Finance and Public Administration Committee [Draft]

Meeting date: Tuesday, March 5, 2024

Official Report 804KB pdf

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Subordinate Legislation

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Budget (Scotland) Act 2023 Amendment Regulations 2024 [Draft]

The next item on our agenda today is an evidence session with the Minister for Community Wealth and Public Finance on the draft Budget (Scotland) Act 2023 Amendment Regulations 2024. Mr Arthur is joined today by two Scottish Government officials: Scott Mackay, head of finance co-ordination, and Craig Maidment, senior finance manager. I welcome our witnesses to the meeting, and I invite the minister to make a short opening statement.

As the committee will be aware, we continue to face challenging economic circumstances. Continued inflationary pressures, particularly around public sector pay, have put real pressure on the Scottish budget over the course of the financial year. Despite some improvement in the overall funding position since the autumn budget revision, managing the impact of pay deals within the overall position has been challenging. Reprioritisation of budgets has been necessary due to continued inflationary pressures, including on public sector pay, and to support priority areas, including the on-going funding for Ukrainian displaced people.

In her letter to the committee from November, ahead of the United Kingdom autumn fiscal event, the Deputy First Minister set out the tough choices that the Scottish Government has been required to make to ensure that we can achieve a balanced budget. The spring budget revision shows the outcome of those tough choices being actioned.

The spring budget revision provides the final opportunity to formally amend the Scottish budget for 2023-24 and contains the usual four categories of changes. The net funding changes increase the budget by £546.8 million. These changes include: providing £750.8 million to health to support services, fund pay rises and provide support as it continues to recover from the Covid-19 pandemic; £134 million to police and fire pensions; £51.8 million net to social security benefit expenditure; and £41.2 million to the Ukrainian resettlement scheme. To help fund these priority areas, it has been necessary to reprioritise budgets in the way in which the Deputy First Minister outlined. The technical, Whitehall and internal transfers are presented in the document in the usual way.

There are some extremely large technical adjustments included within the spring budget revision. These include a £3.1 billion decrease in the annually managed expenditure budget requirement for national health service and teachers’ pensions, and a £735 million increase in the non-cash budget cover required for student loans. From our previous discussions, I know that the committee is aware that those changes do not impact the Scottish Government’s discretionary spending power. The adjustments reflect latest estimates and are used to set the final budgets that outturn is reported against in the annual accounts. They are required to limit material differences being reported against the budget totals and accounts and try to avoid the confusion around underspends that emerged in previous discussions in Parliament.

The supporting document to the spring budget revision and the finance update prepared by my officials provide further background on the net changes, as well as updates on information requested by the committee.

Thank you very much. In time-honoured fashion, we will go through some of the changes to try to get further information and elaboration on how decisions have been made and what the impact will be. I start off with NHS recovery and the health and social care portfolio. The additional funding includes £514 million of resource and £235 million of capital. The budget is a wee bit coy about what that will be spent or invested in. Could you give us a bit more information?

As I touched on in my opening remarks, no part of the public sector has been immune to the significant pressures arising from inflation, the general cost of living crisis and the conditions that have been impacting every aspect of society. The additional funding for health is to support the in-year position—within this financial year—and to support our health services to address those pressures. For example, it includes elements around public sector pay, as I touched on in my earlier remarks.

Indeed, but the £235 million of capital funding interests me because, as we know, there has been a two-year moratorium on new capital projects in the NHS, although, of course, there is still money being spent on care and maintenance. What does the £235 million represent as a share of capital allocated to the NHS and what is it being invested in?

As you would imagine, it will be invested in a range of areas of capital expenditure. As I touched on a moment ago—and I think is more broadly reflected across the autumn budget revision—we are operating in an environment where capital budgets are under significant pressure. Of course, the position that we are moving into in the next financial year is compounded by the reduction in the capital that we will receive from the UK Government over the medium term. Craig Maidment or Scott Mackay, do you have the figures on the capital position in relation to the overall NHS capital allocation at hand?

I do not have that exact figure to hand. I would have to follow up on that.

The question was about what the £235 million represents as a share of the overall capital allocation towards health.

Sorry to interrupt, minister but if you think about it, the total capital budgeted spend will be £5.845 billion and £235 million in one particular portfolio is quite a significant slice of that. That is why I was quite intrigued as to what that money will be spent on.

As I touched on, it will cover a range of capital expenditure across the health portfolio. I recognise the interest in the capital position going forward, but that money is to support the in-year position, recognising the range of pressures that the health portfolio is facing. All I can say is it broadly supports capital expenditure across the health portfolio.

It would be good to get further detail on that.

The other point is that there is £108.9 million capital spend that has been unallocated. Given the pressures that you have talked about, one would have thought that you would have tried to allocate all of it.

On unallocated funds, that ultimately arises from the fact that we do not have certainty on what our final position will be this year. There can be material movements up to the end and, indeed, beyond the end of the financial year. That is just a reflection of the inherent uncertainty in how our fiscal framework operates. Do you want to come in, Scott Mackay?

I was just going to say that we got some surprises in the supplementary estimate in relation to additional funding: based on our discussions with the Treasury, we had been modelling on the basis of negative consequentials, but instead we got additional capital funding. In the run up to the spring budget revision, we were anticipating less funding than actually materialised. That is a key contributing factor to us having that position.

You will be well aware of the pressures in 2024-25. As the minister says, we are still finalising the position for this year, but should things come in on forecast then we would have some additional capital carry forward through the reserve, subject to that final position.

Will that be fully allocated in 2024-25, or will we end up a year from now in another situation in which £100-odd million is unallocated?

10:00  

As Scott Mackay touched on—and if memory serves me correct, he has referenced this in the guide that we provided to the committee—in the scenario where, through the way in which the UK cycle of fiscal events operates, supplementary estimates are only being confirmed at the end of February, scenarios and situations can arise where we receive funding that has not been anticipated, so we have to manage that funding now. We still have to complete this financial year but any funding that is not allocated and spent within this year would be carried forward to support the position in 2024-25. Broadly speaking, we have consistently been able to ensure that any discretionary funding that we receive is spent in-year, and if it is not spent in-year it is carried forward. We have not lost any discretionary spend as a consequence of late consequentials. That speaks to the important role that the Scotland reserve plays in allowing that flexibility.

Thank you for that clarification. One of the issues that we have discussed at this committee is the long-term financial sustainability of the public finances. We see that there is a £284.2 million increase for social security on a budget that is already growing very dramatically. Can you talk us through that and why there is such a huge differential between what was anticipated and what is now having to be spent? It seems a huge difference.

Of course. The net position, when looked at it in the round, is less than that. We are cognisant of the need for long-term sustainability, so we monitor the position on social security spend very carefully. I am conscious that we have provided some more up-to-date information, which we brought to bear in our understanding of the current position. Is that something that you are able to comment on, Scott Mackay?

It is based on updated forecasts from the Scottish Fiscal Commission and subsequent information from the social security policy team on demand. These are demand-led budgets. We establish the policy position and the qualification criteria and there is a limit to the extent to which we can actively manage those budgets within those criteria. It is demand led and we need to manage the movements in-year.

