Chamber and committees

It is the hardest part of any budget to identify what must be reduced in order to increase other lines. I have met all the Opposition spokespeople once and am keen to meet them again because, now that they have seen the budget, there might be more clarity on changes to approach. However, although I might hear differently over the course of today, I have heard from the Opposition only about where budgets should increase. I am very sympathetic to that. I would love a budget where every decision is easy because we are able to invest at the requisite level in all areas of the public sector. Unfortunately, the nature of budgets does not allow that. Budgets must be informed by choices, and there are some difficult choices in the budget that I am not hiding from.

There are areas of criticism that I have heard loud and clear over the past two weeks, but I come back to the position that I have maximised the funding that is available to us. You have heard already what I have said about the £620 million of assumed additional funding, so there is no funding that I am withholding or sitting on, not least because I do not need to negotiate a deal this year. Therefore, as with every penny on the face of the budget, if we are to, for example, increase the local government settlement, where should that money come from? If we are, ultimately, to agree that health consequentials should go to health—which the UK Government is pushing strongly and the Scottish Government has incorporated—that leaves very little room for manoeuvre for other budgets.

On the infrastructure side, it is capital. Capital cannot be spent for business grants, and it cannot be spent on day-to-day services. Capital is allocated to the building of a new school, for example. Someone will come to me regarding a hospital, which costs £100 million, let us say. That £100 million will be drawn down, although the hospital might not be completed by the end of the financial year. I cannot turn round and say, “Tough luck. You ain’t getting the rest of your hospital, because the money needs to be spent by the end of the financial year.” What I say is that, if there is £20 million-worth still to build, we will carry that money forward.

You ask me about choices, but I do not hold money back. The only time I have held money back, which was well documented, was just before last December when we were given significant additional funding of more than £1 billion in the final four months of the financial year. You will recall that I allocated it all and I said that I would hold £300 million in case of another wave. What happened on 5 January? We were all locked down and, thankfully, there was £300 million to invest in business.

I do not hold money back. All of the funding is allocated. The question is whether it can be drawn down, for example by vaccination teams or by the new hospital that is being built. Those are the choices, and the choices are determined, particularly during Covid, by a very volatile situation. I would much rather that we budgeted intelligently, than suddenly trying to get rid of money at the end of the financial year.

You will remember 24 December last year, as I do. On 22 and 23 December, we had been pressing the UK Government to say whether there would be additional consequentials, and we were told that there would be no further consequentials. Late on 23 or 24 December, we suddenly had hundreds of millions of pounds of additional funding. That had to be spent intelligently on business support in very short order. Managing significant additional sums of money late on in the financial year leads to poor decision making if you cannot carry it forward beyond 31 March.

The funding is certainly not coming from underspends, because this year’s budget is particularly tight. It actually comes from a whole range of different sources, and it has been painstakingly built up from funding that had been earmarked for different initiatives and schemes. In my own budget, there were elements for employability, while in the health budget, there was other business that was going to be undertaken. Those things still need to be done, but they will need to be managed over a longer timeframe rather than being stopped completely. However, I think that we will get into the territory of having to stop things completely if no more funding is forthcoming.

No. It would not be available anyway, because it is all about our internal management of budgets. The key is the autumn budget revision, which we have just had, and the spring budget revision, in which every penny will be accounted for in a transparent way, particularly with regard to transfers. In other words, you will at that point see transfers from the area for which the budget had been earmarked to the area where it will be spent. At a time of quite considerable flux, any breakdown would just be a snapshot, and I therefore point you in the direction of the spring budget revision, not least because there might be additional announcements tonight. The fact is that, as soon as you publish one thing, it is out of date, but the spring budget revision will be the point at which you will be able to see all the allocations and transfers and to hold us accountable for our decisions.

What I am discovering is that, in times of Covid, an hour is a very long time. Anything could happen. This time last year, the UK Government told us that there would be no additional pennies and then—within the hour, I think—something like £400 million was announced.

There are no guarantees at this point in time but, based on what I know right now about the budget, I find it difficult to believe that there will be much, if any, resource underspend. If there were to have been, we would have factored it into the carry-forward and baked it into the assumptions for next year’s budget, which, for the first time in probably two years, we have not done.

I will start with income tax. It must be borne in mind that I have no choice but to accept SFC forecasts and figures—I am obliged to spend within SFC forecasts—so, in a sense, whether I accept its forecasts is almost a moot point. However, when it comes to income tax, the final position on the performance of income tax revenues next year—the year for which we are setting the budget—will be known only once the outturn data is published in 2024. My issue in next year’s budget is to manage the reconciliation from two years ago, which was one of the lowest reconciliations that we have had to manage.

I come back to two points that I have made already. One is that managing budgets over a long period requires you to set multiyear spending reviews, and the spending review will need to factor that in. Therefore, the spending review will be able to allocate only the funding that we expect to receive. That includes grants from the UK Government as well as the income tax forecast. We will need to spend, and, once the outturn data is published, we will need to manage any reconciliations. In the past, forecasts of those reconciliations have nearly always been revised multiple times. The best way to deal with reconciliations is, of course, through resource borrowing for forecast error.

That confirms the point that we have made throughout the fiscal framework discussions that we need borrowing for forecast error to recognise the levels of volatility, whereby, in one year, the error could be £309 million and, in another year, it could be £14 million. We need to be able to manage both those levels. The borrowing powers are designed to smooth that path or trajectory, and to avoid our having to use real spending power for forecast error, because that is what it is—when it comes to the reconciliation process, we are talking about forecast error.

Social security is another challenge, because it is a demand-led budget, so we need to manage that. We have taken a slightly different approach in Scotland, which is, as far as possible, to promote uptake of social security benefits, because we think that people have a right to those. We will need to manage that.

My final point is that you will tell me—and I will agree—that the best way to deal with all that is to have economic growth, shared prosperity and fairness. That will not be delivered single-handedly by one budget. A budget is a list of spending commitments, whereas this is as much about policy as it is about spend.

We will need to manage that. There is not really any other answer but that we will need to manage that within our resource spending review. Come back to me if I am misunderstanding the question, but the nature of social security is very different from that of income tax, because social security is demand led. I will therefore need to meet that demand—I cannot say halfway through the year, “Sorry, I’ve run out of money”—and we will need to take intelligent decisions about the nature of social security in order to meet that demand.

I fear from the look on your face that I have perhaps misunderstood the question.

Absolutely. You have hit the nail on the head. We cannot get away from how important the resource spending review is. I have to manage a trajectory of spend. In each budget, I can almost manage a snapshot of spend. This year, to get from A to Z, how do we plan?

The spending review will allow us to do two things. First, it will allow us to spend over multiple years, which can drive reform, and to manage budgets. It is difficult to drive reform on a year-to-year basis, as we end up budgeting for the immediate challenges in front of us, rather than for the challenges in three years’ time.

The spending review also leads us to expect—and the SFC is forecasting—that, in two years’ time, social security spend will be a certain figure, so we need to manage other budget lines on a trajectory of getting to a position where we are dealing not with huge cuts but with a plan that gets us there. That will not be easy.

When you say “lagging”, will you tell me what metric you are using?

In other words, you are basically talking about earnings growth.