Chamber and committees

I do not think that it will be deployed differently, because that would just create a big hole somewhere else. If I move that money, all it does is give me a headache elsewhere. It is not new money.

There was a lot in that question. I will ask Lucy O’Carroll to comment, but we need to get beyond the headlines of what this means and what it does not mean. We might automatically think that it means that earnings are not growing in Scotland, but earnings grew in every year between tax devolution and the pandemic. There is clearly a challenge around the fiscal framework, but let us park that, because I have already talked about it, and it has been made clear that, where we see stronger earnings growth elsewhere, it still means that our budget is being reduced.

You mentioned the north-east of England. Of course, it does not have tax devolution. There will be an impact on its position and, more generally, we know that there are some inequalities there, but we also know that particular sectors in Scotland have been hit hard by Covid. I talked about the oil and gas sector, which contains some of the highest earners in Scotland. It has been through a tumultuous time and we have seen big challenges there, so I think that we need to understand that more.

I will move on to the solutions. You talked about labour participation, and I will bring in Lucy to comment on that. One of the keys here is to understand precisely where the challenges in the Scottish economy are and are not. There are some difficulties in relation to economic activity, and we are looking at how we can get more people into work. There are good reasons why many people are classified as economically inactive. For example, they may be carers, stay-at-home parents or students. However, there is another cohort who are economically inactive due to long-term sickness or for other reasons. We have invested intensively in things such as the no one left behind approach in order to bring those people closer to the labour market, although it is an incredibly expensive process, because the individuals need a lot of wraparound help and care.

I will stop at this point, if you do not mind, and invite Lucy to comment, because she is the expert on all things tax related, and particularly the aspects that get to the nub of the problem that we are discussing.

The £620 million is obviously for future years, but it was based on assumptions of funding that had been announced but not allocated. That is all baked into next year.

The first £220 million was not a direct overlap, but announcements had been made that we had already baked into our budget; we had not assumed that we would get funding. For example, the £145 million relating to material change in circumstance, which the UK Government previously announced for businesses, was included in the £220 million, as well as in the £620 million. That illustrates that there is considerable overlap between money that the UK Government announced as new but which is already very much factored into our budgets, and between what the UK Government is saying will come this year and what we have assumed will come next year. Whichever way we look at it, it is not new money.

The additional £220 million that was announced on Sunday night appears to contain new funding. I again remind members that we only get funding consequentials from UK Government spend, so that money is based on funding that the UK Government intends to spend between now and the end of the financial year, but which it had not told us that it intended to spend. Basically, we have had an advance on any future announcements between now and the end of the financial year of new UK Government spend that generates consequentials.

It is complicated. I do not know whether you want me to expand on that, but I hope that it answers your question.

My assumption that funding will be allocated is rock solid. Both Governments have agreed that a transfer to the Scottish Government is due, and they have agreed the methodology. When it comes to the transfer, you are right that the dispute dates back to 2017-18. There is some disagreement about the quantum of funding that should be transferred.

It is £200 million—£100 million for self-isolation and £100 million for business support. We have gone through the whole budget and identified whether portfolios can contribute or allocate additional funding. I sought to identify funding in my own budget, and funding has been identified from other portfolios. Therefore, we have looked right across the board and identified funding on a portfolio-by-portfolio basis for that £200 million.

You are right: the report by the Institute for Fiscal Studies is very helpful in giving an independent perspective on some of the risks that we have identified.

At the moment, I have no reassurance at all about what the UK Government might do to provide either additional funding or additional flexibilities or guarantees. We know that the UK Government has made an additional £220 million available. That is based not on known announcements but on what it thinks might be spent between now and the end of the financial year. If the funding is less than £220 million, or less than the overall £440 million, we will have to repay that funding. We still do not have the minimum guarantee that the report alluded to.

You asked about furlough. We would need HMRC to work with us to make anything specifically available on a geographical basis. That is recommended and suggested in the report that came out today, but I have no sense that there is any willingness or openness on the part of the UK Government to do that.

