Official Report 674KB pdf
Good morning, and welcome to the sixth meeting in 2026 of the Finance and Public Administration Committee. Our first agenda item is an evidence session on legacy issues, specifically in relation to finance, to inform the committee’s session 6 legacy report.
We will hear from the following witnesses in a round-table format: Stephen Boyle, Auditor General for Scotland; Lindsay Scott, technical officer, Chartered Institute of Taxation; Dr João Sousa, deputy director and senior knowledge exchange fellow, Fraser of Allander Institute; Michael Clancy, director of law reform, Law Society of Scotland; Professor David Heald, emeritus professor, Adam Smith business school, University of Glasgow; and Professor David Bell, professor of economics, University of Stirling. He never calls or writes, but I see David Bell more than occasionally in these rooms. In fact, we met just last Wednesday night at the Royal Society of Edinburgh, and he gave evidence to the committee a few weeks ago. I welcome all our witnesses to the meeting.
Before I ask David Bell to kick off our round-table format discussion, I say to our witnesses that, if anyone wants to contribute to the discussion, they should let me know—by a nod of the head, a finger or whatever—and I will bring them in as soon as I can. The idea is to have a very varied discussion. If we get stuck at any point, I will eyeball someone and ask them a specific question to move things on.
The reason I want to start with you, Professor Bell, is that I was quite taken by your remark, in the second paragraph of your submission, that
“The Committee’s experience demonstrates that effective fiscal scrutiny in Scotland depends less on formal powers and more on timing, focus, persistence and technical credibility.”
Could you expand on that, please?
Sure. The Finance and Public Administration Committee is, by and large, one of the most effective committees at Holyrood. I will start by talking about timing. A lot of the committee’s effectiveness has to do with making the right comments at the right time. There have been difficulties around that, given that we have a very compressed budget process.
It seems to me that having the ability to switch the focus to longer or medium-term issues, rather than focusing just on the budget, would prove particularly useful for the incoming committee. A move towards a focus on considering the sustainability of Scotland’s medium-term finances seems particularly important, given the pressures that many of those of us around this table are aware of and have commented on, such as the demographic pressures and the pressures that exist in relation to health and social care, public sector pay—which is an issue that has perhaps not had the attention that it deserves—and devolved social security.
The notion persists that it is better not to take a scattergun approach but instead to focus on some key issues. Perhaps that focus could be on some of the issues that I mentioned, because they are critical to ensuring that Scotland’s finances move in a fairly well-balanced way in the future and that they are not knocked off course by crises that are associated with reconciliations or forecasts that turn out not to be accurate.
As far as the committee is concerned, persistence on those key issues is an extremely important characteristic of its activity.
On technical credibility, thinking about finance committees in different parts of the United Kingdom, this one probably has the most complicated set of fiscal arrangements to deal with, bar none, and it has established its credibility through dealing with such things. Block grant adjustments, for example, are extremely important but are quite difficult to get your head around.
Indeed they are, and I agree that persistence is very important. The Scottish Government is now taking on board the fact that, if it does not respond to some of the points that this committee raises, we will simply continue to raise them until it does. That is very important. A moving-swiftly-on approach is not effective.
As you are sitting next to me, you can see the yellow highlighting on my screen, Professor Bell.
My question follows on from the comment in your written submission that
“effective fiscal scrutiny in Scotland depends less on formal powers”
and your comment just then that we should focus on medium-term and structural issues. We all agree with that, and it is where we have kept our focus, but I am interested in your reflections on the extent to which annual budgets mean that there is a continued focus on the nearside.
Also, the inclusion of public administration in the wider remit of this committee has enabled us to look at culture and how things are delivered, not just at the numbers. I am interested in widening out your reflections in that respect.
Culture is important. Too often, we do not challenge the assumptions on which we base our budgets from year to year, and inertia builds up without a close examination of why we are doing the things that we are doing. Annual budgeting does not help. It has been a problem for the United Kingdom economy for a considerable period of time, and one of the side-effects is low levels of capital investment by the public sector. To some extent, we can make short-term gain but cause long-term pain by not putting sufficient focus on investment. Of course, investment means investment in skills as well as in things, and that has suffered partly because of the focus on the relatively short term.
Professor Bell, I want to ask you about the fiscal framework in relation to what you said about difficult timescales. I think that we are all agreed that the current situation has not been satisfactory. I am commenting not on what the fiscal framework says, but on the timescale, which has been knocked about like a political football from time to time. Do you feel that having clarity about the timescale and perhaps reforming the fiscal framework would help?
At the moment, the fiscal framework is perhaps not fit for purpose. The immediate issue, it seems to me, is the growth in social security spend and the inability to easily handle wide variations in that spend. Scotland does not have separation between departmental expenditure limits and actually managed expenditure, which is problematic. It is a bit like an earthquake. You get the initial budget and then there are a variety of aftershocks such as reconciliations, problems with forecasts and so on. None of that makes it easy to do medium-term financial planning.
I agree with that point about the lack of a DEL-AME split. It does not have to be called DEL and it does not have to be called AME, but, ultimately, the Scottish Government’s budgets contain very asymmetric risks, particularly in relation to social security. If spending turns out to be lower than forecast, that opens up more opportunity to either put it into the reserve or spend it on something else. It can also overshoot, although there has not yet been a case where it has massively overshot. From looking at the previous years, I think the maximum that it has overshot by is £100 million, which is significant but, in the context of the budget, seems manageable. However, there could be a situation where that is not the case.
As I understand it, part of the thinking behind the devolution of these particular benefits in social security—for example, disability payments and care support allowance—is that they are not tied to the economic cycle. However, there are two things to say about that. One is that there is some evidence that the number of claims for benefits that people were already entitled to is driven by the economic cycle. The Scottish Fiscal Commission has highlighted that. The other thing is that decisions by the Scottish Government, regardless of whether we think that the policy is good or bad, have tied the devolved social security system more to the economic cycle. For example, the Scottish child payment is linked to entitlement to universal credit, which means that it then gets tied to the economic cycle. In the absence of anything that allows the Scottish Government to essentially not have to cut other parts of public spending to pay for any overspending in that regard, that could become a big problem, especially as the social justice portfolio is among those that are going to grow the fastest over the spending review period.
