Chamber and committees

There is no black hole in public finances.

We will work with public sector employers. I have been at pains not to set an arbitrary target—although figures have dominated the press coverage—or to dictate to public bodies what they need to do. Over the next few months, in advance of the upcoming budget, we will engage with them and, most importantly, with trade unions, on where the workforce needs to reset. It is based on a freezing of the pay bill that does not equate to a freezing of pay levels. That is what is driving the need for reform.

I hope that Mr Lumsden will accept that there is a fundamental difference in my relationship with, for example, a public body such as Transport Scotland, and my relationship with local government.

The question is hugely important, because it goes right to the heart of how we build a budget or a resource spending review. The notion that I would base a May publication on December figures, considering all that has changed since then, is flawed.

I will go through the assumptions that underpinned our budget in December and the resource spending review framework in December. They included SFC forecasts for social security in December 2021; assumptions around pay growth; assumptions around health growth and social care growth; and assumptions around inflation. All those forecasts have been updated—not by me, because it is not my job to forecast; it is the SFC’s job to forecast. In order to build a budget or a resource spending review, we use the latest figures that the SFC provides me with, which it has now published, and I must balance my budget based on that. Forecasts change constantly.

There is no black hole. These are the basics of the budget that the Scottish Government sets—

We should bear in mind that, in cash terms, we are trying to protect as much of the public sector as possible, including universities. You have quoted 8 per cent, which is a real-terms figure based on the fact that inflation is at a 40-year high and is eating into our spending power. In the same way as I have given a commitment in relation to the employability and training lines, my commitment to universities is that we will protect them as far as possible. I say “as far as possible” because the overall block grant that I receive will not increase significantly over the next few years, and inflation is currently at 9 per cent. If there is not real-terms growth in the funding that you have available, by necessity, you can go only so far when it comes to allocating funding. Like many other spending lines, universities are hugely important, and we will protect them as far as possible. If you want funding in any part of the public sector to increase, you need to either take it from elsewhere or increase the pot.

I do not know whether we have those figures immediately to hand, because I am giving evidence on the future budget, but we can probably write to you.

You make a very good point. As we have just been discussing, forecasts are, by their very nature, uncertain. The SFC—not me—is trying to predict our budget position in three years’ time based on tax and on receipts from the UK Government. Inevitably, I am still to see a forecast that is 100 per cent aligned with outturn—they are forecasts, so they are based on assumptions. Over the past three or four months, we have seen how assumptions can wildly fluctuate. For example, who predicted war in eastern Europe back in December? It is inevitable that forecasts change.

What other Governments around the world can do is accept that those forecasts should be managed, nearly always, through resource borrowing, so that you smooth the trajectory and do not require the NHS or education to give up funding in order to manage forecast error. However, that is what we are expected to do if the forecast error is greater than £300 million. That is where it hits next year and in subsequent years, where you see the impact of the pandemic and of—through no fault of their own—two different forecasters working on different assumptions as well as forecasts that did not come to fruition.

The reconciliation that is required in that year significantly exceeds the borrowing capability to meet it. Therefore, about £500 million has to be found from front-line services. All it would take for the UK Government to deal with that would be for it to adapt the fiscal framework in that one area to ensure that there is £500 million more for front-line services.

The other aspect of that, which goes back to my answer to the convener, is about smoothing the trajectory. You cannot expect the public sector to suddenly, in one year, absorb £500 million, when we are talking about a workforce, and then see that climb again the next year. That is why most Governments borrow for that.

The fiscal framework review is on-going. For me, this is one of the most obvious areas where I would like to see progress. One of the arguments that we have made in the past, for example, was for the ability to use one of the borrowing powers for cash management, which we have not used or needed to use, and redeploy that to manage forecast error. That is one of the biggest areas where I would like to see progress. It would make a big difference for resource borrowing for forecast error to be indexed or even aligned to inflation.

I will take that question in two parts. The second part of the question is about measurement and the first part is about solutions.

I will take this opportunity to say that I am pleased that Ronald MacDonald agrees that we have diagnosed the problem, because that, in itself, is where we should start. It is easy to shy away from diagnosing the problems, which involve long-term structural challenges and some of the short-term post-Covid challenges.

There is a lot that is new in the strategy on solutions. I have already referred to some examples around developing a more robust supply chain—a Scotland-based supply chain—for our renewables. I am sure that you would be one of the first in the Parliament to criticise the Government for not having done enough to develop the supply chain for renewables. The fact that we have set out a comprehensive plan for how we are going to do that and a commitment to do it sounds like it is new, to my mind.