We have some flexibilities within the fiscal framework—there is some borrowing capability that is linked to helping us to smooth the management of volatility so we can borrow against forecast changes. One of the challenges of managing a budget of that scale when it is demand led is the level of volatility that we see.

Yes, it is demand led, but there must have been a pretty good idea of what it would be, given the fact that it is not something that has been started from scratch. There is a baseline from the Department for Work and Pensions. There might be people on the fringes who may not qualify under some of the DWP regulations but will qualify for some of the new benefits that the Scottish Government has introduced. It just seems that there was quite a significant underestimation of what was required.

Obviously, it is a big number, but relatively small percentage differences can amount to big figures. The social security team are developing their modelling continually, but we do see volatility. Managing £6 billion-worth of social security expenditure that is demand led within the narrow limits of the flexibilities that we have is a continual challenge.

The education and skills portfolio is receiving an additional £54.1 million. The largest element of that is the £29.8 million being provided to the Scottish Qualifications Authority to “support its ongoing activities”. What are these on-going activities that were not previously anticipated?

That reflects pay awards, appointee costs following the introduction of curriculum for excellence, to ensure alignment with the real living wage, inflation and other operational costs as well—it is for pay awards, inflation and various other operational costs.

Would it not be better just to say that, rather than saying it is for “ongoing activities”, which is a bit vague. The point of this is to try to ascertain where the money is going—either up or down. If we are just given that information, it would make life a lot easier than just referring to some “ongoing activities”. You are bound to get a question on something like that because it is so vague, and we are talking nearly £30 million.

I appreciate that position, convener. It is something that we will take away to consider.

Could you talk me through the transport, net zero and just transition portfolio budget? On the one hand, we have been told that it is receiving additional funding of £81.6 million, the vast majority of which is to be provided as additional borrowing capacity for Scottish Water, while on the other, the actual overall Scottish Government portfolio figures show a reduction from £4,307.8 million to £4,068.7 million, which is a decrease of £240 million or 5 per cent. Those figures do not seem to add up.

Certainly. There are areas where it has not been possible to deliver the spend in-year. That is the case in the building programme, for example. There are other elements where work is still on-going in business cases, for example, which has meant that money could not be spent in-year. I will ask Scott Mackay to come in on the specific point on the Scottish Water borrowing.

Justice and home affairs has had funding reductions of £65.5 million. Of that, £41 million relates to capital funding for the HMP Highland and HMP Glasgow projects that should be reprofiled into future years. When you say “reprofiled”, do you just mean delayed? Why do you not just put delayed?

That just reflects the challenges within the construction sector on these particular capital projects. These are macro factors that are not within our control. We have to be able to respond to the economic environment we are in.

You asked a specific question around Scottish Water, convener, and I will ask Scott Mackay to come in on that.

We are trying to show the gross funding movements. That is why we are showing increases and decreases rather than the net position. On Scottish Water specifically, there is a five-year regulatory period. We engage with Scottish Water on its capital requirements over that regulatory period and the borrowing necessary to support that. That is then profiled and, where capacity allows, we can adjust that profile in response to the needs of Scottish Water. It is part of a planned investment programme. There are movements within that across the regulatory periods.

Okay. I will not go through all of the technical adjustments but I will focus on one. Additional budget cover of £48.1 million has been provided for private finance initiative projects in NHS recovery, health and social care. It says here:

“This technical change falls outside of UK Budget limits and is provided to align the Scottish Budget with accounting requirements.”

What does that mean? What accounting requirements are we talking about here?

Again, it is not something that impacts upon discretionary spend but is a technical aspect. I will ask Scott Mackay to comment.

There is a difference in the way that some public-private partnership projects are budgeted and accounted for, which means that they are off the balance sheet in terms of budgeting. In budgetary terms, we score only the unitary payments, but in accounting terms we recognise the full value of the underlying asset in the accounts. This budget adjustment reflects movements in those accounting values. That needs to be shown so that we have a budgetary aggregate that reflects what we will show in the accounts in Scottish budgetary terms, but it does not impact on those Treasury budgets. It is indicative of that difference between the budgeting for these off-balance-sheet private finance initiative projects and the accounting for them. Is that helpful?

That is certainly helpful for Michelle Thomson, who has been nodding away. Thank you.

One of the important aspects of the budget is the Verity house agreement and the interaction there. As part of the budget document, £1 billion of ring-fenced funding that was previously held in portfolios was baselined into the local government settlement. That has been welcomed in local government. We have a breakdown of all that information here. How much remains ring fenced?

We have set out the elements that are ring fenced. We have a commitment, through the Verity house agreement, to establishing a fiscal framework for local government. That is work that we are committed to seeing through and are working at pace to deliver. Where we are in the process of setting a baseline for 2024-25 represents a point on a journey. I know that there is interest in Parliament, in the committee and, certainly, in local government in continuing discussions about what further progress we can make.

Where do you anticipate that going?

I do not want to pre-empt the outcome of the discussions. Clearly, they cover a range of portfolio and ministerial interests.

Is the direction of travel that you will reduce ring fencing further?

That is what we hope we have achieved so far. I know that there is a strong interest in local government in exploring how we can go further. As part of the Verity house process and the commitment to a fiscal framework, we are committed to that engagement and to having those discussions.

In terms of supplementary estimates—Scott Mackay touched on them earlier—additional funding is classed as being expected from the UK Government, but it is not clear why the estimates are included if they are merely expected as opposed to confirmed. I know that there is a lot of exasperation in the Scottish Government when the UK Government hints that money is coming in but it might or might not come. When do you decide to include or not include figures in the estimates?

We provide some commentary on that in the guide that we have provided to the committee. There is informal information that can be shared at official level and there is engagement between the Deputy First Minister and Cabinet Secretary for Finance and the Chief Secretary to the Treasury through the finance interministerial standing committee. There are such opportunities but, as was touched on earlier, uncertainty is inherent in the process, in that our earlier assumptions around capital and negative consequentials have not, ultimately, prevailed.

Ultimately, that reflects the way in which the wider UK fiscal framework operates. In respect of supplementary estimates, we find out what our final allocations from the UK Government will be very late in the financial year. We seek to provide as much information as possible to ensure that the budget, as amended for the financial year, reflects the position as we understand it. Of course, the position is not finalised until the end of the financial year—or even beyond it. That is challenging, so we seek to strike a balance. I acknowledge that, within that, judgments have to be made, but the situation is, ultimately, just reflective of how the UK fiscal framework operates. Scott might want to add to that.

There is a persistent timing issue: supplementary estimates have been finalised pretty late in recent years. We need to complete the spring budget revision and we have a lead-in time for that that we need to hit, we need to reflect funding changes within the document and we need the figures in order to balance the budget position. We engage regularly with Treasury officials and we get an indication of the likely position, which we have incorporated in the document. As you can see from the subsequent information, figures have varied quite significantly from the indicative figures, particularly on resource.