If we had a recession, we would end up spending a lot more on the Scottish child payment and would therefore have less money to provide other services.
That is correct. Also, it is not just the outer numbers that matter. As you go further into the financial year, less spending remains that you can cut in order to balance the budget—there is less for you to play with. That means that, if you end up with many more claims towards the end of the year, you might not have any non-essential spending to cut by, for example, December, because you will have already committed all your spending.
That ties in with the uncertainty that has led to some of the emergency reviews. You see spending running away from the forecast at the beginning of the year, and the longer you wait to review it, the less you have to play with to bring things back into balance.
Dr Sousa has, to some extent, elaborated on the point that I was going to make.
Dr Bell, social security is associated with the term “demand led”. Given the concerns of this committee, the Auditor General and others about the sustainability of a demand-led social security model, what is the alternative? Presumably, the only alternative, unless we consider cutting other areas, is to start to ration welfare.
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I guess that, if you are trying to work with a fixed budget, rationing works by changing the criteria by which you accept claims. To a certain extent, that is what the UK Government had been thinking about before it reversed its policy prior to the end of last year.
One thing that is important in relation to that spending—it is a point that I make in my paper—is that a lot of it is path dependent. Once you have started down the road of granting claims, those claims tend to persist and you are effectively making not just a short-term commitment to spend but a long-term commitment. A lot of the social security budget can be described like that. It is also true that a lot of public sector pay is, effectively, determined in the same way.
Stephen Boyle, you said that, in 2024, the Scottish Government
“continued to take short-term decisions, reacting to events and external shocks rather than making fundamental changes to how public money is spent”
and
“embedding recurring savings which will put the baseline budget on a more sustainable footing.”
You say that what we have seen is
“perpetuating short-term decision making”.
I am very happy to address that point. Before I do so, can I make a quick point about social security spending?
Of course.
I want to build on Professor Bell’s response to Mr Hoy’s question about rationing. For a number of years, Audit Scotland has looked at the devolved social security powers in Scotland, most recently adult disability payment, which is the largest of the devolved benefits in Scotland. Our conclusion is that the implementation of that benefit has been a successful project for the Scottish Government. The Government set out clearly what it intended to do to transition from the UK Government’s personal independence payment to the adult disability payment. However, one of the key factors that we identified in the report, which touches on the point about rationing, is that Scotland has adopted a different set of processes to establish eligibility. We refer to that as a much more light-touch approach.
To agree with Professor Bell’s point, once you are in that set of arrangements, it is very challenging to come out and consider its fiscal consequences. The block grants that are received for devolved benefits do not cover what the Scottish Government currently pays for adult disability. It will be important to manage the forecast. We are talking about demand-led budgets. That and health spending, in particular, are the two most significant parts of public expenditure to be managed over the rest of this decade. That is part of the ever-so-important recalibration of public services to deliver a more sustainable model.
To bring in the point that you asked me about, I refer to what we have continued to see in our audit work. As everybody knows, the Scottish Government has to balance its budget every single year. It does not have the same levers as the UK Government or other states, given the constraints in which it operates in the fiscal framework. Over the early part of this decade, the Scottish Government has had to intervene towards the autumn of a financial year to stop spending and divert funds. Our conclusion was that that feels suboptimal. Instead of mapping out how fiscal sustainability will be delivered, it is a reactive process. The Scottish Government needs a clear plan to move to what it states is a prevention-based model—a recalibration of public services that addresses the forecast £2.6 billion in revenue and £2 billion or so in capital funding—and the key to that will be the delivery of the strategies that the Scottish Government has set out over the course of the summer.
Before I finish, I note that the Scottish Government has set out to the Finance and Public Administration Committee more than 100 strategies that it is currently managing. Of the strategies that were set out in the summer, those relating to public service reform and reform of the NHS will be central to a fiscally sustainable model and a change of public services in Scotland. We cautiously welcome those strategies, but there need to be very detailed implementation plans in order to move to the next credible stage.
Yes, having a plethora of plans and strategies is an issue. There are about 38 in the climate change field alone.
You talk about the lack of detail on delivery in relation to the infrastructure workforce and the NHS. What level of detail would you like to see? What is required? The committee has raised the lack of strategic financial planning a number of times, and it is also raised in some of the submissions that we have received for today’s session. In a way, long-term financial planning works against some of the issues that we have touched on, such as demand-led services. The question is how we balance that, which I think is very difficult.
It is. The essence of many of the strategies, including those set out in the summer, is not terribly new. I know that this committee has held many evidence sessions on the Christie principles, and, as a country, we have been talking for decades about the ambition of moving to a prevention-based model and keeping people healthier for longer outside state health or social care provision. However, we have not delivered on that. There needs to be a serious medium-term financial strategy that aligns with service delivery strategies and very clear implementation plans. It is also about having clear national outcomes, measures and plans, which we have not yet touched on this morning.
Audit Scotland has been supportive of the national performance framework over its various iterations. However, it has not worked on implementation, because high-level indicators are not underpinned by detailed measures. We are keen to see progress around health and social care, long-term financial planning and public service reform that builds on the momentum from the summer of strategies, which will require implementation and difficult choices. I agree with Professor Bell’s points about public sector pay and the public sector workforce, which will be fundamental to moving to a fiscally sustainable Scottish public spending model.
I will move on to taxation in a minute, unless other members want to raise points on this theme.
You state in your submission:
“Coping with spending pressures in the context of minimal real-terms growth in the rest of the 2020s would be eased if there were belief that in-year top-ups and cuts would not occur”
The strong suggestion that we received in evidence from the Cabinet Secretary for Finance and Local Government is that the Government seems to think that they will occur. It is almost as if the Government is dependent on additional fiscal transfers during the year.
In the most recent financial year, we have seen clear evidence of changes in UK funding having a significant bearing on the Scottish Government’s ability to break even. It goes back to the earlier point that short-term decision making and delivering fiscal balance have been a recurring theme over the past three or four years. The committee has received correspondence from the cabinet secretary for finance, and that may bring into further debate the question of how satisfactory or otherwise the fiscal framework is.
There are a lot of moving parts, but I do not think that it steps away from the totality of needing to have clear plans to implement public service reform, a sustainable health and social care model and social security alongside workforce. Without those plans, my fear is that your successor committee will be discussing the same issues that this committee has been discussing.
