Chamber and committees

Earnings growth in Scotland increased every year between tax devolution and the pandemic. I do not have it to hand, but the analysis that we have been able to share as part of previous budgets shows that earnings growth and, in some cases, it shows tax take growing at a faster rate.

I point to three things. You will say that I am describing the problem, but we cannot find solutions unless we do that. The first is the way in which certain sectors have been hit by Covid. The second is the way in which higher earners in particular have been affected by the downturn in oil and gas. The third relates to what you called participation and economic activity, which is a legacy issue. How do we solve all that? Here are three answers.

First, we bring people closer to the labour market. We need to get them into work in the first place. I point to initiatives such as the no one left behind strategy that try to do that. They are relatively recent initiatives that specifically target the problems that we are talking about, not initiatives that have been running for many years and that have failed to deliver.

Secondly, from an economic perspective, we invest in high-growth sectors. Where are our high-growth sectors? What sectors will create the high wages or, at least, ensure that everybody is paid the real living wage and above? They are particularly in the green economy, but they are also in technology and life sciences—the areas where we have strengths.

The third answer is to make sure that we do the analysis on a regional basis. There are clearly areas in Scotland where wage growth is higher and there are more higher-rate taxpayers than there are elsewhere. The convener is regularly at pains to tell me about the need to invest in the west of Scotland; we must ensure that areas such as the one that he represents are not left behind and that we do not focus on creating jobs only in places such as Edinburgh and Aberdeen.

Those are three examples. They are works in progress, and we have not nailed them yet, but we all have an interest in ensuring that they work.

It is for forecasters to determine these things as per their methodology. I would not want to get into the territory of criticising any forecaster’s methodology, given that forecasters are independent of Government. I recently met the OBR and I have spoken to the SFC about the need to align their methodologies as much as possible, as that will make things easier for us. After all, if one forecaster bases its forecast on a far more optimistic scenario than the other, that creates a real challenge for us with regard to block grant adjustments and the overall funding that is available to us.

There are difficulties in that respect. This year, we tried to align the timing as far as possible to ensure that the methodologies, too, were aligned. Indeed, that is why we went so quickly after the UK Government’s budget.

I am happy to bring in officials to respond, but I should point out that no methodology is completely risk free and that there are challenges and opportunities with all the models.

On balance, our sense right now is that we are being penalised by the growing gap between the richest and the poorest in the UK, which informs the fiscal framework methodology that is applied to tax. Indeed, prior to the pandemic, we were seeing growth in earnings, but there were still challenges with the overall funding that was made available to us. It is therefore overly simplistic to say that, because earnings have not been growing, there is a disproportionate impact on our block grant. There was earnings growth in Scotland, yet there were still challenges with the block grant.

I might be putting her on the spot unfairly, but I wonder whether Lucy O’Carroll has anything to add.

There are several questions in there. I will take them in turn. The first is on the undistributed sums that you reference. They are considered by the settlement and distribution group, whose next meeting is on 18 January, I believe. It will decide how the undistributed sums will be distributed.

On the overall settlement, I know that there have been conflicting views. I say again that I am not here to deny that there are challenging decisions in the budget, which I had to make. There are challenging decisions in it. In the local government budget, there is a distinction to be made between the core budget and the overall settlement. We have protected the core budget in cash terms and there has been real-terms growth to the overall settlement.

The wider settlement is not just about Scottish Government priorities; by and large, they are shared priorities. Most local authorities will tell you, for example, that there are acute challenges in social care on both recruitment and the funding position. That is why the additional £200 million to support investment in health and social care that has come as part of the overall consequentials is so important.

Your last question is a very pertinent one. It is ultimately about methodology. I will repeat what I have said in previous years, which is that I am completely open to considering any changes to the funding methodology. The committee will appreciate that that needs to come from the Convention of Scottish Local Authorities, as much as from me, and that agreement is needed within COSLA about reviewing that methodology. I think that we should review it, but I cannot do that without a request from COSLA to do so.

Absolutely. I have two further points.

I strongly advise people to look at the page that you referred to. They will see that, of all the budget lines, the economy line overspent. We spent considerably more on business support than the funding that had been given to us, such was the importance that I placed on helping businesses to get through.

