Chamber and committees

The short answer is that we will not hit that limit if we continue on the trajectory that we set out in the medium-term financial strategy, because we cannot. We have to allow for headroom and obviously have to manage our budget in a way that allows for unforeseen circumstances. The medium-term financial strategy set out our approach to borrowing, and clearly the next one will set out that approach as well.

That does not mean, however, that we could not use additional borrowing powers if the cap were higher. I believe that our borrowing powers should be more in line with those of local government, whose prudential borrowing scheme is based on affordability rather than arbitrary caps. The latter do not take into account the changing nature of the challenges or the economic imperatives to invest or not to invest, so the argument is for something that is more akin to the arrangement that local government has rather than arbitrary caps.

Thankfully, as far as our net zero commitments are concerned, two areas are already highly visible. The first is the capital spending review. It was completed last year and published alongside the infrastructure investment plan, and gives a long-term multiyear view of investment in infrastructure. I do not know whether this has come through in the evidence that the committee has received, but one of the primary drivers of the shift to net zero will be investment in low-carbon infrastructure.

We talk at length about the need for a transition in transport; however, that will require public and, indeed, private sector investment in transport systems. The same goes for heating and power. The capital spending review stands prior to this budget, which will action the next year of the capital spending review with regard to investment in low-carbon infrastructure. I also point out that that has been accompanied by a £2 billion low-carbon fund to accelerate investment.

The second area is the programme for government and the co-operation agreement with the Greens, which are quite clear about the shifts that need to be made. The budget is actually just the power behind the programme for government; it enacts the programme with real money, from a challenging settlement.

I should say at the outset that we of course track Scotland’s economic performance very closely, not only because of its implications for our revenue position but because it is important that we track our performance in relation to that of the rest of the UK, given the operation of the fiscal framework.

Although Scotland’s gross domestic product is still below pre-pandemic levels, it is gradually recovering and it is continuing to broadly track that of the UK as a whole. As you said, convener, the pace of recovery is different across not just geographies but sectors, and it is clear that some sectors are more exposed to the bottlenecks in supply chain and recruitment. Food and drink, for example, which is a particularly important Scottish industry, is facing severe challenges as a result of rising prices and labour market shortages.

The Scottish Government stands ready to do whatever we need to do and can do. That includes close engagement with the UK Government. Richard Lochhead is leading on the labour market shortages and is working hand in glove with industry to intervene where we can. One of the most obvious interventions that we can make is in the skills system.

However, I strongly emphasise that I do not believe that the shortages and challenges that we are talking about can in any way be resolved through the Scottish Government’s budget alone. We have a role to play, and we play it and take our responsibilities seriously, but it is well documented that the acute labour shortages that we face right now are largely to do with immigration policy, over which we have no control.

We can intervene. Some of those interventions might look small, but we are doing what we can, for example by funding a marketing campaign to try to recruit more people to the hospitality industry. I am sure that industry will say that that is small fry compared to what it really needs, which is the ability to access visas and bring in far more people to work in the sectors that we are talking about.

The same goes for supply chains. We engage closely with our UK Government counterparts—I have regular meetings—not least on the challenges to do with gas prices and the CO₂ shortage, which has been temporarily fixed but not resolved for the long term. Those are acute issues.

I guess that what I am trying to say is that, where we can intervene, we absolutely will do, but I do not think that anyone is suggesting that the Scottish Government can resolve the issues. Certainly, from a budget perspective, financial support will go only so far: the issues are much bigger.

Again, that is an important question. Last year, we had a guarantee. Where money was announced, it was guaranteed to come. However, prior to the pandemic, the way in which the UK Government funded the Scottish Government was by making announcements and confirming the funding at key points in the financial year.

On our funding position, we have allocated £980 million of the £1 billion of Covid consequentials in the budget revision, which I imagine the committee will take evidence on over the next month. The Minister for Public Finance, Planning and Community Wealth will lead on that. On top of that, we have drawn down £168 million of balances from the Scotland reserve to support the health service and farming in particular. The balance that is left for formal allocation following the budget revision, which the committee will take evidence on, is £328 million, of which £250 million relates to capital and financial transactions that are being deployed across a range of pressures for capital budgets, such as in health, transport, energy and education.

Obviously, there is a difference between funding that is allocated formally through the budget revision and our on-going internal budget management in the Scottish Government. Every single penny has been earmarked or allocated, and the money is supporting our in-year budget position. Where we have not formally allocated funding, we will do so once we have had reassurances from the UK Government at the supplementary estimate.