Thank you.
Lindsay Scott, the Chartered Institute of Taxation states that a key aim is
“achieving a more efficient and less complex tax system for all”.
Will you expand on how devolved taxation and what we can do here can work in tandem with the UK system to produce a fairer system for all?
You are right—it is complex. A Scottish taxpayer is also a UK taxpayer and interacts with both tax systems. Polling that we did in 2023 discovered that only one in five people correctly identified income tax as being shared between the Scottish and UK Parliaments. That is a low proportion.
An awareness of Scottish taxes is important for several reasons. It informs public debate, which helps people to hold their political leaders to account. It also helps people to understand what taxes they are paying, whether they are compliant and whether they are claiming the right reliefs. For example, for income tax relief on pension contributions, an intermediate taxpayer has to take steps that a UK taxpayer does not. The question is, do Scottish taxpayers realise that they need to do that to claim the relief that they are entitled to?
You are also right that the Scottish Government has a significant role in raising awareness, and we feel that the committee could hold the Scottish Government to account and challenge it. Is it doing enough to raise awareness? How is it measuring that awareness? For example, is it asking His Majesty’s Revenue and Customs for information on how many intermediate-rate taxpayers contact HMRC to claim the additional relief that they are entitled to? Ultimately, if a taxpayer does not claim the right relief, it does not create a great perception of tax if they find out further down the line that they were entitled to something but did not know that they could get it. That is really important for the overall perception of tax within the Scottish tax system.
The committee has taken that on board. When we have taken evidence from the cabinet secretary, I and others have raised it. Is the issue a need for greater simplicity and clarity, as well as certainty?
Yes. A Scottish basic-rate taxpayer has to interact with four rates of tax, whereas a UK taxpayer has to interact with only one up to the £50,000 threshold. That is a significant level of complexity, and tax is complicated anyway. There is a need to raise awareness. You will never get rid of some of those complexities, because—you are right—they are inherent in a devolved tax system. However, if taxpayers are aware and there is correct guidance to enable them to navigate, that should, I hope—
Do you consider that there are too many bands in Scotland?
As an apolitical organisation—[Laughter.]
Just say what you think. I have made it clear that I think there are too many, and I am a member of the party of government. If that is your view, it is important that you feel free to express it.
The addition of bands creates a lot of complexity. It goes back to the point that people are interacting with four tax rates and have to take steps that a UK taxpayer does not need to take. Do they know that they need to do that? Are they claiming the pension tax relief to which they are entitled? So, yes, from a complexity point of view, additional bands certainly create an issue.
Michelle Thomson and John Mason are both keen to come in.
I do not want to take us on to a different thread, convener, but the Auditor General was reflecting on something that we might want to pick up on further. When it comes to the discussion about the shorter term and the longer term, one thing that the committee has looked at quite a lot in this session is financial memorandums, because of our disquiet that some of those have been insufficiently detailed because they have been linked to framework legislation. The Auditor General’s point, I think, was about how a burgeoning environment, which we can project, that will include ever more framework legislation will actively work against the long-term strategic planning and nearside detail around finances that we are looking for. Arguably, the situation is even more risky than the one that the Auditor General set out.
I am happy to accept Ms Thomson’s comments. This morning, I read many of the submissions to the committee, and the level of volatility and risk is growing.
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It adds to the complexity.
Absolutely. Getting it right is challenging for any Government or for any organisation or body that is charged with scrutiny, particularly in a context in which the Government has signalled its intention to reshape public spending and public services. Doing so requires robust transparency, effective oversight and a successful partnership between the Government and the Parliament, to ensure that the appropriate level of scrutiny is applied and that the figures that are presented through financial memoranda are reasonable and soundly based. I appreciate that the committee has seen both positive and less positive examples of that in the parliamentary session.
As you will undoubtedly know, we, on the committee, are not big fans of framework bills.
I want to pick up on something that Ms Scott said. She partly answered what I was going to ask, but my question is about public understanding of the tax system.
Ms Scott, you suggested that the committee could challenge the Government on that point. Who is responsible for improving that understanding? The Fiscal Commission has done some work on that, and so have the FAI and Professor Bell, but what should we say to the next finance committee? Should it challenge the Government or the SFC harder, or should members speak to witnesses differently when they come before the committee? Would that make it easier?
If an issue is raised in committee, that raises awareness, because it brings the topic of tax into the committee room. Ultimately, it is the Scottish Government’s responsibility to raise awareness of tax and to work with HMRC to do so.
There is merit in challenging the steps that the Scottish Government takes. How does it measure understanding and awareness? What steps is it taking? Is it speaking to HMRC and gathering data on pension contribution relief claims? It is about holding the Scottish Government to account and assessing whether enough is being done to raise awareness. Ultimately, it is not the committee’s job to—
I certainly think that not enough is being done, but the question is who should do it.
I accept that the witnesses do not wish to be drawn into a political discussion, but devolving further taxes to Scotland will, potentially, only make the system more complex unless efforts are made to make it more transparent. You see that in respect of rental income falling to the Scottish Government and in relation to various levies—effectively taxes—such as the tourism levy.
To what extent is it inevitable that, as we bring more taxes into the system, there will be less transparency? Could an independent organisation assess the point at which we start working for ourselves in the calendar year and stop working for the Government? The Adam Smith Institute used to call that tax freedom day, and lots of think tanks in the US explore that.
It strikes me that, given the complexity of the tax system—we have VAT on services, taxes and that sort of thing—it is becoming almost impossible for taxpayers to determine how much tax they actually pay, both at the Scotland and UK levels, on income tax and on the proliferation of new taxes. Is the lack of transparency just inevitable now?
That hits on a wider point. We are now a decade on from the implementation of the Smith commission recommendations, and we have a decade of insight, experience and, I hope, data. There is merit in reviewing where we stand. We should review the Smith commission and the package of taxes that we have—or have not—implemented for various reasons, and we should review the overall effectiveness of our tax powers.
It is sometimes good, before looking forward, to look back and assess what did and did not go well. If we undertook such a review, it would inform the discussion around the future of tax. The committee could play a strategic role in tackling some of the hard questions, such as what property tax will look like in Scotland in the future. It is not an easy question, but if we reflect on what we have done and hold an inquiry to gather views on what people think the future of tax in Scotland should look like, the committee can play a strategic, cross-party role in opening that discussion.