10:15  

Thanks very much. Before we move on, I want to thank you for providing detail on the reserves in public corporations, which the committee did not previously have. It is interesting to note that you have outlined where only half a dozen corporations stand on public reserves. I had imagined that dozens of organisations had such pots of money, so it is good to hear clarification that there are only half a dozen.

We will open up to questions from members, with the first questions from Liz Smith.

Notwithstanding the difficulties with timescales and uncertainties—which I think we all acknowledge, as a finance committee—I will take you back to comments that you made in reply to the convener’s question about unallocated sums in the health capital budget. You were clear that you were giving a broad spectrum on a range of capital projects; you did not give us details on what those projects are. I ask this because, in recent weeks, the public have seen that some capital building projects have been paused. Can you give us a bit more detail on what the money is being held back for?

I clarify that the money is capital and has not been allocated through the spring budget revision that you refer to.

Indeed—but the money is being held over.

The money is being allocated in-year and is part of the spring budget revision for 2023-24.

But the money is not being spent.

As I say, the money would be classified as capital expenditure to support the existing wide-ranging variety of work within the health portfolio. I cannot provide you with a line-by-line list of all of the various expenditure that is classed as capital expenditure within the health service.

I am not asking for a full list. In terms of public perception, the public see that certain building projects have had to be stalled. If there is unallocated money, I think that the question in the public mind will be to ask why that money is not being spent when there is obviously a very considerable tightening of the public purse?

Clearly, as I touched on earlier, we will have an exceptionally challenging set of circumstances around capital over the medium term, which the committee appreciates. Those circumstances form the context in which decisions on future capital projects—not just in the health service, but more widely—are considered.

The budget, of course, relates to the current financial year. This relates to ongoing activity that is part of the capital expenditure of the health service. I can appreciate the question about perception about money being allocated, but it is important to make the distinction between what is happening within this financial year—supporting ongoing NHS capital expenditure that covers a range of areas, which, I am sure, the committee appreciates—and what we are looking at from 2024-25 going forward, in the context of the capital constraints under which we will be operating.

I understand that, minister. I think that you mentioned earlier that we always have the argument about underspend; there is not always good understanding about that. In this case, I think that questions will be asked because there is money that has not yet been marked as being for particular projects, or at least there is not—shall we say?—entirely full transparency about it. That is our difficulty in trying to explain it to the public.

I make the point on allocation and budgets that at the outset we allocate full amounts, but clearly there are developments, as the year progresses. There can be underspends, slippage or targeted savings, which can free up additional capacity. That applies to resource and capital and reflects the usual routine in-year budget management.

The challenges that we are facing were, of course, set out by the Deputy First Minister in the letter that she sent to the committee in advance of the UK autumn fiscal event. It is important to make the distinction that we are not in a situation where budgets are being set with some funding unallocated, but as we progress through the financial year, owing to the dynamics that I have referred to we will always seek to ensure, when resource or capital become available, that funding is effectively allocated to support the in-year position across public services.

I am sure that it is a timescale issue. It is difficult to increase the transparency of how budgets work, but to make it clear we should, if there are specific projects awaiting that money, know what they are. That is the key issue, because—let us be honest—in recent years we have had big arguments about underspends at the end of the year, and the reason for underspend is not always clear.

I will move on to a question about the revised fiscal framework. It has obviously increased the Scottish Government’s flexibility in relation to its borrowing powers. Has that had an important effect in terms of helping you to address some of the constraints that you face?

I think that, in the guide that we have provided to the committee, we refer to the additional flexibility around the reserve being welcome. I appreciate that we are right now operating in a challenging environment for public finances, but we highlight that that greater flexibility will be of considerable value in future years. For example, over the medium to longer term there will be an increase in our scope to borrow. Of course, we have to borrow sustainably in respect of capital, but the flexibility will increase our scope to borrow, over time.

Will that give a little bit more certainty to the planning process for capital spending in the future? Will it be beneficial to the Scottish Government to work with increased flexibility?

It certainly could be beneficial, but availability of capital is, of course, only one element: many other factors determine the viability of capital projects. We recognise that there have, in recent years, been challenges in terms of supply chain shortages and inflation. Pressures within the construction sector can have an impact, as well. Capital resource being available is not necessarily in itself a guarantee that an organisation’s project can progress at the pace that it would want.

Broadly speaking, given that the challenge that we face right now is that lack of capital is constraining what we want to do, the additional flexibility is welcome. As that grows over the coming years, it will be of benefit.

Okay. I will ask one final question, if I may, convener.

When it comes to capital investment, pressure on supply chains and greater inflation in the construction industry, for example, have obviously been among the difficulties for the UK and Scotland, recently. They have made things very difficult. Does the Scottish Government foresee those easing a little in its planning for big capital projects for the future?

There have certainly been changes from the position that we were in two years ago. Of course, the challenges persist; we have to contend with higher costs and the challenges that come with them, as a consequence of the period of high inflation that we have had. Inflation is still high, by historical standards. That presents ongoing challenges, as do the other factors that we have touched on.

We are committed to working within the limited flexibilities that we have, and to ensuring that we can work constructively and collaboratively to deliver capital projects. However, we have to set out very clearly the challenges that we are facing and their consequences for the delivery timescales of various projects.

Good morning. I will follow up on a point that Liz Smith made. I have raised with the Deputy First Minister a question about inefficiency related to the annual budget process and significant in-year changes. It seems to me that that must incur a significant amount of sunk costs in redoing and repositioning things, and so on. Am I right in having that perception, and is it also your perception?

Would any of us start from this position? I do not think so. Clearly, we operate within the broader UK fiscal framework. I cannot give you a prescription for a revised approach for the whole UK. The situation presents significant challenges. I think that an approach by the UK Government that was more cognisant of the impact on the devolved Administrations and their significant responsibilities would be in everyone’s interests. That is not a political point—it is a technical point about how we do things, which I think could be improved.

Clearly, the situation creates challenges. We are getting towards the end of the year and are anticipating negative capital consequentials. What should we do when we are anticipating negative capital consequentials and have a requirement to balance the budget? Let us remember that we cannot spend a penny over budget and that we have very limited capacity to carry forward budget—barely more than 1 per cent—through the Scotland reserve. I have characterised the situation previously as trying to land a jumbo jet on a postage stamp. There are challenges.

There are various ways in which that could be improved—I am sure that the committee will have various views on this—but ultimately, the case more broadly is that every aspect of the public finances in Scotland is driven by decisions of the UK Government. The process, which does not get as much attention, and which we are considering this morning, also creates challenges.

Ultimately, there is asymmetry in respect of information that the UK Government has and information that we get. We have to make decisions based on assessment of risk and we have to take a cautious prudential approach and ensure that the budget balances at the end of the year. That creates challenges. I do not think that it is inevitable that we should have challenges because of processes related to devolution within the UK. Those things could be addressed, and the matter is worthy of consideration. Certainly, if the committee has particular views on it and wants to engage either with us or the UK Government, I would be very interested to have such discussions.

You have set out what I thought, and very clearly. I suppose the point that I am making is that there is a cost to the inefficiency. If you were working in a law firm, you would itemise every hour to say what goes to this client and what goes to that client. Have you ever considered collecting the cost of inefficiency as fiscal events occur, and of late notification? A number being put on that inefficiency could very well be quite compelling.