It is unfair to suggest that there are no new solutions. We have started with the data, diagnosed the problem and identified the actions to get where we want to be, bearing in mind the fact that not all the agency lies with Government. A lot of it lies with other institutions and the private sector.

Measurement is vital. If we are not measuring the right things, we will probably not be able to define success. Ultimately, there will be clear metrics for success in the implementation plan.

On what we are measuring, I go back to the analytics paper. I will give the example of entrepreneurship. Scotland is an entrepreneurial country if we define it in terms of entrepreneurial activity such as start-ups—new businesses—but we are not performing as we should on scale-ups. In other words, the success rate for new businesses is not as high as it should be. There is much to celebrate in the way of entrepreneurial activity. If we just stop there, we could say that it has been a success, but there is a problem with business survival rates. We do not perform in the way that Ireland performs, for example.

What we measure is key, and we will set out the measurements. That is unpacked in the analytics paper—particularly the example on entrepreneurship. Gary Gillespie, the chief economist, might want to come in on measurement, because we debated at length what we should measure.

Those are great questions. On your first point, one of the actions is to develop a wellbeing economy monitor. That will bring in measurements of, for example, healthy life expectancy, fair work indicators, mental wellbeing, child poverty, greenhouse gas emissions and biodiversity. It goes back to a previous question to which I responded. The measurements are key, so what we measure really matters. We are one of the founding Governments of the wellbeing economy Governments initiative, working with countries such as New Zealand to improve our measurement of wellbeing, because we talk about trying to build a wellbeing economy but the measurement of it is really important.

Some elements of that will align with other metrics that we already work to. We have metrics in place around biodiversity, greenhouse gas emissions—obviously—and child poverty. The point is to ensure that economic activity is certainly not undermining efforts on those issues but, more than that, is contributing to addressing them.

On your second point, about care, as you say, the strategy is a fairly short document. We could have taken the approach, which might have been quite popular, of listing everything that we think people would like to see name checked. However, there is reference to the importance of care in achieving all our economic aims.

It is an economic strategy, not a care strategy. However, going back to my favourite subject of entrepreneurship and the fact that certain groups are still underrepresented, the strategy specifically says that, in order to provide those underrepresented groups with more exposure to entrepreneurship and mentorship and more encouragement and support to build businesses and so on, we need to understand what is stopping them.

Let us take women as an example. Obviously, it is not just women who have caring responsibilities, by any means, but supporting women to be entrepreneurs probably means providing enhanced wraparound care support. Where individuals have caring responsibilities, how do we ensure that there is wraparound support to help them with those responsibilities? The strategy identifies the fact that, if we are serious about supporting those with caring responsibilities in either a paid or unpaid capacity, we need to do more as a Government to provide that wraparound care.

That sits alongside a lot of other things that are going on, such as the establishment of the national care service and improving terms and conditions and pay for our carers, but that is where it is referenced in the strategy.

That is a critical question, and it goes back to two points. One is that we are halfway through our resource spending review and setting out multiyear budgets. The strategy acknowledges and reflects the fact that we need multiyear budgeting for the approach to be successful. That is the bottom line. The resource spending review is due to be published in the coming months, and it will set out a medium-term trajectory on spending. However, on opportunities, we absolutely have to leverage in private sector funding in new markets. There is no question about that. It is well documented that, for example, the gap between what we need to achieve to meet net zero and what we have funding to be able to do is significant.

The bottom line is that the funding exists. As part of the Global Fund Advocates Network initiative, $130 trillion of assets under management right now that need to find a home have been identified. Either that money will find a home in Scotland or it will find a home elsewhere. I want it to find a home in Scotland, but, for it to find a home in Scotland, we need two things. First, we need to be clear about the green prospectus. We have built the £3 billion green prospectus, which we used extensively at the 26th UN climate change conference of the parties—COP26. We need to expand on that and bring in more initiatives so that investors can easily find opportunities. Those opportunities also need to align with our values—that is an important point.

The second thing relates to the supply chain. We face a choice. As part of the up to 25GW of offshore wind energy that might be developed over the next 10 years, we will create jobs outwith Scotland or in Scotland. The way to create jobs in Scotland is for businesses to be established, to grow and to identify and take a larger share of that market. I refer you to project 5 under “New Market Opportunities”, which explicitly says:

“Build on Scotland’s Strengths to Win an Ever Greater Share of Domestic and International Market Opportunities”.

That is the action that hits the nail on the head, and I do not want to miss that opportunity.