Another issue is the public’s understanding of Scottish devolved taxation. They think that we have tax-raising powers when we actually have tax-varying powers. That point seems to have been lost in Scotland.
Yes, and I think that having that discussion would help to raise awareness, because it would take it into the public domain, too. It all helps. It helps with awareness and, hopefully, with understanding—after all, awareness and understanding are two different things—and it also informs the debate about where we go next with tax in Scotland.
I will bring in Professor Heald and then Patrick Harvie. Professor Heald, you said in your submission that, in your view,
“too much policy effort has gone into minor taxes with limited revenue potential and not enough into managing the significant revenue-raisers, namely Scottish Income Tax, Non-Domestic Rates and Council Tax.”
Yes. You have to recognise the constitutional context; one reason for the Government wanting more tax powers is that it makes Scotland look more like an independent country and eases the transition to independence, which is the policy objective. There is a widespread public misunderstanding, however, that having more tax powers means more money. It means more money only if the tax raises more than the block grant adjustment. I have long argued for devolved taxes and I believe that they should be used, but I think that we have got to the point where the amount of fiscal risk taken on by the Scottish Government is too great in relation to its reserve holdings—that is, the Scotland reserve—and its borrowing powers. Therefore, one thing that I would like to see is a rethinking of the fiscal framework.
I was always opposed to the assignment of VAT as recommended by the Smith commission, and I anticipated exactly the kind of problems that have arisen, but I think that it is very important for the public to understand that getting more tax powers does not mean more revenues. What it does is tie the Scottish budget much more to the UK budget. As I said, I have long argued for devolved taxes, thinking that they would actually give more fiscal autonomy to Scotland, but the way in which it has worked in practice is that it gives you less fiscal autonomy, because you have to worry about what the UK Government is going to do about its own UK income tax. You will remember all the nonsense in the UK budget about changing national insurance and the “two up, two down” discussion. The Scottish budget is now much more dependent on what happens at Westminster than it was when there was mostly a block grant system, and that is what we have to think about.
I have not recanted my support for devolved taxes, and I welcome the fact that, in Scotland, we have a discussion about taxes instead of just asking for more money, but I think that we actually have a problem here. As David Bell said, the present fiscal framework is not fit for purpose.
Thank you for that. I reiterate that the committee has made it clear that we do not support the assignment of VAT either. We could argue about whether VAT should be devolved, but we think that its assignment would, frankly, be more trouble than it is worth.
I call Patrick Harvie, to be followed by Dr Sousa.
On that last point about VAT, I want to reassure Professor Heald that some members of the Smith commission were equally sceptical about that proposal at the time, despite the conclusions of the report as a whole.
We have talked a little bit about taxes at local level, but I wonder whether we can expand the discussion from the tax side of things to look at the finances of the local versus the national public sector in Scotland. We have collectively failed to reform the major local taxes, as has been mentioned, and we have also put more responsibilities on to local government, often for very good reasons. However, that has been incremental over time.
We have moved forward with the integration of health and social care, which makes absolutely sound sense in theory but has not been unproblematic, to say the least, in its implementation. There is also a lot of discussion going on at Scottish Government level—or at Scottish budget level—about whether the Scottish Government’s finances are sustainable, at a time when at least some local authorities are, I think, much closer to a crisis point than the national Government is.
Have we ended up with a fragmented landscape across the public sector more generally that makes it impossible, or very difficult, to undertake coherent scrutiny of the Scottish public finances, as opposed to the Scottish Government’s finances? If so, what should we do about it?
Are you positing that to anyone in particular, or are you just throwing it out there?
Preferably to someone who has an answer. [Laughter.]
We might have to leave that question in the ether unless someone it picks up. I see that Professor Heald wishes to respond.
Scrutiny will inevitably be complicated when tax raising takes place at three levels—UK Government level, Scottish Government level and local authority level. The problems with local authority taxation are political. For a long time, people have realised that using 1991 valuations for council tax is completely nonsensical. However, nobody dared do anything about it. That problem goes back 20 years to when the Burt committee reported, and the then First Minister disowned the report on the day it was published. Since then, it has become impossible to do anything about the issue.
I welcome the fact that the Scottish Government has held a consultation on council tax, although, conveniently, it pushes the process beyond the Holyrood election. We will get no reform of local property taxes unless there is a measure of political agreement in the Scottish Parliament. Otherwise, the practical difficulties will be enormous. For example, there has been an enormous shift in relative property values over the past 35 years, which means that people in some types of housing in some parts of Scotland will lose out relative to those in other parts of Scotland. We all know that, when it comes to tax changes, the people who lose money shout much louder than the people who gain money. Reform of council tax is very difficult. I think that it should go ahead, but, without having a measure of cross-party agreement on what should be done that sticks, the same discussion will be had in 10 years’ time.
I think that the chances of that happening are probably nil. The way I see it, we will probably still have the same system when we are in our dotage.
Professor Heald, could you go beyond purely the issue of council tax and address the issue of local government finances more generally? I am not talking simply about how local authorities raise money and whether we have a modern, efficient and fair system for that. We talk about the sustainability of the Scottish Government’s budget, but we are not having the same conversation about the sustainability of local services across Scotland. We are leaving that to councillors who have been given a legal duty that, as MSPs, we do not have—they all have to vote for a balanced budget, and we are making it increasingly impossible for them to produce balanced budgets.
There are interconnections between the different levels of government. Local authorities heavily depend on the general revenue grant and business rates, which are essentially a national tax.
One of the issues with the demand-led pressures on the Scottish Government is that local authorities take some of the consequential pain. I have previously raised with the committee the fact that I believe that devolution should involve policy variation, but, with the system that we have, Scotland has lots of items of what Northern Ireland would call above-parity expenditure, whereby benefits and conditions are more generous in Scotland than they are in England. It is very difficult to find cases that run the other way.
If we are to operate a system of policy variation within the devolved system, all the variations cannot be upwards, particularly when we are talking about kinds of expenditure that, because of the eligibility criteria and the political difficulty in reversing anything that is done, start pressing out other kinds of expenditure. In my memorandum, I make the point that Scotland has historically had higher health expenditure per capita than England. If you look at the public expenditure statistical analyses that are published by the Treasury every year, you will see that there has been a remarkable drop in the index of Scottish health expenditure relative to UK health expenditure. Health and local government are taking the pressure from a lot of the demand-led items.
