Chamber and committees

NRS and Scottish Water were set the same challenge as other public bodies—that of ensuring that they can live within their budgets, which are under strain. They therefore need to drive their own efficiencies and consume their own smoke, if you like. However, they also need to improve outcomes, and that is quite a challenge.

Scottish Water has carried out a huge programme of efficiency and reform. NRS is similarly focused on digital opportunities. They were not forced to do that, but they have had the leadership in their organisations to recognise the need to do that. We need to make sure that that work progresses at that pace, not at the pace of the slowest. There is an organisation that brings together the leadership of all the public bodies, and work is being done to share that best practice and to ask, “How did they do it? What did they do? How can we do it?”

Public bodies know that there is no option, given the financial outlook, other than to make sure that they get on with the reform that they need to do. It might look a bit different in each organisation, but some of the principles are the same, and that work needs to be done at pace.

Ultimately, ministers will have responsibility for oversight to make sure that that happens at pace. I have talked in bilateral meetings with my colleagues about the need for pace here. Ministers are aware of the need to ensure that every organisation gets to the point of being as efficient and productive as it can be and having the best outcomes for the people it serves.

I will start with the capital funding point. You are right—it is an extremely challenging capital outlook at a time when we want to be investing in the infrastructure, so it is the worst time for capital budgets to be cut. I remind the committee that our capital funding is expected to reduce by 7 per cent in real terms between 2023-24 and 2027-28. Of course, Barnett funding is by far the largest element of the Scottish Government’s capital funding envelope, so it is essentially dictated by those decisions. It is indeed hugely challenging. As the MTFS explains, the challenges in the capital funding outlook mean that it may be necessary to prioritise borrowing capacity in the coming years, potentially at the expense of longer-term capacity, so we have difficult decisions to make about how we manage our way through that. Of course, we will have to set all that out and we will do so.

On the wider point about productivity, we have now appointed a chief economist, Gregor Irwin, who gave an excellent presentation in a pre-Cabinet discussion about many issues such as prospects, GDP and earnings growth, and increasing productivity is an important part of that. The NSET has also recognised that and what needs to be done. All that is critical.

On how we go forward, we publish progress updates on the delivery of capital investments twice a year; I think that one is due soon. The updates cover all the infrastructure projects over £5 million and all the programmes over £20 million, and they will show the importance of and variation in those infrastructure investments. We will come back to the Parliament to set out how we will manage through constrained capital funding going forward. I am sure that the committee will take a close interest in the detail of that.

In addition to what I have just said, we are looking at all our programmes through the lens of the core missions. There are more than 500 programmes. We will consider how each programme will help us to address those core missions.

You are quite right about the increase in social security spend beyond the block grant adjustment. I make no apologies for that; it is the right place to invest money, given the cost of living crisis and our need to lift people out of poverty. However, we also need to be able to afford that, which will mean that some difficult decisions will have to be made. I cannot give you any more details because that work has not been completed and I would like to present it in the round.

The other pillar is growing the economy and the tax base. Data was published this morning that shows that there is cause for optimism there. For example, according to HM Revenue and Customs data for May 2023, which was published alongside the labour market statistics, there were 2.44 million people in payrolled employment in Scotland last month. That is an increase from April 2023, 56,000 more people than in February 2020—pre-pandemic—and 28,000 more than last May. That is a good barometer for income tax. There is some cause for optimism that that will feed through to a more positive tax reconciliation position, which would be good.

We need to do all of that. We need to ensure that our spend is focused where it needs to be, that we grow the economy and therefore the tax base, and that we have a fair and proportionate tax system. As we have said, we support progressive taxation whereby those with the broadest shoulders pay a bit more. That has brought in much-needed revenue to the budget. Had we not made those changes in Scotland, our public finances would be considerably less. All those issues must be looked at in the round.

The single island authority idea has come from the local authority and public sector bodies in the islands. They came to us and said, “We’d like to go ahead and scope out how this could be done in a different way, but we need you to be on board,” and we have said that we are on board. We need to work through the detail, clearly, but we absolutely want that innovation, fresh thinking and reform. That will be a really interesting one to watch.

On council tax, I am sure that you are aware of the joint working group that we are involved in with the Convention of Scottish Local Authorities, which is looking at local government taxation generally and broadly. Some progress has already been made on the issue of second homes and empty homes. The group will also have the space to look at council tax reform, albeit that it is a longer-term ambition to get that right and to get it agreed.

