Chamber and committees

That is probably one of the most important questions, which I will obviously answer with trepidation, because the moment that I say in a public place what I will reduce spending on, I can already see—with no offence intended to the Opposition—the press releases being written about how outrageous it is.

I go back to a comment that I made in the chamber about how this requires a genuine and mature debate across the Parliament in which we look at outcomes and make decisions about shifting funding. I know that everybody will look at the budget document and compare last year to this year, and that anything that has a decrease will instantly be jumped on, with politicians—rightly—asked to justify that. That is why this whole discussion sounds laudable but is a very difficult conversation to have.

I will cite an example in the health budget. This year, we have chosen to allocate more of the health and social care consequentials to social care. In the past, there has been a tendency for health consequentials to go straight into front-line health—and rightly so. However, recognising the preventative element, we have allocated more funding from those health and social care consequentials to social care. The equal and opposite effect is that health consequentials that would otherwise have been spent on health are now being spent on social care. However, there is a very justifiable argument for that; if we are looking after those who need social care and providing that care, there is less pressure on our hospitals, so it requires that shift. That is a very real example from next year’s budget.

On the £15 per hour wage, which Labour was keen for, with a staged approach of £12 per hour initially, our calculation was that £15 per hour would cost around £1.8 billion. If I am being fair, the Labour Party identified the additional Covid consequentials to cover that, but pay is recurring, so that would have impacted this year’s budget as well and there is certainly not capacity for anything in the region of £1.8 billion.

We think that it is new money. However, as the committee will know, the key is that every year in either late January or early February we have the supplementary estimates, which is the point at which the UK Government confirms the finalised budget position for this year. The challenge arising from our going earlier on our budget—as we did on 9 December 2021—is that we cannot factor in any late movements. Those late movements usually happen in February. That happened last year, when there were very substantial movements of £1 billion and more in the last few weeks of the financial year.

Right now, the supplementary estimates—the formal point at which our budget is fixed and does not really move any further—are still to happen. However, the impression that we are getting from the UK Government—through informal channels between officials, as well as formal channels, which is me speaking directly to the Chief Secretary to the Treasury—is that there are two new pieces of information.

The first is that, although we have been told multiple times that we would probably need to pay back the £440 million—or some of it—the thinking now is that that is unlikely, because there will be spend by the UK Government that generates sufficient consequentials to cover that £440 million. That obviously gives us a bit more leeway and flexibility this year; otherwise, I would have been thinking about how to be in a position to pay back funding. The second piece of information is that there might be additional funding. As I cannot confirm the quantum of that until the UK Government confirms it to me, I have to try to give the Parliament as much information as possible while stressing that these positions have not yet been finalised by the UK Government. That will happen in a very public fashion when the supplementary estimates are confirmed.

My last little point, which is nevertheless important, is that anyone in my shoes would normally wait until the UK Government had formally announced the position, but I am conscious that local government has decisions to make and that we are going through a budget process. As always with these decisions, there is an element of risk; I am conscious of there being a bit more flexibility and of new information emerging, and ultimately I will have to manage the budget in advance of the formalised position being confirmed.

I hope that that is a fair and comprehensive overview of where we are at, convener.

The short answer is no, but that is where we need to get to. As you have outlined, my position has been echoed by my Welsh and Northern Irish counterparts and, indeed, should be echoed by anybody who cares about effective budgeting across financial years. We need to remember that this is only an issue for the devolved Governments because of limits on carry forward in our fiscal framework. In other words, throughout the financial year, we budget to manage the overall funding available for the purposes that we deem necessary with a view to getting into balance by the end of the year, given the severe limits on carry forward.

What I have sought to avoid over the past two years, with great advice from officials, is a position where funding is not being used effectively, simply because it happens to fall on either side of 31 March. As we all know, businesses continue to need support on 31 March and 1 April; vaccines continue to need funding on 31 March and 1 April; and we continue to need to fund public services on 31 March and 1 April. That arbitrary cut-off at the end of the financial year, which we are now used to dealing with, becomes really challenging if in the last few weeks of a financial year we receive additional consequentials that have not been factored in. Basically, our effective budgeting gets undermined because of those consequentials.

Please do not hear me incorrectly: I am not saying that we are not incredibly grateful for additional funding. The problem is the messaging that we get for weeks on end that, first, there is no more money and, secondly, some money will need to be clawed back, which then flips, in a matter of days, to people saying, “There’s going to be more money.” It is a question of effective budgeting.

The position is the same for the Welsh and the Northern Irish—they want to budget effectively and carefully so that there is sufficient funding. There has been no change in the mechanisms. It looks as if, this financial year, we might again have additional money that we did not expect. Nobody is complaining about that; the issue is the management.

I invite the committee to reflect on the most effective means of budgeting across financial years. That goes back to the fiscal framework, the ability to carry forward and the ability to use the reserve. If we can use the reserve, that is great, but if the reserve does not have enough capacity, that creates a problem. The position now is that, if the reserve did not have enough capacity, the UK Government would say that the funding should be paid back. I could not possibly do that, because I know that the funding is needed out there.

