Chamber and committees

I am not sure that I am advising or advocating that—unless you are quoting something that I said earlier. What we are saying to local government is, “Here are the spending parameters over the next few years”. That allows them to plan, but it will not replace annual budgets; it gives them the parameters, but not all the details. Future budgets will need to update the details.

Incidentally, there is a lot that we can learn from local government, particularly in the way that it works together and the way that COSLA facilitates a lot of sharing of best practice. You are right to say that there is a lot for us to learn. However, to all intents and purposes, local government is fully autonomous. We set the spending parameters, but ultimately, it is for local authorities to determine how they spend that money.

Local authorities have to make choices within the spending parameters that they have. I do not dictate to local government how it uses its funding—that is for local government to determine. All I can do through the resource spending review is to set out the parameters; it is for local government to decide what it does with that core budget. Obviously, there is additional funding on top of that for education and social security, which we have more influence over. However, inside the core spending parameters, it is for local government to determine how that money is spent.

Our immediate priority is to embed fair work. It goes back to questions about poverty and productivity. If you have fair work conditions and people are in secure, well-paid employment and get paid a reasonable wage, that delivers multiple benefits for our economy and the overall cost of the public sector.

Our primary focus right now is to embed fair work principles. Employers also want to focus on that, because, at a time of high demand and more supply, they have to distinguish themselves. Having said that, we are particularly exposed by the fact that a lot of the highest earners are in very few industries. That means that a downturn in oil and gas has a disproportionately large impact on our tax revenues and economic outlook, so there is an argument to make sure that we diversify, while also taking into account the impact that that has.

I would hope so, yes.

We will certainly engage with public bodies on taking forward that reform. The important point is that the public sector exists for the benefit of citizens. We need to start with citizens, and they will not necessarily be aware of or interested in the backroom shared services. In an age of digitalisation—obviously, digital is one of the key focuses—we need to consider things such as shared cloud services and shared investment in digital capability.

We have talked about estates. Sharing estate will lead to the need to share services as well. Many bodies do very similar things with their finance or human resources capabilities. As I said, I am not sure that citizens are as interested in the backroom capabilities as they are in getting the service that they want. We all need to be aligned on the need to improve outcomes for citizens, whether that is individual businesses, households or anybody else.

We will certainly work with public bodies and look at the art of the possible. I want to ensure that we protect and preserve public bodies’ autonomy to deliver services to citizens as they wish, but I also want to work with them where they need, for example, investment in their information technology or digital services and where there is scope for those to be more effective. The Scottish Government has been working on our shared services—even within the Scottish Government, we can ensure that we have one system for all the parts. There is a lot of scope, but we will need to act carefully. Obviously, we will report on the initial conclusions in the upcoming budget.

Others might want to come in on this, but from my perspective, getting social security right has two impacts. I have already touched on the Scottish child payment, and if we manage to meet an objective such as tackling child poverty, that will, in a very obvious way, deliver benefits not just for those families but for the wider economy and, ultimately, for public finances. If people are taken out of poverty and they are in well-paid, secure employment, I do not need to spell out the benefits of that to the taxpayer or in relation to pressures on public services and so on.

The other impact relates to the tight labour market. Again, if we are able to support people into work at a point when unemployment is at 3.2 per cent, we know that the area on which we need to do most work is the economic inactivity figures in order to expand the labour market.

To my mind, there is a moral obligation to ensure that those who are entitled to social security support get access to that support in a dignified way; that is an ideological choice, and I think that it is the right one to make. Equally, if we get this right and support more families out of poverty, inevitably that will deliver benefits elsewhere, reduce pressures on public services and, I hope, boost the labour market.

We have had discussions, and I will see the Chief Secretary to the Treasury next week, when, I am sure, we will continue those discussions on the fact that our current assumptions around block grants are largely based on an out-of-date spending review that does not take inflation into account.

I will continue to make those points to the Treasury. I certainly would like to see, at the very least, some review of the fiscal framework, taking into account the impact that inflation has, not only on our spending power but on the way that certain elements keep track with inflation.

Those conversations will continue. I am, generally, an optimistic person, but I have been having those conversations for a very long time.

I sincerely hope that our budget will not be as bad as I feared but, ultimately, the only way for that to change is for the UK Government to increase the funding pot and take into account the huge increases in inflation.

I think that I heard three questions in there. I will take them in turn.

Thank you very much, convener.

I thank the committee for its input into the resource spending review and the medium-term financial strategy.

Obviously, this is a hugely challenging time to be delivering a spending review. We are recovering from a pandemic as well as experiencing an unprecedented cost of living crisis, and there is quite clearly significant volatility in the funding outlook. Despite that, I think that our partners appreciate their having as much certainty and transparency as possible in our setting out the spending parameters for the next few years.

That is what lies behind the spending review, which commits £180 billion over the next few years. We started the process by focusing on a number of key objectives and priorities. Where you have priorities, you, by extension, focus your attention and funding on them. Those priorities include tackling child poverty, transitioning to net zero, economic recovery, and strengthening the public sector in Scotland. In addition to that, we have added as another priority responding to the cost of living crisis.

We have also set out commitments to drive reform and greater efficiency across the public sector because, notwithstanding the current uncertainties, the funding position is constrained. As far as that position is concerned, the assumptions in the MTFS and the spending review are based principally on the existing block grant settlements as implied in the 2021 UK spending review, the OBR forecasts of future public spending, and updated tax and social security forecasts from the Scottish Fiscal Commission.

When the UK spending review was set last autumn, inflation was about 3.1 per cent. Despite the fact that inflation is now hitting a 40-year high of about 9 per cent, the UK Government has not updated its spending plans. We have far less funding in real terms, and we have had to use the best available assumptions. In addition, there has been a real-terms reduction of 5.2 per cent between last year and this year, and our real-terms funding will grow by only about 2 per cent across the whole four-year period, once we account for the devolution of social security benefits.

As the committee knows, I have highlighted some of these challenges with regard to delivering our priorities, and there are other issues that emerge as a result. That also goes to the heart of a point that the committee has made in the past about the limitations of the current fiscal framework and the lack of economic and fiscal levers available to the Scottish Government to manage the volatility and risk that are inherent in any forward-looking spending review.

Finally, we have also undertaken a targeted capital review to address a lower than expected capital grant allocation provided by the UK Government. As members will recall, we had set out our capital spending review in advance of the UK Government’s own spending review to try to provide as much certainty as we could in emerging from the pandemic. That review will invest around £18 billion between April 2023 and 31 March 2026, with over half a billion pounds of additional funding directed at net zero programmes compared with the funding in previously published plans.

As a brief conclusion, the aim of the plans is to provide as much long-term certainty as possible in an extremely volatile economic situation.