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As I have argued before, the committee should be asking the Scottish Government to be transparent about what those above-parity policies are costing and what savings are being made by the below-parity policies. There is almost a fear of making that information public. It could be politically difficult for a Government, because people will say, “You’re going to introduce higher education fees.” However, if you do not understand what the drivers are, you will end up with a crisis in due course.
I was going to make a point related to what David Heald said about the interactions with the BGA and what David Bell said about the fiscal framework. The BGA and its system are not and should not be immutable; it should be up for discussion. Wales is considering changes to the design of its fiscal framework—I know that because, disclosure, I am doing some work for the Welsh Government on that. Northern Ireland will also be considering that, and so should the Scottish Government. For example, should we have a by-band BGA or a single BGA? How do we weight the different risks of that, and how likely are those risks to pan out? For instance, we have seen that, even if earnings in all the areas grow at the same rate, growth in very tax-rich bits of the distribution, particularly in London and the south-east, generate higher tax revenues in England and Northern Ireland, which are comparative geographies, than they do in Scotland. That might not have been fully understood at the time that the fiscal framework was set, which would be perfectly reasonable, because it is a quirk that is difficult to understand, but it ends up having important consequences. It is also very difficult to explain to people. That we are cutting services because income or tax revenues grew more strongly in some bits of England is a difficult argument to make. Therefore, changes should definitely be considered in future negotiations and reviews of the fiscal framework.
I was interested in the discussion on local finances and local taxes. I agree that council tax should be reformed and that revaluation is needed. The problem goes back further than 1991. The domestic rates revaluations of the 1980s were extremely contentious, and, even before that, in other areas of the UK, people were being told to rip up revaluation forms because revaluation was a political football—and it has been for nearly 70 years. I therefore think that council tax needs to be reformed but, like you, convener, I am sceptical as to whether it will change quickly.
The way in which the new council tax bands are being introduced in Scotland is actually very different from the way in which changes are being implemented in England. In England, it looks like council tax, but it is not actually council tax; it is something that is tagged on to council tax but contributes to national revenue, whereas in Scotland it will be local revenue. That is why the new bands have not been costed by the SFC.
We risk ending up with different bits of the housing stock having different valuations for the same tax, which is strange. There will also be lots of properties with an up-to-date valuation, as they will have been revalued. However, they will fall below the threshold for the new bands. What are we going to do with those revaluations? They involve information, and they cost money to do. I think the answer is that we are going to ignore them. That is a pretty strange thing to do, though—to ignore the fact that a house has been revalued at £900,000, say, but we will tax it on the basis of what it was worth in 1991. That is a pretty awkward situation for assessors and councils.
Indeed.
On the sustainability of local finances, I agree with David Heald that, ultimately, they are driven by the grants that authorities are given. They get some amount of money from non-domestic rates and some amount of council tax, but the vast majority of their financing comes from central Government in the form of general revenue grant.
Local authorities have legal duties to provide some services, such as social care. They are kind of bound to that—and perhaps that is what Patrick Harvie was alluding to. They are bound by certain things that they have to deliver; at the same time, they have no power to change what they deliver, and they have to try and balance the budget in that regard. That is true across the board in the whole of the UK, including Scotland, across local authorities. That is why councils in England have had to issue section 114 notices. We have not seen any of those in Scotland, but it is not impossible that that situation could happen.
Issuing a section 114 notice does not stop all spending. It restricts spending to statutory duties or to planning towards getting out of the situation. Ultimately, some of that risk is borne by the central Government, which has to underwrite some expenditure that has to be made statutorily. That is a really uncomfortable position, and it is absolutely right that that is not sustainable. We will probably end up seeing more actual rationing of the delivery of services through informal measures. For instance, a council might say, “We just don’t have as many people to provide this.”
Like having to wait six months to get a chairlift and that kind of stuff?
Yes.
That has been the case since I was a councillor in the 1990s.
On council tax, Lindsay Scott was talking earlier about the public understanding of the tax system. Most people I have encountered think that the council tax pays for all local government services. If you tell them that it is 14 or 15 per cent, they simply do not believe you—they think, “That cannae be. I pay £X a year. How can that possibly only amount for a fraction of services?” There has to be a level of education there.
João Sousa has made most of the points that I was going to make in responding to Mr Harvie’s points, although I have a couple of other things to mention.
I appreciate that the committee knows this, but I do not audit local government; the Accounts Commission does that. The Accounts Commission, with which I and Audit Scotland work closely, has reported extensively on some of the fiscal challenges that Scotland’s councils face.
The Accounts Commission has also covered integration joint boards in its reporting and, similarly, it points to the financial challenges that those organisations are facing. Those boards straddle health and social care, but they are local government bodies by definition. There is a clear sustainability concern there.
João Sousa is right: we have not seen the nuclear option being used by Scotland’s local authorities in the way that has happened in some English local authorities. The Accounts Commission has been very clear in its reporting about the scale of the challenge that is facing authorities, however.
I will make a couple of points to address other questions that you raised. One is about the reforms that the Scottish Government has indicated that it wants to make, which I mentioned earlier. Implementing the service renewal framework is one of the stated ambitions for the NHS in Scotland. One thing that we observed is that there was limited reference to social care in that strategy. The reform of the NHS cannot be successful without being clearly aligned with plans for the sustainability of local government services in Scotland.
You also asked about the scrutiny of local government. That is perhaps a question for the Convention of Scottish Local Authorities or councils to address, given that I have often heard them refer to the spheres of government as opposed to the tiers of government with regard to where scrutiny of council services and council performance should be undertaken. Is that an ambition of the Scottish Parliament or is it something for councils to engage in with regard to their own electorates?
I will finish on a wider point. As I noted in my submission, Scotland has not made quick enough progress in setting out the totality of its assets, liabilities, revenues and taxes. Your committee, of course, considers budget and budget scrutiny, and the Public Audit Committee looks at the consolidated accounts of the Scottish Government, but those consolidated accounts have a boundary, and they cover only the bodies that are within the accounting boundary. There are some significant public bodies that receive funding from the Scottish budget that are not included. For instance, local government is not part of the accounting boundary.
