Chamber and committees

In short, we are not cautious about getting money out to the people and the services that need it as soon as we can, but what has really exacerbated things during the year is the level of volatility. You will forgive me for stating some basics here, but I want to build up my argument.

The fact is that we cannot overspend our budget; at the end of the financial year, I have to bring to Parliament through the outturn statement a budget with no overspending, because the Treasury would not look kindly on us if we overspent. In-year budget management is all about trying to maximise spending power for the services that need it and to meet all the asks. After all, every day in Parliament, there is always another ask for more money.

At the same time that we trying to maximise that spending power, we have to come in on budget. The difficulty is that, during the year, there is volatility. For example, with the UK Government’s announcement of health and social spend, we were told that we would get up to £520 million; that will be confirmed in the main estimates, which means that the final confirmed position will probably be known in January, February or March. If all that £520 million gets spent on the important services that it needs to be spent on—and we will spend that money; please do not read into what I am saying some lack of commitment to spending the money that needs to be spent—and we are told in January or February that we will get £400 million in consequentials, because the UK Government equivalent departments have not spent the full amount to generate the full £520 million or because it is recycled funding, I suddenly have a shortfall of £120 million that I need to make up with only a matter of weeks to go before the end of the financial year to ensure that our budget comes in on balance. That is the level of risk that we face.

Knowing that that is the position, we are managing our budget in year on a daily basis to maximise our spending power while at the same being cognisant of the fact that, once the money is spent, it is challenging to make up any shortfall. One actual example was a sum of £25 million for education. The UK Government announced some education funding, which was very welcome, and we passed that money on to education. However, when we saw the May estimates, we discovered that the actual funding was £25 million less. In other words, it was £25 million that I was not going to receive but which I had already passed on. This is not a complaint—it is a request for more levers to manage that kind of volatility and ensure that we come in on balance.

Last year, the Barnett guarantee made it clear that there would be no negative consequentials and that what had been announced would not be clawed back. I therefore had total reassurance that when the £25 million was announced it could be passed on without the fear that the actual sum might be less. The guarantee has been taken away this year, because the UK Government’s volatility is such that it cannot predict with any certainty what UK departments will spend. That is why the increased volatility this year has made things very difficult. We manage that volatility internally, but it makes things more challenging and any Government in this role would find huge value in having more tools to manage it.

There are two parties involved and—as you will be aware—quite a lot of change is afoot for local government over the next year. I think that we can make some progress prior to the local government elections, but I imagine that the matter will be one of the first that will be picked up after the elections. We are committed to working with COSLA to develop a rules-based fiscal framework to support future funding settlements.

The other part of the issue—again, this is not a cop-out—-is that a big ask from local government is for the ability to set multiyear budgets. Along with the need for additional flexibilities, there is a need to know what will be in a budget from year to year. I sincerely hope that the resource spending review that we will set out will allow local government to look three years ahead. [Inaudible.]

I hope to discuss it. We are not seeing a huge appetite for change, and I have not had much evidence of such an appetite during the pandemic when we looked for temporary fiscal flexibilities. I think that the discussion is unlikely, but there is an opportunity for civic Scotland—if I can put it like that—on a cross-party basis to come to a position on borrowing that is good for Scottish businesses and the Scottish economy, and is not new, since local government already has it.

The Scottish Fiscal Commission obviously has to judge our projections of capital borrowing, and its most recent report said that they were reasonable.

Yes and no. I wrote to the UK Government in the immediate aftermath of the announcement of the health and social care levy to seek clarity on various points. The response that I got did not actually give me any of those answers. The big question remains what we will get in additional consequentials. In the past, when there have been announcements about increased spend on health and social care that have generated consequentials, we have later discovered that those have been netted off against funding that was due to come anyway, so it is not all additional. We know what the UK Government has publicly announced for Scotland, but the big question for 27 October is whether that will all be additional or whether some of it will be netted off against decreases in other health and social care lines, so that it is not, for example, a net additional £1 billion.

That is a great question. From a technical perspective, being able to have a wider mix of tax powers would be far more effective for the management of our budget and of the economy. Taking business support as an example, we have just spent time discussing non-domestic rates despite the fact that that is not a business tax but a property tax. It would be good to have a broader mix of tax powers and to have all the powers associated with income tax as well as a wealth tax and perhaps capital gains tax. It would be helpful to understand and have responsibility for the interactions between national insurance contributions and income tax.

My first ask would be to have a far more comprehensive toolbox of tax powers at our disposal, so that we are not basing all our action on a few narrow taxes that cannot bear the weight of what we ask them to do. That is certainly true of income tax and that position is universally shared by tax professionals.