That is interesting, because one of the things that has emerged in previous years is a question about provisional outturn and why money was not spent in the previous year. It will be spent; it will have been carried forward. If we were to spend money in March rather than in April, just for the sake of it, that would be quite inefficient. That would be allocation of capital and resource spending simply for presentational purposes when the accounts are published. That is, obviously, something that we avoid.

Particularly during the pandemic, we sometimes had significant funding through consequentials coming late, which posed challenges. For example, we saw higher amounts in the reserve being carried forward. All of that was discretionary spend; all of it was applied and no discretionary spend was lost.

You made a point about not having certainty; of course, that leads to challenges. I recognise the committee’s particular interest in public service reform and I know that you are very engaged on that. Is what happens the optimal, efficient and effective way to manage the wider UK finances between the UK Government and devolved Administrations? I do not think so. I am not here to criticise; I think that the matter is worthy of further consideration.

If the committee has views on that, I will, as I said, be very keen to engage, because I feel that there must be a better way to do things. I recognise there could be trade-offs and that there can be benefits from other approaches—which might also come with particular challenges. I note the particular points about having to manage our in-year position with the tight constraints on what we can carry forward and late provision of information. That is obviously not the case only for the Scottish Government—it will be the case for all the devolved Administrations, and in the relationships between the Treasury and other Whitehall departments. It is a broader issue that ultimately reflects the fact that we are still in the position of the process being driven by the UK Government’s approach.

10:30  

I will finish by noting some of the examples that you have given and pointing out that such additional post-Covid sums were exceptional—I think that we all appreciate that. Now that, with the recent changes, we have a more bedded-down fiscal framework, we have actually baked in some of these inefficiencies, and we need to try to understand what they might look like.

I have one other question that follows on from that. In reality, to what extent will the complexities, uncertainties and inefficiencies in the Scottish and UK Governments’ fiscal framework be reflected in the fiscal framework that is developed for local councils through the Verity house agreement? In other words, will they, at an even deeper level than might have been the case before, be saying, “This is no use to us, because it doesn’t allow us to plan”? Do you expect that what you as a Government are dealing with will, in effect, be replicated in that way?

As part of the progress that we are making towards the fiscal framework, there are things to do with baselining, for example, that reflect the opportunity that we have through that direct relationship between the Scottish Government and local government.

Of course, as has been touched on, the broader context in which we operate is determined by the UK Government. I know that issues such as multiyear funding settlements are routinely raised by committees and members across Parliament, but, again, the challenges that we face will ultimately come down to decisions taken by the UK Government. We have been through what has been, economically and fiscally, a quite volatile period, but in the context of a politically quite volatile period for the UK Parliament and Government, with changes of personnel at the most senior levels. Again, that creates challenges, and there will always have to be a degree of realism about what can actually be achieved.

It is important to remember that, notwithstanding the Scottish Government’s aspirations around Scotland’s constitutional future, ours is ultimately a devolved Government within the United Kingdom, and the decisions taken by the UK Government will be predominant in the context within which we operate. Any of the work that we seek to carry out as part of our relationship with local government, and indeed with other partners, must always be cognisant of that context within which we operate. The level of discretion and autonomy that is available to an independent state is not available to the Scottish Government as a devolved Administration. That is not a political point—I am just stating the facts of the matter.

I come back to the earlier point that improving the way in which decisions are taken within the United Kingdom, the amount of information that is provided and the timelines would be in the interests of the Scottish Government and, indeed, our counterpart devolved Administrations.

I will watch that with interest.

My last point comes back to a question that I previously asked you about police pensions and the extent to which the increase in them—and, therefore, provision for them—came about a result of Covid-19. I thank you for your reply, in which I think you pointed out—and I am paraphrasing here—that that was not due to Covid-19 but was the result of the move from a final salary to a career average pension scheme. The legal challenge in that respect will also apply to other public sector professionals such as teachers, because they face the same issue, but the fact is that we have seen a difference with regard to the rate at which police officers are retiring. As a result, the change to the provision—compared with that of, say, teachers—was not necessarily entirely due to the change to the police’s pension arrangements, given that it did not equally apply to teachers. Do you have any reflections on that?

Let me take that away and speak to pensions officials about it, because I do not want to give you an off-the-cuff answer. I would rather consider it in more detail. If you are happy for me to do it, I will speak to pensions officials, write back to you directly and copy the committee into that correspondence.

Thank you.

Are you sure that you do not have any more final questions, Michelle?

Coming back to the NHS capital budget, I look forward to seeing the detail that you can provide on the list of projects. You mentioned this in one of your earlier answers, but do you have any indication of how much of the £235 million has been taken up by inflation? Will that amount cope with construction inflation, and do you have an idea of the proportions in that respect?

I cannot give you a specific analysis of the time value of those resources compared with what it was 12, 18 or 24 months ago. There will be broader statistical analysis of the overall impact of inflation within the construction sector and its impact on capital projects. I am happy to source that and provide it to you.

I suppose that our questions relate to the pipeline of work. We have heard ministers—you included—talk about a 10 per cent cut, as you have called it, in capital expenditure, but it seems to have resulted in a 100 per cent cut in capital projects going forward in the NHS or in a full pause while you wait for further clarity. It would be very useful to get an idea of how much of that relates to legacy spend that has already been committed and therefore has to be coped with.

Perhaps I can contrast that a little bit with your approach to net zero and just transition. Capital spend in the NHS has gone up by £235 million, while the net zero and just transition portfolio is seeing a net decrease of £217.9 million. Is that a decision that ministers have taken, or is that just the reality of where the projects find themselves?

You touched on it yourself when you mentioned capital spend; it is always about where we are with existing commitments and what requirements have to be met, and I know that that has been of some interest with regard to the capital allocations in the 2024-25 budget. As far as the net zero portfolio is concerned, either it has not been possible to deliver certain projects or changes to the profile of projects mean that they will fall in another financial year. There can be that kind of movement, given that the horizons over which capital projects are developed and actioned can go across multiple financial years. A number of different factors are reflected.

Moreover—and more broadly across the budget, including in resource—there can on occasion be demand-led schemes where the demand has not been what was anticipated or forecast. We have particularly sought to identify as early as possible where that sort of thing might emerge, so that we can reallocate the resource in an effective way. In certain areas—net zero, for example—it has not been possible to deploy the resource in-year, and as part of that in-year management, the capital has been reallocated.

The contrast is quite striking, though. You are right in the detail that you have provided—there is a lot of delayed capital spend, including for heat in buildings projects, vessels, piers programmes, and port works at Uig, Ardrossan and Gourock. None of these things is happening. Is this portfolio worse at delivering capital expenditure and its capital programmes than the NHS?

It just reflects the particular circumstances that attend these particular projects. As I have said, the commitments are there, but—and I touched on this earlier with regard to capital—different aspects and factors can have a bearing on the actual timeline for delivering capital projects. I think that such elements—indeed, we touched on the same thing with regard to business cases—are reflected in some of the decisions taken in that particular portfolio.

