Chamber and committees

In paragraph 3.47, you say that pay in the finance sector in Scotland is growing 3.5 percentage points faster than it is in the rest of the UK. In the next paragraph, you mention that, for a while, North Sea oil acted as a drag on earnings, which are coming back up to the average. Will you talk to us about that and the circumstances around that? Why is that happening? Is that likely to continue?

Thank you for that helpful opening statement.

I will turn straight to your report, “Scotland’s Economic and Fiscal Forecasts”—my questions will be mostly based on that. On page 6 of the summary report, in the very first sentence of the introduction, you say:

“The Scottish Government’s budget next year is set to increase by £1.3 billion from the latest position for 2023-24. This is a rise of 2.6 per cent in cash terms or a 0.9 per cent rise after accounting for inflation.”

The point about the rate of inflation is always a bit of a bugbear for me, because it assumes a gross domestic product deflator for inflation of 1.7 per cent, but that does not bear any relationship to the real impact of inflation on the Scottish budget, given that more than half of the Scottish budget is salaries, which are increasing by significantly more than 1.7 per cent. Why does the assumption continue to be 1.7 per cent, given the differential between the GDP deflator and consumer prices index inflation?

Yes, because we are talking about a real-terms increase in resource, but it is not a real-terms increase in the real world, if you are using a deflator that is so far below the increase in wage settlements, for example.

Okay. I assumed that that was resource only. I did not realise that it was capital and resource.

That is what we are really looking at: how accurate the forecast has been and how behavioural change has impacted in previous years.

Some of the forecasts seem to be pessimistic compared to others. For example, it now seems that we are going have a positive reconciliation in 2025-26 of £732 million. That seems to be very optimistic compared to what was predicted. What explanation do you have for that?

This figure does not have a number. It is on page 5 of your summary report—it is right at the beginning.

I will move on to debt interest. One obvious concern is the fact that debt interest is increasing and national debt is now at 93 per cent of GDP. I understand that the cost of servicing that debt is about £116 billion this year. Could you discuss what you feel the impact of that will be for the next year or two and beyond?

I think that the debt interest in the UK is now about six times Scotland’s annual expenditure on the national health service, which puts things in some kind of perspective.

You have touched on health and social care spending in relation to departmental expenditure limits, saying that it is

“reaching 45 per cent of total resource DEL”

compared with

“25 per cent at the turn of the century.”

That is clearly on an upward trajectory. Given the fiscal position that we are in, how sustainable do you believe that to be?

Carl, you said that there are options other than raising tax, which I find intriguing. What are those other options?

Yes, although it is quite easy to predict what the natural growth in the population of people born in the UK is, because you get about 16 to 18 years’ lead time on that.

One of the issues of concern in your report is that almost 650,000 more adults were outside the labour market in the autumn of 2022 than at the start of 2020. You go on to mention the £7 billion that is being spent each year on health-related benefits and the resulting £9 billion that is lost in foregone tax revenue. That is at the same time as unemployment is set to increase by around 85,000 more than was predicted. What is the impact on growth of those figures?