I will divide that question into two, because the £25 billion spend on the supply chain is slightly different from the direct revenue benefit from the option fees, which are about £700 million over 10 years.

For next year’s budget, because it was again being produced earlier than normal, and in advance of ScotWind, we identified a prudent estimate of ScotWind fees for next year. As you said, that is included in the £620 million of additional funding for next year’s budget. That funding includes other elements as well, which I can unpack if that is of interest.

That funding is slightly different from the £25 billion figure, which is based on supply chain investment. As you will know, we are intentionally trying to ensure that there is a legacy from ScotWind—which, arguably, is unlike the legacy from other significant industries that have operated in Scotland over the past five decades. That legacy is to build up our supply chain.

Take onshore wind as an example. We know that there has been a lot of scrutiny of the fact that manufacturing is largely done overseas and that we import turbines. We want to do things differently with ScotWind so that we leave a legacy of a Scotland-based supply chain. Therefore, requirements are built into the ScotWind process for winning bids to invest in the supply chain. The commitments to date are about £1 billion per gigawatt of energy generated.

That amount will be slightly more uneven—as you can imagine, a significant investment will be made up front in the supply chain to enable the developers to build the required infrastructure. However, the option fees of about £700 million will be a lot more stable over the 10-year period.

Others have probably described that better than I could. I remember one business organisation describing the situation at the end of the financial year as being like trying to land a 747 on a postage stamp. We should remember that the Scottish Government cannot overspend its budget, which means that I have to deliver as small an underspend as possible. It would be a remarkable Government that got down to the last penny of spend, not least in a period of emergencies, when urgent responses are required.

That means that, for example, any capital that has been delayed for projects needs to be managed using the carry-forward through the reserve. The same applies to any financial transactions money that has perhaps not been able to be drawn down by businesses or organisations that use it. In essence, we take the risk of managing the budget on behalf of various infrastructure projects in Scotland and so on, so we need to leave some room for the management of capital and financial transactions. Also, with resource, an assumption of some carry-forward is already built into the budget.

You can see how that £700 million starts to be eaten away. As we approach the end of the financial year, we need to ensure that there is sufficient capacity in the reserve so that we do not breach it. I think that, when I spoke to the committee previously, I said that there was no forecast underspend on revenue, which was true, but at the time I was trying to factor in potentially having to pay back some of the £440 million, with no additional consequentials coming.

Things have changed quite quickly. In the last few weeks of the previous financial year, we had an additional £1 billion from the UK Government, which meant that we exceeded the carry-forward limit—again, that is not a complaint about additional funding; it is purely about effective management of budgets. Last year, we secured an agreement with the UK Government to carry forward some of that outwith the reserve, and I am certainly keen to seek such an approach now.

Ultimately, I hope that we are all agreed that we need to protect our spending power. There is a lot of need out there for additional funding, which I am sure we can all detail, so, no ifs, no buts, we must protect the spending power. If the flaws of the fiscal framework undermine or erode that, the problem is with the fiscal framework and not with budget management.

As you said, we have allocated the bulk of the funding—it is largely being paid out to bank accounts or applications for it are open. The feedback that we have had from quite a number of sectors—one of the most obvious is tourism—is that, although the initial funding was useful and it was helpful to have that in business bank accounts to address the immediate challenge, they would very much like us to invest in a programme of economic recovery. The retail sector has also been clear about that, and news reports at the weekend covered that.

We are well advanced in developing such proposals with different sectors, and I hope to confirm what we are doing as quickly as possible. Some sectors would have liked additional funding but, now that most sectors are largely open or trading, even if that is with some restrictions, we should invest in a programme of recovery. As for timescales, I hope to do that as quickly as possible.

Dougie McLaren can come back in on that. We should remember that, when the £440 million was identified, the Treasury said that it did not think that there was enough spend in the UK Government to generate consequentials to cover it and that, if the consequentials that were generated were less than £440 million, we would have to pay some of that back. That is a very different conversation from one about baselining. It is still one-off spending; it is not baselined spending. It is one-off Covid consequentials that do not feature in our block grant.

I do not know whether Dougie McLaren wants to add anything.

Absolutely. The £620 million of additional funding that we expect to receive—incidentally, everything has been passed through the Scottish Fiscal Commission—includes a number of things. It includes the personal allowance adjustments—I will speak to the UK Government about the spillover dispute on Thursday. It includes ScotWind. It also includes two consequentials that we knew were coming but had not been finalised. One of those is the £145 million that I have just mentioned for non-domestic rates. A slight complication, which makes things more confusing than it already was, is that that money is now part of the £440 million. That funding has been allocated this year, rather than next year. We were expecting to receive it next year, not this year.

I think that that is largely the breakdown.

The £145 million is part of the £440 million. We have used the £440 million for business support and the self-isolation support grants.