Chamber and committees

Mr Devine touched on that point about chasing people, too.

Scottish Financial Enterprise and Professor Bell have provided evidence to the committee. Professor Bell said:

“if Scotland does end up with higher tax rates than other parts of the UK, that will be seized upon by those other parts of the UK whenever potential inward investment opportunities arise in an attempt to ensure that they do not come to Scotland”.

He went on to say:

“the impression that is given, not just the tax rates themselves, matters quite a lot, too.”— [Official Report, Finance and Public Administration Committee, 19 September 2023, c 7.]

What is your view on that?

You touched on universities; I will ask about them next. In its evidence, Universities Scotland said that we still punch well above our weight in Scotland. For example, about 13.25 per cent of research and development spend is in Scotland and, of course, we have only about 8.2 per cent of the UK’s population. However, that spend has declined from about 15.4 per cent in recent years. Universities are of the view that, if we want to continue to outperform the rest of the UK and, indeed, encourage new business start-ups, which will lead to more people being in work in highly skilled jobs and paying more of the taxes that we require to fund our public services, we need to invest more in research and development start-ups and innovation.

As the convener of the cross-party group on life sciences, I am aware of the example of a significant company that moved from Dundee to Cambridge because there had not been enough investment in lab space. I am also aware that Heriot-Watt University is looking for similar investment in order to advance its artificial intelligence research. Again, that is because it is threatened with competition from Cambridge. It is doing well against Cambridge and other parts of the UK, but it wants us to continue to have that advantage. We win some and we lose some: we have actually attracted businesses from Cambridge, so it is not a one-way street.

How are we going to ensure that public sector investment continues and that investment is not just left to the private sector? Universities have said that their research—I am sure that the Scottish Government has access to that—shows that every £1 that is spent in research and development creates a further £8 of investment in the sector. What are we going to do to continue to leverage that and increase it? All the economists who speak to us say that, if we broaden the tax base, we will have more people with higher salaries who pay more tax, and that will fund the public services that we all want to see.

Thank you very much. I will open up the session to my colleagues around the table.

The theme of this budget scrutiny is fiscal sustainability. I realise that you have two major issues to address. One is the budget for the forthcoming year. You are also trying to put Scottish fiscal sustainability on a long-term track.

Professor David Heald said in his evidence:

“the UK tax system is a total mess, and the Scottish Parliament has made the tax system in Scotland worse.

We are in a nonsensical position.”—[Official Report, Finance and Public Administration Committee, 19 September 2023, c 3.]

He went on to talk about how the tax system in Scotland is not particularly progressive. For example, the marginal rate for someone earning £43,662 is higher than it is for someone earning £10,000 more because of the interaction with national insurance. How will the Government address that?

I suggest that, in the UK and Scotland, most of the additional revenue comes from fiscal drag caused by high inflation rather than anything else.

Capital is a critical area. At First Minister’s question time last Thursday, I raised the issue that, according to the Auditor General, the UK Government is going to cut Scotland’s capital allocation by 7 per cent in real terms over the next four years. That is obviously a major issue. Our witnesses—for example, Scottish Financial Enterprise—talked about how critical it is to improve Scotland’s infrastructure not just on the ground, with bridges, harbours, roads and railways, but in the digital space. Last year, when your predecessor, John Swinney, looked again at the budget and the commitments that had to be made due to the need to meet wage increases, some money was actually taken out of capital. As all witnesses have suggested, capital is essential for economic growth. Given that public sector capital is likely to be scarcer in forthcoming years, will the Government commit to ensuring that capital is not switched to resource but is invested exactly as it should be? The Government went to the Treasury to get permission to do that, but I hope that it will continue to invest capital as it should be invested.

Thank you very much for that very helpful opening statement, and good morning to you.

We have taken a lot of evidence on the matter so far. Most of the questions that I will ask will reflect the responses that we have had.

You talked about the challenges that we face, the difficult decisions that are being made, and your discussions with the United Kingdom Treasury and Government. On the discussions in Scotland, as well as those wider discussions, the Fraser of Allander Institute said in its evidence:

“There will have to be discussions and decisions made about whether there will be increases in tax, reductions in spending or prioritisation across different programmes.” —[Official Report, Finance and Public Administration Committee, 19 September 2023, c 1.]

Where are we in those discussions?

That is big of you. Thanks.

The Federation of Small Businesses welcomed the £15 million that is going to be committed to help entrepreneurs. However, that is not even one tenth of 1 per cent of the Scottish budget. There is an issue of balance if we are going to retain and attract the people who will pay the taxes. What came over strongly from witnesses was that it is not necessarily about increasing taxes; it is about broadening the tax base. If more people earn more, they will, therefore, pay more. Will the Government look again at the balance in the public resources that are going in to boost those sectors where we will get a disproportionate return in the economy?

It is understandable that there will be a reprioritisation of capital spend. Where economic growth can come out of that and lead to increased tax revenues for public services, that will be important. Some of the witnesses have said that, although the Scottish Government has a growth strategy, it has not been as clear as it perhaps should have been. We need to show that clarity going forward.

There was an issue that came up significantly. You touched on the Government’s three priorities. The Scottish Fiscal Commission has said that, by 2027-28, Scottish social security benefits will cost about £1.4 billion more than the Scottish Government receives in positive block grant adjustments. The difficulty is that that money has largely had to be diverted from core public services such as health, education and local government when you have a more or less fixed budget. Paradoxically, the poorest people in our society are impacted the most, because they are mostly the ones who rely on those services. Those who depend on those services are those who are being impacted. Do you accept that?