In short, I cannot confidently allocate every penny without the Barnett guarantee until that funding has been formally guaranteed for me by the UK Government. We expect the Treasury to provide an update on additional funding for 2021-22 alongside the spending review in late October. Formal confirmation from the UK Government often happens in the days after the spending review. We will be in discussion with it to get that formal confirmation of our spending so that we can ensure that the Parliament, through the budget revision, has a formal allocation of every penny.

You are right that this is primarily a justice issue and that, ultimately, when it comes to policing such issues, responsibility lies with Her Majesty’s Revenue and Customs and with Companies House, which both come under United Kingdom Government competence. Obviously, Police Scotland has a role when it comes to suspected criminality. However, with regard to funding, when something is a reserved matter, it will be funded on a UK-wide basis, which means that consequential funding will not be generated for the Scottish Government.

Please come back to me if I have misunderstood any element of your question.

We are still trying to fully comprehend what the impact will be, particularly on economic growth. A lot of our attention has focused on the impact on employees, rather than on employers. Let us consider the example of the hotel on the Isle of Skye that was in the press over the weekend. The owners were lamenting the fact that VAT is increasing, that they cannot secure labour and that prices are increasing across the supply chain. The national insurance increase is clearly another issue for such businesses to contend with, on top of a number of pressures that they are facing.

You will recall that we were all set to devolve air passenger duty when we discovered a pretty major issue to do with subsidy control in relation to the Highlands and Islands air discount scheme. We had extensive conversations with the UK Government about where the matter would sit. We could not expose our finances to any potential liability before the matter was resolved—as it had to be—with the European Union.

In the past six to nine months, however, the fundamental issue has moved slightly because of Brexit. We will want to progress the matter in our discussions on the fiscal framework. Ultimately, the challenge was to resolve the issue of the Highlands and Islands exemption before air passenger duty was devolved.

Discussions about the fiscal framework have often focused on the volatility that is inherent in tax forecast, and perhaps we focus less on the inherent volatilities in social security demand. There are two reasons for forecast error in relation to social security: one is that we have been through quite an uncertain 18 months with Covid, so it would make sense that getting a grasp of what demand truly is has been challenging.

Secondly, it is likely, as the SFC’s forecast illustrated, that demand for social security will increase. Revenue borrowing for forecast error is capped at £300 million, which needs to cover not only tax volatility but also social security volatility, and we have an obligation to fund social security because it is a demand-led budget.

Therefore, there are two challenges. One is that I have to fund a significant demand-led budget line from a fixed budget and, secondly, the limits on our revenue borrowing for forecast error are quite low to meet the errors that occur. It is an area of concern. We must ensure that we can continue to meet that demand-led budget, which we are obliged to and must meet, but if we do not have any capacity in the revenue borrowing limit we have to fund the forecast error from within our budget.

The primary, but not the only, means of reaching that age group is the national transition training fund. That supports people who are unemployed, at risk of redundancy, or in need of upskilling or retraining. There are other schemes, including the no one left behind scheme, which is about supporting people who are furthest from the jobs market—for a whole host of reasons that we could go into—and helping them into work. There are a number of different schemes, but the one that I point you to is the national transition training fund.

I might ask officials to comment and give a straight-bat, technical answer, but Scottish Fiscal Commission analysis shows that income tax reconciliations could exceed Scottish Government borrowing limits up to four times every 10 years. That answer may not feel as tangible as you would like. Our own analysis suggests that there is up to a one-in-six chance that funding volatility as a result of income tax forecast error will breach the current limits of our resource borrowing powers, but you must remember that the borrowing limits also have to cover forecast errors for other devolved taxes and social security benefits. We cannot look only at income tax when it comes to forecast errors.

Governments around the world have to manage their budgets within fiscal rules, and that is right and proper. The difficulty for us is that we are dealing with a fixed budget. We still have to take a very prudent approach in how we spend our money, but what we are talking about here is the ability to use our spending power to benefit public services rather than to resolve errors, which are no fault of our own, from previous years.

This year, the reconciliation that applies to the 2021-22 budget is higher than the current borrowing limit—somebody can correct me, but from memory it is about £319 million, which is higher than £300 million. It does not get more tangible than that. The only reason why it has not breached the borrowing limit this year is that a Scotland-specific shock due to a timing difference between our forecast and the UK Government’s forecast allowed the resource borrowing limit to be temporarily increased. If anything, this year’s position demonstrates why it is essential that we have had that temporary increase, which should perhaps be made permanent.

Does that give you enough of a tangible hook to hang the argument on?