Given that there is also a net decrease of £98.8 million in expenditure on the education side of things, it feels a little bit as if you are saying, “We can make this kind of short-term coping investment, but we are really struggling to do some of these longer-term projects and invest in the economy, net zero and education.” Is that representative of your feeling with regard to how we are delivering this capital expenditure?

In general terms, I would say that you have touched on a very important point. With any programme of public service reform, any spend-to-save approach or any investment, what the constraining of budgets will mean for any Government—and it is one of the effects that we are still reeling from after the austerity that we have had at various points over the past 14 years—is that it will have to focus day to day on key, mission-critical tasks. Often the challenge that we have with reform is that we need to identify parallel funding to support change and transformation. That is just a general point, but all Governments have to contend with such things.

What we are seeing feeding through to next year’s budget, particularly around capital, are the consequences of decisions taken by the UK Government, which predominantly impact the discretionary fund that we have available. We are trying to manage that impact in a way that is consistent with the principles and values that the Government has articulated, in recognition of the key and central role that the NHS plays, not just in delivering public services, but as a key economic actor within the wider Scottish economy, too, and in recognition, too, of the key expectations that Parliament and indeed the public have that it be resourced adequately. That, again, has been reflected in the decisions that we have taken.

Is that really the case with capital, though? We have a very under-delivered programme that already has huge backlogs, and you are pausing all new developments to try to bring the backlog of programmes in the capital development plan forward.

Capital projects have been impacted by what we have been through over the past four years, since the onset of the pandemic. We came out of the pandemic into a cost crisis. It is remarkable to think about the last four years: we had a global pandemic—the worst, in fact, for a century; a cost of living crisis; inflation at its highest level since the 1970s; and major conflict on the European continent. Moreover—and you will correct me if I am wrong—we had the Prime Minister whose tenure, the shortest of any in British history, ended with a catastrophic mini-budget. That is the environment that we are operating in.

Some of those factors are global and macroeconomic and not in the gift of any one Government; some are a consequence of situations that have been exacerbated by or which are directly attributable to decisions that the UK Government has taken. That is the context for all capital projects and all investment decisions that have been taken over the last four years. I think that it is extremely challenging, but we are seeking to work our way through that and to be very transparent about how we are doing so.

I have a final question on the education side of things. I note a £29.8 million increase for the Scottish Qualifications Authority to support its on-going activities. Could you tell us what that money is for? After all, this is an organisation that, in 2021, we were told was not fit for purpose and had to be scrapped, because the leadership was failing. Should we be giving these people £29.8 million to spend when ministers have already decided that they are not capable of running their own organisation properly?

Perhaps I can clarify this—indeed, I sought to provide an answer to the convener earlier. That increase came about as a result of pay awards, an increase to appointee costs, inflation elements and other operational costs. In other words, it was all about pay and operational expenditure.

10:45  

I will finish on the social security side. You have touched on some of this already. There is a £284.2 million increase for demand-led expenditure, with a net impact of £50 million, given that there are areas where forecasts have decreased—I understand that. There has been an extraordinary rise in out-of-work benefits since the pandemic, which is a huge challenge across the UK and internationally. Is that something that ministers discuss when they talk about a demand-led budget? If that trend continues, our ability to cope with it within our resources must be a real concern for ministers.

Yes, it is something that we monitor carefully. The forecasts are produced by the SFC. We monitor the position carefully both for our end-of-year management and in looking at the longer-term trends.

On the broader point, the issue of those who are not in work due to ill health is topical and was covered in the press today, but it is also something that the Cabinet Secretary for Wellbeing Economy, Net Zero and Energy, Màiri McAllan, touched on recently in a speech in which she recognised the challenge and considered the role that we all have to play right across Government in supporting more people back into the workplace. The social security aspect is something that we monitor in-year and pay very careful attention to. We focus as well on the longer-term trends, and I know that the cabinet secretary is keen to engage on the broader point about labour market activity.

There are clear economic effects from people not participating in the workforce. That would be of concern to us because of the impact on the taxation take. I know that you are not in the Cabinet, but do you know whether that is being discussed in the Cabinet? The trend appears to me to be more pronounced in Scotland, although it is significant across the whole of the UK. We also have a higher unit cost in Scotland because of the Government’s decisions and how it is spending money on social security payments. We are more exposed in this country. We already know of the £1.3 billion shortfall in the block grant allocations by 2027-28 against the social security budget. Do you think that the Government is getting a grip of this and understands its exposure? Does it have a plan to do something about it? I know that you are saying that you are aware of it, but what will the Government do to try to deal with it?

In saying that we are aware of it, I was just addressing the point that we recognise that issue. Of course, we are considering how the Government responds to those trends going forward. The system that we have in Scotland is still quite young. Of course, we will collectively develop our understanding the longer the system is in place and the further it embeds. We appreciate the points that you articulate about long-term sustainability and resource.

Again, this is something that we are carefully considering that will inform decisions that we take on the budget, but it is important to recognise that the support that has been provided through the social security system is invaluable to the individuals who receive it. It is an investment in the people of Scotland as well. It is important when discussing this matter that we recognise the impact for the individuals who receive that support and do not ever allow that to be lost when talking at a high level about numbers. The point that you make ultimately is that we need to be able to meet this expenditure on an on-going basis. That is something that we take very seriously, both from the perspective of public finances and from the perspective of the administration of the social security system directly.

Going back to some of the stuff that has already been touched on, I was interested in a phrase that Scott Mackay used earlier:

“based on discussions with the Treasury”.

I had imagined—obviously wrongly—that in England they spend £100 million on the national health service and then we get £8 million or so as a consequential. I had imagined that it is all factual, the figures are there and it is automatic. The phrase

“based on discussions with the Treasury”

suggests that it is a lot more subjective than that. Is that because the Treasury itself does not know what the spending in England is? For example, it does not know whether the NHS will overspend or underspend a bit, and that in itself will impact on us. Is that part of the problem?

I do not want to risk in any way being perceived as seeking to speak on behalf of the Treasury, but I will ask Scott Mackay whether he can offer some reflections from the experience of officials.

The final figures are firmly based on the changes in funding for UK departments. Obviously, as we go through the supplementary estimate process, there is negotiation between the individual Treasury teams and the equivalent UK departments as they refine what the requirement is for the supplementary estimate. It is a developing position and we try to engage with our Treasury team to get a sense of how that position will pan out.

As we have said already, the Treasury team know that we have a requirement to deliver our budget revision to a certain timetable. There is a commitment from them that they will give us an emerging picture as early as they can as we move into January, so that we have an idea of how things are developing. We then take a judgment on what funding we can put in the SBR in advance of having that final sign-off. However, that final sign-off is absolutely Barnett based. We get a line by line analysis of the individual changes for UK departments.

Will the timescale for that be well after the year-end?

No, that is what the minister was referring to earlier. We got that by the end of February but, obviously, that was too late for us to have incorporated all that detail.