The Scottish Government has made some progress in moving towards more of what we would recognise as whole-of-government accounting for Scotland, but that has taken a long time. It would be a significant benefit if, in the next session of Parliament, there could be a much broader sphere of reporting to allow that level of scrutiny, whether it is by this committee or elsewhere in the Parliament.
That adds to the issue of transparency, which, as you know, is an area that the committee has pressed quite extensively over the months and years.
We have about 30 minutes left, and I want to be able to touch on public sector reform and one or two other things, if we can. First, however, I see that Professor Bell is keen to come in, and that John Mason and Craig Hoy have questions.
Only a small proportion of local government finance is supported by council tax—we have just made that point. The general revenue grant accounts for by far the greatest proportion of total spend. However, how the general revenue grant is allocated between Scotland’s local authorities is not something that tends to be looked at very much—I do not think that your committee has looked into it.
One of the things that have been talked about in some of the submissions is the need to do fewer things but to do them well and in depth, and that is what we try to do in this committee. There are lots of things that I would love to do, such as having an inquiry into public sector procurement costs and taking an in-depth look at the issue of local authority funding.
We work on the same distribution model that we have had for 30-odd years, with the addition of the funding floor about 10 or 15 years ago. The issue has been that, when some political parties or local authorities have tried to change that, there has been a huge kickback because, as with council tax, there are winners and losers. I remember that the Labour Party had a proposal to change the funding arrangements, which would have cost my local authority about £6 million or £7 million a year, and there was a huge hoo-hah about it. That is probably one of the reasons why the distribution formula is almost set in aspic, like the council tax.
Just to reiterate the points that David Heald made, we talk about fiscal autonomy for Scotland, but we talk very little about fiscal autonomy for our local authorities. In effect, we end up with local authorities that focus on their statutory duties almost to the exclusion of other things. I will come back to rationing, but I would just observe that those factors make local authorities less attractive places in which to work.
10:00
To be honest, every year when I was on the local government committee, and on a number of occasions while I have been on the finance committee, when COSLA has given evidence and asked for additional taxing powers, I have asked COSLA what those taxing powers should be and who should pay them. I have been met with complete silence. COSLA has to get its act together, frankly, and say what it wants and who should pay that before it comes here and makes woolly comments, which it has been doing for years and years.
I want to say one last thing. Stephen Boyle mentioned the sustainability of social care, which I have been writing about quite a lot in the UK context. That is an issue where you have to get everything together. You have to get the workforce together, but you also have to get the suppliers on board.
It is almost certain that more care home places will be needed in the UK going forward, but far fewer will be needed in Scotland. Last year, a net addition of 87 care home places was provided in the whole of the UK, and the population aged 85-plus is set to almost double in the next 15 to 20 years.
My constituency has a care home with a capacity issue because it is short of 15 staff members; it has only 70 per cent of the staff complement that it needs. Since 22 July 2025, the UK Government has ensured that no overseas care staff can come in, so we have a real difficulty there because a lot of people do not want to work in that sector. I think that money is an issue, but people are a bigger issue, particularly in rural and island Scotland.
We digress somewhat. John Mason has a follow-up question.
On local government finances, I think that everybody here has accepted that there is a problem and that it is very difficult to revalue or whatever. However, as I understand it, the aim of this evidence session is to come up with a recommendation for our successor committee. What are we going to say to that committee? I aim this at the Auditor General for starters. Are we going to say to future committee members that there can be no change because revaluation is too hard and that they should just forget about it? Are we going to say that they have to push for revaluation? Are we going to say that they have to push for a new tax?
I suspect, Mr Mason, that I will not be the first to notice that the committee’s ambition and inclination prompt it to seek comment more directly.
It is perhaps not for me to make recommendations to the committee. There is clearly an unresolved issue regarding the sustainability of local government finances. There is, of course, a risk with that—I did not make this point earlier, and I am glad to get the chance to reference it. The Scottish spending review illustrates that growth in the indicative areas around health, social care and welfare will make things incredibly difficult for other local government services. I am quite sure that the sustainability of local government finances, including through revenue allocation, council tax and rates, will be of incredible importance to your successor committee.
Should we just say that sustainability of local government should be a priority for it, without going into any more specifics? Do you think that that is the way that we should—
It feels to me that that will be on the work plan of not just the successor to this committee but the successor local government committee, if that is the model that the Parliament chooses. I think that it has to be.
Thank you.
I think that I know what the answer to this question will be, but it will be useful to get it on the record. It might be one for you, Mr Boyle. What should be the committee’s view of the Scottish Government repeatedly using one-off revenues to fund long-term commitments? You referred to the spending review. Recently, when we put to the Cabinet Secretary for Finance and Local Government the alternative set of figures for real-terms cuts to local government budgets in the years ahead, she said that something will turn up and that no Government ever sticks to a spending review. How do we get a Scottish Government to understand that the principle of budgeting by assuming that something will turn up is neither sensible nor sustainable?
As I mentioned in my opening remarks, in many of our reports over the past five to 10 years, we have identified the use of short-term, reactive interventions to deliver what the Scottish Government has had to do. It has to balance the books each year but doing so in that way is sub-optimal. That approach does not allow for planned spending outcomes from that public spending, nor does it allow for delivery of the reform model that the Scottish Government has set out as an ambition. There needs to be a vehicle not just to support effective scrutiny by this committee and Parliament but to help to transition and recalibrate public services. Planning for longer-term savings, supported by a clear implementation plan that is linked to a strategy, feels like a far more solid approach than having line-by-line intervention, as we have seen over the past three or four years.
I have been studiously quiet—uncharacteristically, you might say. Two cogent issues are intertwined here. Professor Heald was one of the few people to mention the constitutional aspects, and John Mason was one of the few people to talk about what we are going to tell the future committee to think about.
I will take us on a slight detour from where we are at the moment. Although constitutional issues crop up in relation to local government finance and the Scottish tax code, as it will emerge to be in the future, I would like to focus on the Scottish tax code aspects.