The second thing would be to be able to manage year-on-year volatility in the budget. It is hugely detrimental to have an arbitrary cap of £300 million for forecast error. It reduces our ability to plan ahead and it means that when forecast error exceeds £300 million, as we have seen in previous years, actual money that could otherwise be used for public services must be used to deal with the forecast error. The ability to manage our budget in year and from year to year needs to be considered.

My final point is that we should have a prudential borrowing scheme that is based on affordability. We already have to base capital borrowing decisions on affordability. I have to deal with the revenue consequences of capital borrowing in future years. I know that. The medium-term financial strategy sets out how we manage it. The notion that we would not use borrowing powers prudently if we had them does not bear scrutiny. We have had to do that in part with capital borrowing. All that we are asking for is something similar to the prudential borrowing arrangement that local government has.

Those are the three items on my wish list.

There are a number of different points. The first is a real focus on innovation leading to productivity. You will be mindful of that, and, over the past few days, we have heard in the media a lot about UK-wide productivity challenges. There are real challenges when it comes to increasing levels of productivity. Those are being highlighted by population shortages right now. If we live in an environment in which we are unable to access additional labour from outwith the country, it is even more imperative that we invest in innovation and tech and that we improve productivity levels across the country. That point has been repeated for a number of years by the Confederation of British Industry and others. That focus is on how we incentivise innovation and invest in productivity; that includes investing in our people.

That takes me to my second point, which is a real focus on skills—making sure that we have the right skills in the right places for the right jobs. We have seen, post-pandemic—not that we have got through the pandemic—that unemployment is much lower than was originally forecast; however, that means that there are acute labour shortages in certain sectors. We therefore need to make sure that, through the young persons guarantee and our other interventions such as the national transition training fund, we are reskilling people with the right skills—those that are actually required.

Those are two areas that are coming through loud and clear in the conversations that we are having around the advisory council, that I am hearing regularly from business organisations and that I would like to see prioritised in the forthcoming budget.

In short, your characterisation is accurate. We have, where we can, used softer powers to try to crack down on tax avoidance. I would say that since its establishment Revenue Scotland has taken a firm and effective approach to tax avoidance, because it is working collaboratively with other public bodies—for example, it works closely with the Scottish Environment Protection Agency in relation to landfill. The taxes are small in the grand scheme of things, although they are important for the Scottish Government, but the point is that, since the establishment of Revenue Scotland and the development of other devolved taxation, we have taken a much more robust approach to tax avoidance. However, you are right that it is based only on soft powers rather than on actual legislation, because, ultimately, tax avoidance is a reserved matter.

I will answer that in two parts. First, I support the principle of conditionality across all Government spend. We should consider more carefully where we can embed proportionate conditionality; we have committed to do that, as part of the co-operation agreement.

The second part is perhaps more disappointing. I have looked at non-domestic rates through every lens to consider how we can expand conditionality, but doing so is extremely challenging, if not impossible, in places. We place a huge burden on non-domestic rates—which, we should bear in mind, are a property tax—because we have no other form of business taxation in Scotland.

It is difficult to use conditionality in non-domestic rates in any way but through conditions that relate to the property itself, because it is a property tax, not a business tax. Non-domestic rates are based entirely on a property’s rental value—what that property might get in the open market—which is applied to the poundage. The tax was not established to take into account income generation, nor was it ever based on employees. The various conditions that we might want to attach to reliefs are almost impossible for a property tax.

That is not to say that we have not considered the possibility. During the pandemic in particular, I was keen to see whether we could attach other conditions. However, the methodology behind non-domestic rates—the way in which rates are collected and the principle that underlies them—means that it is almost impossible to attach conditions that are not specifically related to the property.

People might argue that we should overhaul non-domestic rates and set up a taxation regime that is based on income and other factors. That is a perfectly legitimate argument to make, but because it is a property tax, we look to non-domestic rates to do more than it was set up to do or is capable of doing because it is the only form of semi-business taxation that we have in Scotland.

Yes, in short. I note that that applies to non-domestic rates as well, to link in with your previous question. The Barclay review of non-domestic rates specifically talked about what powers we might have in Scotland to crack down on tax avoidance. That was incorporated into a general tax avoidance provision. I am happy to send the committee more information about non-domestic rates in that context.

You will remember that in discussion about tax havens there was a lot of public debate about whether or not the Scottish Government had the power to act. Where we have powers or softer means of cracking down on tax avoidance, we will use them, but the issue is, ultimately, reserved. When it comes to having real teeth that can crack down on tax avoidance, the powers are still reserved to the UK Government.

No, I apologise for not grasping what you were asking. We have had a lot of engagement with the UK Government on those points, and Dougie McLaren might be able to give you a brief update on whether there will be full compensation.