It sounds as though it is not a lack of willingness on their part, but also that they are a wee bit in the dark. Sometimes we get announcements at Westminster that the UK Government will spend £100 million on X—it came up quite a lot during the Covid pandemic—but we do not know whether that is new money, in which case we get a share, or it is a reallocation of existing money. Is that part of the problem as well?

Yes—

Just before Scott Mackay comes in, I will make the point that we are four weeks or so before the start of the next financial year and we have a UK fiscal event tomorrow. Everything that we know in the Government and, indeed, I think around this table is based on speculation that we will have read in the newspapers. In terms of the overall process, you can understand the challenges. That is just reflective of some of the broader challenges that can emerge in terms of what the UK Government will do. Sorry, you can come back in, Scott.

The Treasury is usually pretty good at giving us an indication as to whether it is new money or money from existing budgets, and the default is usually that it will be from an existing budget. There is always a challenge, because funding can be announced and the Treasury will say, “This is new money,” but then the amount can be refined over the course of the year, or it can turn out that we do not get confirmation of that amount until the supplementary estimate. The Treasury does only the main estimate and one supplementary, so there is limited opportunity for updates of the in-year position.

We could talk about the £500 million of local government money that was announced. The Treasury has said that that is new money. It might be that that is confirmed in the budget tomorrow. It might be that we do not get that until the main estimate. It might even be that we do not get it confirmed until the supplementary estimate because, all the time, there will be dialogue between the Treasury team and the spending department on what its requirement is.

The UK Government has rehearsed publicly the pressures that are on public spending. Additional funding is given only on the basis of absolute need, so often things can be left right to the supplementary estimate, because that is when the Treasury is getting the final position from a UK department on what its funding requirement is. There has been pressure on all UK departments to contain spending, and that is what filters through at the end of the year.

That is helpful in allowing us to understand the position that you are in as well.

When we get to the end of the year and there is an overspend or an underspend, I look at it to see whether it is around 1 per cent. If it is around 1 per cent, I have to say that I think that that is very good. I know that the numbers are very big and that 1 per cent is quite a big number, but I think that for most of us, in our own personal spending, we would never get it within 1 per cent. Most businesses would not get within 1 per cent. That is just by way of comment.

We almost have to target a level of underspend so that we do not go over, but if we did not land in that space and went beyond 1 per cent—it is slightly more than 1 per cent, given what the reserve represents as a carry-forward—that would be resource or capital that we have lost. It is a challenge and I think and hope that, collectively as a Parliament, we are getting a bit more accustomed to that reality and that, when underspends are reported as part of a provisional return, it is just part of a routine operation of the fiscal framework rather than some suggestion that there has been resource that could and should have been allocated that was not.

I fully agree with that.

I will move on to some specifics. I am going through the guide, so hopefully the paragraphs match.

I hope that you are not going through every paragraph.

Not every paragraph.

That is good.

I will stay within the 22 minutes that you took.

Paragraph 18 talks about some overspends or additional funding for the Scottish Children’s Reporter Administration, the Scottish Social Services Council and Children’s Hearings Scotland. I do not know whether that is just strictly because of pay increases or whether there are other factors. As I think you know, the committee has been concerned about the number of commissions, commissioners and semi-separate organisations and I would be concerned if the costs of those were slipping.

I will see whether we can bring up the details. If we cannot, we will follow up.

That is largely pay and inflationary pressures that have to be funded.

I have not checked back to see what the percentages were but, obviously, pay is going up 7 per cent or thereabouts. Some of these are quite small amounts, but it is the principles that I am thinking about.

Paragraph 26 talks about £4.75 million for the Covid-19 inquiry. It concerns me a little with some of these inquiries that the costs can run away, which I think happened with the Edinburgh trams inquiry. Is there a control on such inquiries, or is it very much up to the person leading the inquiry what the costs end up being?

We are all familiar with the rules that govern these inquiries and their autonomy and independence.

Do they have complete autonomy?

When inquiries are established and in train, we of course comply with the legislative requirements .

Okay.

We have already mentioned prisons. Paragraph 47, on the justice and home affairs portfolio, talks about the reprofiling of capital for HMP Highland and HMP Glasgow. Is it your expectation that there has been such high inflation in construction costs that that might come down, so we could save money in the long run, or is it the case that, if we reprofile, the costs will inevitably go up?

I think that the environment that we are operating in right now is reflective of the sustained inflation that we have seen, which we touched on earlier. Inflation would probably be regarded as quite high had it not been for the context that we have just emerged from. We set out earlier the reasoning and the rationale as well as the broader capacity challenges in the construction sector. It is reflective of a number of different factors.

Costs could go up further or they could go down a bit—we just do not know.

11:00  

Given the various factors that can impact on capital projects, including some that are geopolitical, as we have touched on, I would not be in a position to say where things will be a year, two years or five years from now. I would defer to the broad suite of independent forecasts and assumptions that are freely and publicly available on these matters.

We have discussed capital expenditure and borrowing. I note that paragraph 89 says that

“The improved position has allowed the Capital Borrowing requirement to be reduced, by £150 million from £450 million”,

which means that the plan is to borrow £300 million, although that could still vary by the end of the year, presumably.

Decisions on borrowing, which are one of the few flexibilities that we have, are taken at the end of the year. The capital position has allowed us to move to the position that you have outlined.

Although the target is to borrow £450 million, which I think is the maximum that we are allowed to borrow annually, it is likely that we will end up slightly below that each year.

Yes.

On the financial transactions money, I think that £53 million is being deferred to 2024-25. Will you explain to us what impact that will have? If I am not mistaken, some of that was used for housing in the past.

I appreciate that the role of the financial transactions budget has been a matter of some interest. I think that the notification of the financial transactions reduction was fairly late and that the Treasury agreed to defer that to the following year, given the lateness of the notice. My officials can correct me if I am wrong about that.

There was a very late upswing in the negative consequential, so we have been allowed to defer it.

On your question about the use of financial transactions, the two largest users of financial transactions have been housing and the Scottish National Investment Bank. The squeeze on FT budgets means that, generally, because the profile of the budget that is available is going down, less is available, and that is compounded by the negative consequentials that we need to manage.

That could mean that there is a little bit of leeway for SNIB and housing next year.

Could you clarify what your question is, Mr Mason?

Mr Mackay has just told us that the financial transactions money mainly goes to SNIB and housing. Does that there will be a bit more leeway next year, or is that already built in to the budget?

We have set out the position for 2024-25 but, as we are reflecting on today, the final budget for 2024-25 will be determined by decisions that the UK Government takes. I made reference to the fiscal event tomorrow—I do not know what will be in that—then there will be the process of main estimates and supplementary estimates, and, of course, a general election is anticipated this year. Therefore, a number of factors can impact on the Scottish budget position during a year.

Our position is set out in the budget document. Any changes that materialise during the year as a result of UK Government fiscal events will, of course, be reflected in the normal way through the budget revision process.

Thank you. My final point is about paragraph 101, which covers the Scotland reserve. The idea is that

“over time the Scotland Reserve could become more of a genuine reserve of funds.”