The working group provides a forum for those discussions to take place. It is also set against the backdrop of the new deal for local government. Part of that is about the fiscal framework, which is being worked on. A partnership agreement has to come first to set out the principles, and that will be announced soon. The fiscal framework will look at how local government budgets will be taken forward. I think that it is no secret to say that what we are talking about in that regard is more flexibility and working with local government on revenue-raising powers. One of the latest such powers is the visitor levy, which local government was keen to have. Councils can choose to use or not use that power. That shows that our direction of travel is to empower local government with more flexibility and more levers.

With regard to the external tax stakeholder group, it is important that we hear from a range of stakeholders. We will send out invitations imminently. The views of that group will be quite broad and will range from a desire for us to go further by using tax levers in a progressive way to a desire for us to be more constrained with tax levers. It is important that we hear a range of views. Ultimately, the Government will have to come to a view and, when we set out our stall on our tax proposition for 2024-25, it will take all those views into account. We will look at the pressures on the budget, but also at the need for fairness in taxation and the need to land in a space that balances all the competing demands.

As soon as we send out the invitations, I will be happy to furnish the committee with the detail of who will be on the group and the meeting schedule over the summer. It is my intention to have a series of meetings over the summer and in the lead-up to the budget.

First, I agree with your premise. We have to deliver against one rule that is set by the UK Government, and that is to balance the annual budget—that is a requirement. We have to deliver that fiscal rule with the limited fiscal levers at our disposal, with no ability to borrow for the day-to-day spending as other Governments would and with almost two thirds of our funding tied to UK Government spending plans. That is the backdrop to the challenges that we have.

I will answer your question in two parts. First, in terms of the review, the aim is to secure some immediate improvements. If you were looking at it on a scale of 1 to 10, with a major or complete rewriting of the fiscal framework being 10 and no change to it being 1, we are somewhere in the middle. We want some significant adjustments to the framework to help us manage some of that difficulty, but we are not going to get to a complete rewriting of the framework at 10—that is just not the territory that we are in. We need to take what improvement to our position we can get and that is what we will do.

Secondly, there is the wider question of the future. We absolutely need to get into a space where we look at the fiscal powers more generally and, obviously, we have a very clear ambition for what that looks like. However, there are also opportunities under devolution to have far greater fiscal power. Local authorities have more fiscal powers in terms of borrowing than the Scottish Government has and that cannot be right. The Welsh Government is similarly minded that we need to get back to some of the fundamentals here.

There might be opportunities in the future to negotiate something far more ambitious that can change some of the fundamental restrictions and inherent links to every UK Government funding and spending decision from which we take the consequentials and which quite often are not positive. That will not be achieved through what is quite a technical review of the framework in the here and now, but my ambition is that we need to go much further than that in terms of how the current system operates.

We know that it was £900 million above what the budget had programmed for. On the entire pay bill, I have in mind something around £24 billion, but I can come back with the exact figure. It is a large chunk of the budget. The figure is over £24 billion. It is clear that most of the money goes on pay. The point that I made to Keith Brown was that, because of the pay deals to try to avoid strike action, for example, and because of inflation costs and people’s household budgets really suffering, we wanted to try to reach settlements that were as fair as possible. It is clear that pay is the main expenditure in the accounts and that any addition to the pay bill will be considerable. Those things need to be balanced.

I will bring in officials in a second.

It is correct that we have a larger public sector in Scotland and that it is better paid. Inevitably, that will have an impact on the importance of the public sector for the tax base. However, that is also a challenge because of the pay deals. As we have a larger public sector, pay deals will have more of an impact. We have tried to avoid strikes—quite rightly, obviously—and we have landed pay deals that are above what was budgeted for. That is one of the challenges to which the SFC points. Nevertheless, that is an important element of our economy and in relation to delivering public services.

I do not know whether Andrew Scott has anything to add.

The gap that you talk about cannot all be closed by taxation. I have not said that. What I am saying is that in our spending plans, focusing and targeting on the four key missions that I mentioned earlier, all the pillars are important. Tax is one, but it is not all. Having the powers to raise more money is clearly also important. If you look at the SFC forecast of nominal earnings in Scotland, it is talking about that going through a period of higher growth relative to the growth in earnings forecast by the Office for Budget Responsibility for the rest of the UK over the next five years, which will support our tax base. Therefore, although taxation cannot be the only answer, it is an important part of the equation and it is looking more positive. Aside from what we choose to do in terms of the tax policy, the revenues are looking more positive, which is something that we hope is welcomed.

On this morning’s figures, unemployment is still below that of the UK; employment has fallen slightly but is still in a good place. You are right about economic inactivity, which is why the action that we are taking to support people into work is important. Bearing it in mind that there are acute labour shortages in many sectors, we need to join the dots to support people into work and to make sure that, whether it is through training, skills support or childcare, we help people into work and into better-paid work and additional hours if that is what they are seeking.

I appreciate that.