We have heard a lot about Lindsay Scott’s magisterial—if I might call it that—survey and why the taxpayer should be informed about the tax that they will pay. That is a crucial issue, and it raises questions about what we teach people in school and in other places of learning about our constitution and how it all fits together—the UK and Scottish elements—in a particular way in connection with tax. I think that, from this committee’s point of view, the constitutional value, which I would ask you to press the future committee to consider, is in proper consultation for good law making. Good law making is what we are talking about here. It might be bundled up in various ways, but we want the up-and-coming committee to look at the issue of making laws that are coherent, clear and effective.
I was also just thinking about interconnectivity in that regard. The Scottish Government has said that, if re-elected, it will introduce a Scottish human rights bill. That would affect public bodies across Scotland. My question is, to what extent is that properly costed, so that people who will be given rights under such a measure will know what they are, how to enforce them and how they will be enforced? That is quite an important point, because if we are talking about having a better, healthier, wealthier and wiser Scotland, knowledge about our rights—including in the context of taxation—is extraordinarily important.
The idea of having an annual finance bill is something that we would push for, and we hope that the committee can include that in its legacy paper, because reform of tax will increase as there are more taxes to reform. That is something that we would want to focus on.
Parliamentary scrutiny is also an issue for the future committee or, as we have talked about, future committees—one for public administration and one for finance—and talking about how that fits into the arrangements for allowing MSPs the opportunity to spend time on complex issues. We all agree that tax is complex. I knew only one person who had memorised the Income and Corporation Taxes Act 1970—it did not go well for him. In any event, the important thing is that we allow people space and time to consider those complex issues.
Lastly, there is post-legislative scrutiny, which Michelle Thomson talked about. If we do not post-legislatively scrutinise measures, we will not learn what went right, what went wrong and what needs to be fixed. That is another important thing for a future committee.
I will take three brief points and then move on to public sector reform, which is the last issue that we will touch on before everyone has an opportunity to make final wind-up statements, should they wish to.
I will briefly go back to the point about top-ups and in-year savings. That is a disastrously bad way to run the Scottish public sector, which is one reason why we need a bigger Scotland reserve and larger borrowing powers that are commensurate with the risks that we take on. The Scottish budget benefited by about £800 million because the UK Government backtracked on welfare reforms, and the Scottish Government is under pressure to spend that money because, if it underspends by too much, it passes the money back to the Treasury.
If you are going to run serious public sector reform, the top-ups that you get through Barnett could be used for that purpose. There is political pressure not to underspend, because people think that we can have more of the things that we want. However, the Parliament and the Government must recognise and persuade the UK Government that greater fiscal flexibility allows better management of the public sector. In-year spending rounds are just wasteful. They divert people from the long-run tasks and encourage people to spend the money early in the financial year, which means that there is nothing left when the cuts exercise comes around.
I will come back quickly on three points that Michael Clancy made. First, I would extend the point on literacy. The committee recommended a tax programme for new MSPs to learn—
It is all MSPs—it is for everyone.
Yes. We fully support that, and we would be willing to support such a programme if that would be useful.
I fully support the points about a Scottish tax bill. I appreciate the volume of work that the committee has done, which has been really good, but the work on considering the legislative process has been on pause since Covid. Members will no doubt have read the examples that we have put in our numerous submissions. Although some of those issues might have been fixed, we have current issues and potential issues on the horizon.
For example, the Law Society has a great long list of technical amendments that are important for the effectiveness of tax. On the Scottish building safety levy, the minister has today proposed amendments to increase the consultation on the regulations, which brings into question whether the regulations were the right legislative mechanism in the first place.
Wales has been doing some really good work in that area. It has fewer taxes than us, but it has found the time and space to consider that. There is a role for the next committee to pick up that work. My key ask would be to consider the work of the devolved taxes legislation working group and the challenges—there are challenges—and to try to get Revenue Scotland, the Scottish Parliament and the Scottish Government round the table to agree a way forward. That is really important for the effectiveness of our tax system. Having a legislative mechanism such as that would provide the opportunity to scrutinise tax legislation and to bring experts and stakeholders round the table to examine whether it works. I hope that that would prevent any unintended consequences.
10:15
I will try to be quick, because I know that the convener wants to move on to another topic. I support what Stephen Boyle said in response to John Mason’s question about the sustainability of local government finances being a priority for the next iteration of the committee.
On the use of non-recurring revenues and one-offs, the FAI has started work to quantify those things as much as we can. The committee could make a recommendation, should it wish to do so, for the Scottish Fiscal Commission to produce some sort of memo line in its tables that details the amount of non-recurring revenue and what the financial position might be without it, so that that information is available and the commission can be quizzed on it. Crucially, the Scottish Government and the finance secretary will also be able to be quizzed on the information.
The committee is keen to see progress on public sector reform. In a recent report, we said that it was
“a collection of disparate workstreams and sectoral reforms, with no overall strategic purpose and with limited oversight and direction from Government”.
We recommended that
“the Scottish Government sets out a clear vision and strategic purpose for what it wants to achieve with its public service reform programme”.
I do not know who wants to come in on that. I will pick on Stephen Boyle first.
Like the committee, Audit Scotland has commented extensively on public service reform, not in and of itself, but as a vehicle for supporting fiscal sustainability. We welcome the Government’s strategy to reform public services as it set out in the summer. As I mentioned earlier, alongside that, we did not see a detailed implementation plan, which will be an essential component.
We recognise the fair comments that the committee has made about the volume of change in strategies in recent years; the Government has had reform strategies and recovery strategies. It would help to have consistency in strategy. The Government should set a strategy and have a plan to implement it that includes reporting on progress and consistent scrutiny over a sustained period.
So much is riding on the Government’s public service reform strategies. The committee has noted, fairly, that implementing them will not be without challenge. Workforce issues will be central to the implementation of the public service reform strategy. We note the Government’s plans to return to a public sector workforce that is akin to pre-Covid numbers. We also note the Government’s statement that front-line services will be protected, so there will be far larger reductions in back-office services. That is a policy decision, but it is really important that that is not left to chance through a reliance on resignations or holding vacancies. That will be much more successful for effective continuity of service. Moving to a digital, prevention-based model will require a thought-through implementation of a workforce strategy. We have not seen that yet, and it will be absolutely vital to delivering public service reform effectively.
I touched on that at the RSE last Wednesday night, but I will not comment on it now, because time is against us.