Absolutely. My entire objective is to grow the Scottish economy, ideally faster than the UK’s, to ensure that people are in work and have well-paid and secure employment, and to ensure that we are more productive as a country. In that, from an economic perspective the budget needs to be seen alongside our other work. It is not just money that drives economic improvements: a wider policy landscape enables businesses to take risks and entrepreneurs to flourish and prosper.

However, we cannot get away from what the drivers are of, for example, income tax performance. We know that the Scottish economy is disproportionately exposed to the oil and gas sector. I am not passing judgment on that; it is just a fact. On volatility in the oil and gas sector, we know—irrespective of what any politician around the committee table or anyone else thinks about the future of oil and gas—from having been exposed to the sector that there being more redundancies has a knock-on impact on income tax. We need to understand the key drivers in such economic exposure, which, in turn, affects income tax performance.

There are two ways of resolving that. One way is the fiscal framework. I am pressing to ensure that the framework better mirrors the Welsh fiscal framework so that it takes into account the nature of the Scottish tax base.

The second way is to ensure that all sectors in Scotland are prospering. Lloyds Banking Group and PwC recently said that Scotland is already, and will continue to be, the place in the UK for green jobs. If we create green jobs and ensure that we attract talent to Scotland, that talent will contribute to the public coffers, which will result in an overall net benefit to the Scottish budget.

I reinforce that I absolutely agree that we cannot look at the budget independent of our economic aspirations for Scotland.

I will bring in Ian Storrie, if that is possible, to speak to what the settlement and distribution group does. It is a fairly standardised process.

The risks are significant and are exacerbated by Covid. The medium-term financial strategy that has just been published would not necessarily have taken into account the specific impacts of the omicron variant. The OBR would certainly not have taken that into account; I do not know to what extent the SFC would have done so. The forecasts were made pre-omicron. We have already had to make new funding available, and there is uncertainty about the extent of the impact of omicron. If it leads to a need for drastic measures further down the line, that will have an economic and financial impact that we will have to manage from within our own budget. That is a challenge.

That takes us back to my point about having the tools to deal with unexpected risks. No one—not even our forecasters—has the crystal ball that would be required to figure out precisely how omicron or other variants might unravel. We are absolutely dependent on the UK Government for additional funding. If we make that funding available from within our own budget, that puts at risk our ability to come to a position of balance by the end of the financial year, and I am required to be in balance by the end of the financial year.

There are huge risks, without our necessarily having the tools to manage them, which is why the period since the budget was passed has been hugely difficult and very busy as we have tried to figure out how we can squeeze any more funding out of our own budget to help businesses.

Again, I will pause and see whether anybody else wants to come in on the point about managing risk. It is probably unlikely, but one of my officials might want to add a little more flavour.

That is a very fair question. I return to what I think is an unfair distinction between the core and overall settlements. The figures from COSLA do not factor in the overall settlement. A lot of what is in the overall settlement is very much in the prevention space. I know that, if more money goes on social care, we are relieving pressure in acute health settings. I fought very hard in this budget to ensure that a fair share of the health and social care consequentials go to local government, because it deserves a fair share of those consequentials—they are not just health consequentials; they are health and social care consequentials.

You mentioned obesity, which is a good example. Take free school meals. I know that local government is as committed as we are to ensuring that children growing up in poverty have a nutritious diet. Doing that relieves pressure on parts of the health system.

You cannot just ignore the overall settlement. Once things such as enhanced funding for free school meals are included, we are talking about a cash increase of about £917.9 million, or 7.9 per cent, which is a real-terms increase of 5.1 per cent.

As part of the overall settlement, we need to be clear that those are shared priorities. That does not take away from some of the pressures that are in the local government settlement, but every one of my cabinet secretary colleagues and every public body is telling me about the pressures that they face. I do not think that any part of the public sector is cushioned from the budgetary pressures.