That would allow us to save a bit. However, at the moment, as the Government has pointed out, there is just not the leeway to do that. Do you anticipate that we might be able to put money aside at a future point, or do you think that the pressure to always spend as much as we can is too great?

We have seen the Scotland reserve operate in different ways. Clearly, given the way in which we have to balance our budget, it is unavoidable that underspend will be generated, and, sometimes, that underspend will emerge after the end of the year. We have also seen the reserve play an important role when we received late consequentials, particularly when we were coming out of the pandemic period, which has allowed us to ensure that resources better align with the optimal time to spend them. We have seen the reserve operating in those two ways.

As to whether the reserve develops into more of a reserve rather than continues as a function for allowing money to be moved from one year to the next, that will depend on a number of factors. The most prominent of those will be the fiscal settlements that we receive from the UK Government, and there will be demand commitments and so on. Is there anything that you want to add, Scott?

The forward projections on the tax position show quite significant positive reconciliation impacts on income tax currently. One idea that has been floated is that we would deposit positive reconciliation in the reserve against future negative reconciliation impacts, but the scale of those impacts could be so significant that it would take up a significant chunk of the reserve even with the additional flexibility—the growth—that we will see in future following the fiscal framework renegotiation. A couple of reconciliations of £400 million or £500 million would exceed the limit and, as the minister said, we need that flexibility for year on year spend.

That is helpful. That is something that we will return to.

Good morning. Liz Smith and Michael Marra covered a lot of ground in relation to the additional capital spending in the NHS. You said that you will provide further information. Will that include a breakdown of projects that sets out whether the cost increases are inflationary and non-inflationary, whether those are new capital projects and whether there are refurbishment issues and so on?

People have raised concerns about the moratorium on new builds with me a number of times. That means that our NHS boards will likely have to invest more heavily in refurbishment because they will not be able to build new hospitals or facilities. Will that information be provided in your written response to the committee?

We can certainly incorporate the high-level impact of inflation on capital projects and of construction pressures in the construction sector in the response to the committee.

I am also interested to know where the issue is not just inflation but where there are simple cost overruns. I ask that that be included as well.

We will endeavour to provide as much information as we can to reflect the committee’s asks.

On a technical and process point, you have identified areas in which you can invest more or in which you need to increase capital spending. How does that process happen? How are the individual projects identified, and what are the timescales for that?

Is that in terms of capital projects?

In terms of the revisions.

Again, as I said, I am happy to see whether we can cover some of that in our correspondence to the committee.

The capital is in-year as opposed to the next financial year. It is there to support the existing position and the on-going cost pressures in the health portfolio. The capital is allocated to support the existing activity that is taking place in this financial year.

On your broader point about what those pressures are and, indeed, about the different ways in which capital is used, whether it be for new projects or for maintenance for example, I would be happy to try to pick some more detail on the issue of capital expenditure with regard to construction and maintenance.

I suppose that what I am asking is this: when do you first become aware, or when is it confirmed to you, that a project will need additional support in the current financial year, and how does that process work?

I ask Scott Mackay to talk about the engagement that takes place in Government to identify priority spend areas.

We have well-established monitoring processes that all portfolio areas feed in to with spending projections on both resource and capital. They are signalling, as early as they become aware of them, of additional funding requirements over the year. Part of what we have been talking about is the challenge of juggling that with the funding uncertainty that we have.

In addition to in-year monitoring. We have a well-established programme on and an awareness of the overall capital projects across each portfolio and the scope to vary the profile of those over the year. There is active management of that programme in-year. For example, if there is slippage in one area, we know that there is scope to advance some expenditure in other areas. A dialogue takes place over the year about what capacity exists in individual portfolio areas to redeploy such resources elsewhere.

Would some projects be reprofiled to allow the movement of additional capital to other projects that are facing difficulties?

We would actively manage that over the year. It is easy to think of capital budgets as just supporting new infrastructure projects, but there are other elements to it. For example, some research and development expenditure is capitalised and funded from capital budgets. Another example is equipment in the NHS that has been identified as a key area for investment. Obviously, we can bring forward spend on that more easily than we can bring forward spend to build a new medical centre or whatever.

I guess that point that I am trying to make is that, when making judgments on what is available and how we can deploy capital, some areas are more easily switched on than others.

That is what I am trying to clarify—the process behind it. As you said, decisions might be made to prioritise one area over another, and those might be perfectly reasonable priorities. However, it could be that projects are reprofiled, put on hold, slowed down or whatever in order to deliver in other areas or in areas where there is, say, an overspend or that face inflationary issues.

In relation to the £75 million and the £41 million for vessels and piers in the ferry services budget, how much of that is capital and how much of it is resource? Are you able to say? Sorry—I should have given you a little bit more notice on that.

The £75 million is entirely capital. What did you say the £41 million was for?

That was for phase 1 of the small vessel replacement programme.

That is entirely capital.

Okay—they are both entirely capital. I was going to ask where that sits in relation to road equivalent tariff funding but, as those are capital budgets, that would not apply.

Gillian Mackay was going to ask some questions, but we have just been informed in the past couple of minutes that she is due at another committee, which we did not know before we started this item, or we might have been a bit tighter on our time. I thank her for her attendance.

Incidentally, I was also going to ask about small vessels, given my constituency interest, but we have a statement this afternoon on Ferguson Marine, so the issue may come up there.

With that, we will end our questions on the instrument. I invite the minister to speak to and move motion S6M-12053.

Motion moved,

That the Finance and Public Administration Committee recommends that the Budget (Scotland) Act 2023 Amendment Regulations 2024 [draft] be approved.—[Tom Arthur]

Motion agreed to.

I thank the minister and his officials for their evidence. We will publish a short response to the Parliament setting out our decision on the regulations in due course.

I suspend the meeting for a couple of minutes to allow for a changeover of officials before we move on to the next agenda item.

11:15 Meeting suspended.  

11:18 On resuming—  

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Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2024 (SSI 2024/60)

Under the next agenda item, we will take evidence from the Minister for Community Wealth and Public Finance on the order. Mr Arthur is joined by Robert Souter, who is a senior tax policy adviser at the Scottish Government. I welcome Mr Souter to the meeting and invite Mr Arthur to make a short opening statement.

Thank you, convener. The Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2024 specifies a standard rate and lower rate for Scottish landfill tax that would apply from 1 April. The rates are consistent with the rates that are set out in the Scottish budget for 2024-25, which was published on 19 December 2023. The order sets out that the standard rate will increase from £102.10 per tonne to £103.70 per tonne, and a lower rate for less polluting inert materials will increase from £3.25 per tonne to £3.30 per tonne. Committee members will wish to note that the rates match landfill tax rates in the rest of the UK for the financial year 2024-25 as confirmed in the UK and Welsh budgets.

The Scottish Government is continuing to act to avoid any potential for waste tourism to emerge as a result of material differences between the tax rates north and south of the border. The increased rates provide appropriate financial incentives to support delivery of our ambitious waste and circular economy targets.