My second point is that we should compare that with previous years. There are well documented complaints every year about the Scottish Government carrying an underspend. I agree with that. We cannot overspend. It is illegal for me to overspend. Therefore, as we get closer to the end of the financial year, coming in under budget is a bit like landing a 747 on a postage stamp.

By way of comparison, there was a £669 million underspend in the previous year, which is 1.7 per cent. There is the £580 million figure, which is 1.1 per cent, with £392 allocated in the budget bill and £168 million in the autumn budget revision—I appreciate that budgets are hugely complex, with lots of different material. I can say that every penny is accounted for, and every penny has been spent. I maximise the value of every single penny in a Covid year, because I know that the needs far outstrip the availability of funding.

The disagreement ranges from £400 million to £1.7 billion. It is a very significant range.

To clarify, that is not from underspend but from budget that was allocated. For example, in my own portfolio, budget had been allocated for some schemes and initiatives that we will now need to manage over a longer time period. All the funding was allocated, and the same applies to other portfolios. For example, in health, there was money that had been allocated. Right now, this year, we are managing a particularly challenging budget. That is demonstrated by the fact that there is no money in next year’s budget that is based on an assumption of carry-forward. In other words, at this point in the financial year, we do not assume that there will be any underspend that could be carried forward, because we are fully maxed out on every budget line. The money that you mention came from a host of different sources, largely where we have had to phase things over a longer time period.

I would always advise people to believe the numbers rather than necessarily anybody else’s take on the numbers. I know that Douglas Lumsden will know his way around the local government settlement probably better than anybody else. In relation to what the numbers show, I would differentiate, as COSLA does, between the core budget and the overall settlement.

In relation to the core budget, which is protected in cash terms, I do not recognise the £100 million figure that local government is using. COSLA recently wrote to me about that £100 million, and I am trying to get underneath it. My understanding is that COSLA is saying that it is for Scottish Government priorities, but I do not recognise the figure. As far as I am concerned, if you compare last year’s core budget to this year’s core budget, you will see protection in cash terms. Of course, the argument could be made that it does not take into account the impact of inflation, but I cannot inflation proof any part of the Scottish Government’s budget, such is the nature of inflation right now.

The other part to this is that there is real-terms growth to the settlement. I think—and hope—that Douglas Lumsden would probably agree that education and social care are joint priorities, and there is significant additional funding for health and social care integration. Although COSLA does not calculate that as part of its core budget, we see significant additional spend on health and social care and a significant additional spend on teachers and support staff. Of course, that also includes funding for free school meals, curriculum and music tuition charges and expanding the school clothing grant.

I hope that I have tried to be as fair as possible in distinguishing the budget as COSLA does. However, I certainly do not recognise the £100 million that COSLA references.

There is funding in this year’s budget to enable us to continue to invest in our key trunk roads. You will appreciate that the current plan is to fully dual the A96 between Inverness and Aberdeen. We have agreed to conduct a transparent, evidence-based review of the programme, which will report by the end of 2022. All road projects, including the A96, are subject to detailed review and assessment. We remain committed to making much-needed improvements to the A96, but we need to let that review run its course.

The report highlights that business investment as a share of gross domestic product has increased in the past decade, but it is still low by the standards of the Organisation for Economic Co-operation and Development, and it has fallen in the two consecutive years since 2018.

What are we doing already? Our global capital investment plan, which was published earlier this year, does what it says on the tin—it tries to attract additional investment. The inward investment plan was published in 2020.

Those are both key to improving Scotland’s business investment performance. We have seen good data tracking against that, but these are not things that can be delivered within a matter of months. We have already set ourselves a business investment target.

If I heard correctly, the second part of your question was about innovation and the fact that the share of innovation-active businesses in Scotland was about 32.2 per cent, which was a decrease from about 50 per cent in 2015. That area is one of the key elements of the national strategy, which looks at how we develop actions to improve Scotland’s performance. Among the five objectives of the strategy, one is on productivity and another is on entrepreneurship, and they are closely aligned to innovation. It is about us incentivising businesses to do what they want to do, rather than us making substantial investment. A few sectors that are doing exciting things, from manufacturing through to the green economy, which is leading the way on innovation.