My question is probably for Stephen Boyle, but others may want to chip in. It strikes me that, with the Scottish Government coming forward with a £1.5 billion figure, it is very much focused on scale, size and cost but not on the required form and function for the public sector in Scotland. If we end up with a salami-slicing approach to the process, what is the risk that we could meet the numerical targets but have entirely the wrong public sector for the challenges of tomorrow? I presume that that is the warning that we should be alerting people to.
That is the potential risk. We have touched on the workforce issue; instead of just holding vacancies, we need a considered approach that looks at which people are needed and where, what the state in Scotland is designed to do, what services the state is and is not providing, and, alternatively, what digital is going to do for people. It is the coherence of the whole strategy that will be essential. Of course, it is still vital that, within the constraints that exist, Scotland delivers the bottom-line number, but—perhaps this goes back to the national performance framework—it will be more successful with public service outcomes if all those things knit together.
You look under the bonnet of the Government machine more than anybody else. Do you get the impression that the really hard work that needs to be done beneath that bonnet is being done to get us into that position?
As I have said, we made it very clear in the summer that we welcome these developments and the fact that there is a strategy. We see that it is not going to be straightforward. We can see the balance being struck between direction from the Government and its working in partnership with many of Scotland’s public bodies to deliver the strategy. I do not underestimate the scale of the challenge involved in reforming public services, given how they have grown—and how they have grown incrementally in various iterations, whether through post-Brexit or post-Covid planning—but what we need to see now is a clear and detailed plan that happens with pace.
Zero-based budgeting would no doubt help with that.
I have a quick supplementary. Are we sufficiently considering the extent to which, in effect, turkeys do not vote for Christmas, given that the change programme will be delivered by the very body that it could ultimately impact? I am reminded of the time when my colleague Liz Smith pulled from the former permanent secretary, John-Paul Marks, the comment that accountability for head count resided with the permanent secretary, not with the Scottish Government. I suppose that the question is this: is there enough of an understanding of what a significant blocker that could ultimately be when it comes to the how of delivering public service reform, not just the what that we have been talking about thus far?
Yes. It speaks to the need for a very detailed workforce plan to support the implementation of the Scottish Government’s public service reform strategies, so that the approach is not reactive or piecemeal.
I am just looking for the right number, Ms Thomson, but I think that public bodies are planning to reduce corporate costs by £1 billion over the next five years, while protecting front-line services. It feels reasonable to request that that be mapped out in detail. What types of services are going to change? Where will there be a head-count reduction? That would support implementation and scrutiny, which will be a vital role for your successors on the committee.
I have no one else down on my list to speak, and time is marching on, so I will wind up the session by giving everyone an opportunity to make final comments on any finance and public sector reform legacy issue that they wish us to put forward in our legacy report. Professor Bell will be the last to speak, given that he opened the session; I will take everyone else in turn. First up is Michael Clancy.
I would like to say that it has been a pleasure appearing before the committee in the past. As I was preparing for today’s meeting, I was looking quite intently at the website, and I saw that the committee has issued 53 reports. That is a very creditable number for the committee to have produced.
Looking at all the legislation that has been considered over the parliamentary session has certainly spurred the idea that splitting the committee’s functions between two committees might give people more space to think. However, there has been such a creditable achievement over the session that the committee should be commended for it.
Gee, thanks. [Laughter.] Thank you very much for that—it is very much appreciated.
Who wants to go next?
One thing that we have not touched on is the timing of fiscal events. There has been some frustration—to put it mildly, perhaps—in the committee with some of the timings that have come to pass.
The committee has been very effective in its pre-budget scrutiny—I think that that has been really good—and it has also brought the Government and the SFC to account by bringing them before it in a timely manner. This year, the committee ensured that that happened very quickly after the budget, but it has also happened at times when things have not been so easy.
Perhaps there should be some consideration of how that sort of thing could be made better. I do not have all the solutions, but there could at least be a discussion of what processes could be put in place to ensure that scrutiny happens in a timely manner and that it is always planned for. That would, I think, be welcome.
We are always liable to be victims of decisions taken elsewhere, as you know.
On the point about timing, I think that the Minister for Public Finance said that only the news about the new property income tax powers was not leaked before the UK budget was announced. That raises some concern about whether there is actually a collaborative and constructive relationship, which I think should be a priority.
I also want to thank the committee for inviting us along here. A couple of weeks ago, you talked about the committee’s role in holding people to account; you get the opportunity to sit here and question the figures and really get into the detail when others do not have that same opportunity. I think that that is a very good point, and the committee has done a lot of good work in that respect.
Thank you. Stephen, you can start with compliments and then go into substance. [Laughter.]
First, I thank the committee for inviting me here today and for your engagement with, and the evidence that you have taken from, me and Audit Scotland colleagues over the past five years. Like others, we have always recognised the seriousness and the importance of the work that the committee does and its even-handed and fair scrutiny across an extensive range of topics.
I would note that, as David Bell pointed out in his submission, the effectiveness of the annual budget scrutiny has, in many ways, been a noted success of the committee. What comes in the next parliamentary session, particularly with regard to medium and long-term financial planning, and the links with reform and sustainability, will be vital to the legacy of the next committee.
Thank you very much. Professor Heald?
I think that the successor committee should ask the next Government for a tax strategy that says where the tax system ought to be in 10 years’ time.
That was succinct—thank you. Last but not least, I call Professor Bell.
I think that I had better commend the committee for its work and thank it for the several invitations that it has given me over the parliamentary session.
It occurs to me that the committee’s work deserves more public recognition than it gets. It tends not to come top of the headlines in the local press when its fairly weighty documents, which should be very influential, hit the airwaves.
I will say a couple of things. First, we have to get a laser-like focus on prevention and, as Stephen Boyle said, much better information to motivate policies that might relate to that. That will be particularly important for path-dependent spending, where we make commitments that have long-term consequences. I went through some of those earlier.
Finally, an economist would say this, but there are always trade-offs, and there will be losers as well as gainers. We have talked with the committee about loss aversion, and the political challenge is how you deal with those who might find that a particular policy does not necessarily work in their favour.
Thank you very much to all our guests this morning for their contributions; they are very much valued by committee members. I will call a five-minute break to have a changeover of witnesses.
10:29
Meeting suspended.
10:35
On resuming—
Air ais
Attendance