Thank you very much. I have noticed that, over the past eight or nine years, the inflation rate has been 31.5 per cent in the UK, but the standard rate is going up by 23.6 per cent and the net rate by 25 per cent. I realise that you have been effectively mirroring UK rates, but why is the increase lower than the rate of inflation, given that the whole purpose is to try to reduce the amount of landfill? Indeed, over the past decade, there has been a significant reduction in the revenue from the tax despite the costs going up.

Indeed, the revenue has declined as was forecast, and it will continue to decline as per the policy intent and objectives. As I said in my opening statement, the rationale for the rate being consistent with that of the UK and Wales is to avoid the risk of waste tourism from emerging. That rationale underpins the approach that we have taken with the tax.

There has never been any divergence, has there? Has anyone looked at what the cost of shipping a tonne of waste 100 miles is, for example? A rate of around £3 a tonne for inert waste does not seem very much. Is it likely that someone would ship a tonne of waste from Edinburgh to Newcastle or wherever to save £3?

I can appreciate that there will be a range of views but, along with seeking to mitigate the risk of waste tourism, we have always wanted to provide a degree of certainty and stability for the sector as well. Furthermore, we have a clear target towards the end of 2025 and our approach on tax policy is consistent with that.

I understand that the proportion of inert waste is about 35 to 40 per cent. Is that a significant increase on a decade ago?

Robert, do you have any information that you are able to share on that point?

Sorry, but can you repeat the question?

Yes. Has the amount of inert waste as a share of the total waste that is going to landfill increased over the past decade or does it remain fairly stable?

I do not have the exact numbers but, yes, it has increased slightly as a result of non-inert waste reducing more quickly.

Why is inert waste not reducing quite so quickly? Is that because there is no tax incentive to change, for example?

For non-inert waste—that is largely household waste, including black bin bag waste—there have been increases in recycling and a shift towards incineration. The same options are not available for inert waste.

I am inquiring because the evidence session after this is on a similar issue. The £102.10 rate that we have in the current financial year seems like quite a disincentive but the £3.25 rate does not. That is why I am wondering whether that has impacted significantly on the level of inert waste increasing relative to the level of non-inert waste.

It is certainly an important observation. However, of course, the policy of landfill tax sits as part of a broader suite of objectives aimed at achieving a circular economy, which I know that the committee has been taking a keen interest in. I am conscious that, more broadly, the committee will be beginning its scrutiny of the Aggregates Tax and Devolved Taxes Administration (Scotland) Bill, which I am looking forward to engaging with you on.

Just one last question. I understand that there has been a significant increase in fly-tipping across the UK. Do you know how much fly-tipping has increased in Scotland, and whether the tax on non-inert waste has impacted on that? There are suggestions that it may have had an impact.

On the specific interaction between the lower rate and the quantity of fly-tipping that we have seen, I do not have any direct data analysis that can show any correlation at this point, but I am happy to—

Sorry—I am asking about the higher rate, not the lower rate. The higher rate is more than £100 a tonne. The revenue to the Scottish Government is decreasing because less is going to landfill. Is that because there is a genuine and significant change in behaviour, or is fly-tipping going up? Is it more likely to be both those things?

I cannot speak to what particular factors are influencing that behaviour, so I cannot isolate the extent to which the relevant tax rate impacts that behaviour. The Scottish Environment Protection Agency works with a range of partners to address the issue, which sits in the broader environmental and circular economy policy areas.

If the committee has a particular interest in relation to any analysis that has been undertaken on the interaction between the higher rate and the propensity for fly-tipping in particular areas, I am happy to take that away to find out if there is any further information that we can provide. I note that the rate that we have set is on par with the rate that is set in the rest of the UK.

Do you want to come in, Robert?

No; I have nothing else to add.

Yes, it is on par with the rest of the UK, but if someone has 20 tonnes of stuff, they might pay somebody £500 to dump it in a field as opposed to pay £2,000 in tax; that is the issue.

My concern is that inert waste might not be taxed at a rate that is high enough to change behaviour, and that the standard rate might be taxed higher than it should be, despite the fact that it has increased by a rate that is lower than the level of inflation in order to encourage more responsible dumping.

As I said, I am happy to take that away. As I mentioned in my opening statement, we have a long-standing position on landfill tax, which is consistent with that of the other Administrations in the UK. Our policy objective is to ban biodegradable municipal waste going to landfill at the end of 2025. We are seeing the forecasted reductions in revenue; the direction of travel is consistent with meeting that ambition.

Private companies and local authorities are very responsible in how they deal with waste; they follow the regulations that apply. Have there been any prosecutions of unlicensed and unregulated dumpers?

I do not have that information available, convener.

I will share some anecdotal information. I watched a BBC programme about fly-tipping. It covered England, but I do not think that the situation will be much different in Scotland. Some businesses feel that they are very highly regulated as a result of the increase in fly-tipping but that SEPA almost turns a blind eye to those who are not. Therefore, revenue from the tax is decreasing not just because less waste is going to landfill but because more waste is being thrown over hedges and dumped in fields.

You raise a broader suite of questions about enforcement and the role that other partners play in that. The administration and enforcement of tax collection is a matter for Revenue Scotland, which operates independently as the relevant tax authority.

On your questions about the interaction of tax policy with specific behaviours, I am happy to take that away to establish what, if any, analysis has been undertaken on that, and I will ensure that the committee is furnished with any relevant information that we hold.

Okay; I appreciate that.

As the convener has been discussing, the issue is about whether the measures that we have to deal with the problem are effective. I think that I am correct in saying there have been a couple of prosecutions in Scotland, but this is about the deterrent factor. What modelling has been done to demonstrate whether the measure will have a really big deterrent effect?

Clearly, broader behaviour with regard to complying with environmental regulations goes beyond tax policy. Ministerial colleagues lead on those areas, and I would not want to speak about an area in which I do not have a direct policy lead.

The role that tax plays has been recognised. Important points have been raised. I want to have an opportunity to take those points away and come back to the committee to speak to how those factor into the considerations on rates.

As I have set out, the broad underpinning principle—the rationale—for the measure has been consistency with the rest of the UK. Correct me if I am wrong, but I think that the questions that the committee is asking are: has consideration been given to changing the rate to incentivise other behaviours, and how would that be balanced against any potential risk of waste tourism? Would that be a fair summation?

Absolutely. It is a very difficult area, because it is very hard to identify a lot of the bad behaviour. That is a really big issue. Any modelling that could be carried out on behavioural change would be very helpful, because that is what this is about, by and large.

Indeed.

I remain unconvinced that people will ship a tonne of waste across the border to save a pound, or whatever it would be. They are much more likely to dump stuff in a field a mile up the road.

As there are no other questions from colleagues round the table, we move to the next item, which involves formal consideration of the motion. I invite the minister to speak to and move motion S6M-12277.

Motion moved,

That the Finance and Public Administration Committee recommends that the Scottish Landfill Tax (Standard Rate and Low Rate Order) 2020 for SSI 2024/60 be approved.—[Tom Arthur]

Motion agreed to.

I thank the minister and his officials for their evidence today. I will suspend the meeting briefly to allow for a changeover of witnesses before we move on to the next agenda item.

11:30 Meeting suspended.  

11:35 On resuming—