-Anne Somerville, and the Minister for Housing, Paul McLennan, have been looking at how to use about £100 million to try to lever in £500 million for building for mid-market rent—I think that that is the aim.

There is not one solution here, but we need to be imaginative and open to pushing the boundaries of what can be done on all those things.

Transformation and reform are absolutely critical. There are really good examples of the public sector doing things differently, for example by using digital and delivering services in a different way. All that is really good.

We have seen good examples in local government as well. For example, the transformation in Glasgow of social work services for children has led to a 50 per cent reduction in the number of kids going into care. Thirty-one local authorities should be beating their path to Glasgow’s door. The last I was told, 16 of them had. That is good, but I would have expected more with something as transformational as that.

It is not rocket science: it is a question of services working alongside the families and asking them what they need to break the cycle of the issues that impact on the family, such as addiction and so on, which put kids at risk of going into care. The services have worked alongside the families, supported them and got help in place—and look at the results.

We really need to be in that sort of landscape: supporting and incentivising local government to share best practice. We also need to ask them some of the hard questions, such as why they are not using that best practice, which is not unreasonable to ask. Members around this table and beyond might ask the same of some of their local authorities.

We need pace. Some local authorities will always be trailblazers and want to get out there, and some might never be, but we need to see an appetite for change. It is about the sustainability of services, which will have to look different over the next 10, 15 and 20 years with an ageing population and so on. We need to really step up all that work.

The Improvement Service—that is it. The name completely went out of my head. We fund a lot of the capacity within COSLA to help it to support local government in doing some of the work. A lot of good work is going on, so we are trying behind the scenes to build some capacity to help it.

The fiscal framework is designed to move us forward and get away from what had been an annual ask from COSLA that set the scene for what was never going to be a quantum that met that demand. It was a joint endeavour to get a more constructive discussion.

There are complexities in the fiscal framework. I do not know how much Katie Hagmann spoke about rules-based funding. We have been exploring that, and Ellen Leaver or Ian Storrie can tell you a lot more about the detail of the discussions at official level. It sounds like a simple thing, but it is not without its challenges. We need to test some of that thinking, and we may look at shadow components of things over 2025-26 before coming to a fixed position.

I will give you one complexity. If rules-based funding landed at a place where the rules were met and the funding was agreed, what would happen if there were events during the financial year that caused local government to turn to the Scottish Government? Where would that sit in a rules-based framework?

I think that local government is very cognisant of the ups and downs and of the fact that things are not always neatly packaged at the start of the financial year. Events happen and they need to be responded to. I do not know whether Ian Storrie or Ellen Leaver wants to come in.

If we can get to a position in which the UK Government provides certainty on multiyear funding—we are being told that that is the aspiration—and I can see what those multiyear envelopes will be like, of course I would want to work with local government to deliver multiyear funding for it. I would be delighted to be able to do so, because I know that that would open up a whole range of opportunities, some of which I mentioned earlier.

I recognise that that is an issue for local government and COSLA, and they raise it with me regularly. However, I also note that we have made significant progress on it. Alongside the fiscal framework that we talked about earlier, we have an accountability framework. That looks at how we are collectively accountable for delivery on homelessness or teachers and narrowing the poverty-related attainment gap, for example, without ring fencing.

The framework is at an advanced stage. We have removed £1 billion of ring fencing, mainly in early learning and childcare, as a goodwill gesture in advance of the accountability framework being signed off. We said that doing that was a risk, but we wanted to set a direction of travel, and £1 billion was baselined into the local government budget. Of the £14 billion local government settlement, about £250 million is ring fenced in year.

Local government spends £4 billion on education and £3.5 billion on social care. Those are big chunks of its budget. Those areas are a joint priority. I do not think that there would be many calls from any political party here or in local government to say that we should not be spending £4 billion on education or £3.5 billion on social care, because they are key priorities for local government and for us.

We end up getting quite focused on the small amount of the in-year ring fenced funding that is left—I think that it is £250 million—which covers things such as pupil equity funding, the attainment funding and the £145.5 million for teachers. To be honest, having money going directly to schools so that headteachers can decide what they do with it has been quite innovative. Headteachers will say that they have been able to support pupils and families in ways that they would not have been able to otherwise.

There is a balance to be struck: we have to ask what we are trying to achieve and, if we think that those are good things, I presume that, collectively, we would want them to continue. I am not pushing back on the principle, but if we can agree that we would want to continue to empower headteachers and enable some funding to go directly to them to provide support for families, I would not want to lose that. It would be a shame if we were to move away from that.

Those are the types of discussions that we will have about the budget. Normally, if there is a new burden, as local government would describe it, or a new funding stream to deliver A, B and C, there would be a negotiation as to what that would look like. Local government will provide a lot of information about what it would cost, as it will not cost the same in each area, and we see where that lands. The process can be quite backwards and forwards. A landing spot for delivery will then be reached, because the policy is seen as something new that the Scottish Government is asking local government to do. We do not just put a finger in the air and say, “Oh, we think that that’s enough”. There is quite a lot of negotiation. Ellen, do you want to come in?