Economy and Fair Work Committee

Meeting date: Wednesday, January 18, 2023

Official Report 654KB pdf

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Budget 2023-24

Our next item of business is an evidence session on the Scottish Government’s 2023-24 budget. The budget was published on 15 December 2022 and the stage 1 debate on the Budget (Scotland) (No 2) Bill is expected to take place in the next few weeks. Today’s evidence session is on the areas in the budget that come within the committee’s remit.

I welcome John Swinney, Deputy First Minister and Cabinet Secretary for Covid Recovery. He is joined by the Scottish Government officials Colin Cook, director of economic development; Aidan Grisewood, interim director of economic strategy; Kathleen Swift, head of the economic directorate finance unit; and Richard Rollison, director for international trade and investment.

As always, it would be helpful if members and witnesses could keep their contributions as concise as possible.

I invite the Deputy First Minister to make a short opening statement.

Good morning. I welcome the opportunity to give evidence on the Scottish Government’s draft budget for 2023-24 and the delivery plans for the national strategy for economic transformation. If it is acceptable, convener, I will make opening remarks that cover both those areas.

The national strategy and the budget support our long-term aims and ambitions for transformation to a stronger, fairer and greener economy and, in the short term, although our levers are limited, they provide immediate support for our businesses through the current cost crisis. That crisis continues to present a significant challenge. The latest inflation figures, which were published this morning and cover December 2022, show that inflation remains very high, at 10.5 per cent.

When facing some of the most turbulent economic and financial conditions that most people can remember, the Scottish Government has had the difficult task of providing as much support as possible while our budget is lower in real terms than it was in 2021. That means having to make difficult choices in the coming financial year. We have chosen to concentrate our efforts on eradicating child poverty, providing sustainable public services and transforming the economy to deliver a just transition to net zero. The national strategy provides the right foundations on which to transform our economy and helps to secure better outcomes as we emerge from these difficult conditions.

In setting the budget and developing the NSET delivery plans, we have firmly prioritised the actions that will give us maximum return on our strategic objectives. In the coming financial year, we will introduce measures to boost entrepreneurship and productivity across sectors and regions, and to invest in our infrastructure.

We are committing to funding the transition to net zero not only to meet our climate change targets but because it will help us to realise our long-term economic ambitions, which will bring investment, jobs and growth.

The skills and employability aspects of NSET are also being supported so that more people can access more job opportunities now and in the future, which will help some of the most vulnerable in our society into employment and improve their wellbeing.

We have consulted the public, private and third sectors throughout the development of NSET, and we will continue to work in partnership with them as we push forward with delivery.

I appreciate the committee’s pre-budget scrutiny and report. As well as being given the opportunity to respond to that, I look forward to discussing with the committee some of the points that I have outlined.

Thank you very much, cabinet secretary. You referred to the letter that you received from the committee on the areas that we considered as part of our budget consideration. Notwithstanding the significant economic challenges that Scotland is facing due to a number of external factors, pressures on the budget have led to difficult decisions being made. One such decision was a reduction in spending for employability services.

The Fraser of Allander Institute has published a report on and an analysis of that decision. When the committee took evidence from businesses, they talked about the tightness in the labour market and the value of bringing those who are furthest away from it into employment.

I asked the First Minister about the cuts at the Conveners Group, and we have had letters from Richard Lochhead and, I think, from you about that. The £53 million was money that had not been spent. It looks as though we are being told that there is nothing to worry about here, but a reduction has been made. Had that money not been committed? Is that why the decision was taken?

If you will forgive me, convener, I fear that this will be a long answer, but I will try to be as quick as I can. Essentially, as the financial year has progressed, the scale of the pressure on our budget has become more apparent as a result of two factors. The first of those is the additional resources that we have had to find for public sector pay. We budgeted on that being 2 per cent; clearly, we are paying more than that to address the legitimate claims of employees. The second is the effect of inflation, for which there has been no change in the resources that are available to the budget.

I have had to take some pretty difficult decisions to balance the budget. As I explained to the Finance and Public Administration Committee last Tuesday, I am still not in a position to be confident that I can balance the resource budget this year. I am still—it is now mid-January—wrestling with the scale of the financial pressure. I need to save between £200 million and £500 million before I can balance the budget.

In trying to get to that position, I had to make reductions in planned expenditure. As you correctly pointed out, one of those reductions was to employability programmes. I removed a projected increase in the budget. I did not take away any spend that was being delivered; rather, I did not put in place a planned increase.

The opportunity cost of that, convener, which I think is the point that you are driving at, is a fair issue to raise. The more we can spend on employability, the more we can erode the levels of economic inactivity in society. That is because the programmes that we work on and fund, as distinct from the programmes that the Department for Work and Pensions funds, relate to the group of individuals who are furthest from the labour market and require much wider and more holistic support to get them back into employment.

I accept that the opportunity cost is that we could have put in place programmes that would have provided opportunities for more people to re-enter the labour market, but I will set out two factors to reassure the committee on the understandable concerns that the convener has put to me.

First, yesterday’s employment data showed a fall in economic inactivity of nearly 1 per cent in the year, which is quite a substantial reduction in economic inactivity levels, given that many people in that category face significant challenges. It is a much higher reduction in economic inactivity than there has been in the rest of the United Kingdom.

Secondly, when I took that decision, there was, and there remains today, capacity in our existing employability programmes to take on new individuals—if an individual wanted to re-enter the labour market and required support, there would still be capacity in our employability programmes for them to do so.

Finally, for completeness, the budget envisages an increase in employability support in the next financial year, so although I have had to take a short-term decision to remove planned expenditure in order to help me to balance the budget, we are increasing the resources available for employability support in the forthcoming financial year.

That is helpful to know. How much will that increase be? Will it compensate for the £53 million cut?

No, it will not.

Is it £68 million minus £53 million?

It is an increase of about £11 million, so it is not of the scale that was originally envisaged.

When you talked about NSET, you stressed the importance of helping the vulnerable into employment as part of the 10-year strategy. Although I accept that, once we have subtracted the £53 million, there is a net gain to the employability budget of £11 million, is there an intention to increase investment in that area in future years? You have recognised that there has been a loss of opportunity here, in that activity that was planned, or that was seen as important, will now not take place because of the reduction in the original increase.

The question really relates to what the necessary capacity is that we need to have available in the employability budgets to support the return of people to the labour market. We had projected a significant increase in those budgets for the current year, which we have not been able to fulfil because of the issues that I have raised. We would look to support that activity as much as we can in recognition of the effectiveness of such expenditure, so I will monitor the situation very carefully.

I also give the assurance that one of the issues that I looked at in taking the decision in question was the capacity of programmes to deliver support to individuals. There is almost a demand-led element to the employability programmes. If we see during the course of the financial year that demand for them is rising and we are finding it difficult to meet the demand in the labour market, I will obviously look to address that issue during the financial year, if possible.

That is helpful. The committee is about to undertake a short inquiry into the disability employment gap, so that will help to inform our discussions.

It will be helpful for the Government to understand the committee’s deliberations on that question. It is clear from the labour market data that was published yesterday that we find ourselves in a position in which employment is at a record high and unemployment is very low, at 3.3 per cent. Despite the fact that we are experiencing enormous volatility in economic conditions, employment remains very high and unemployment very low.

I have a couple of observations to make about that. First, that situation might not be sustained, because a lot of economic turbulence is coming our way. Secondly, we must be mindful of the importance that NSET attaches to increasing the value of employment. That is a major consideration in the approach to employment support, employability and economic development that we take as part of our wider programme.

Thank you. At this point, I will bring in other members, who will initially focus on the areas that we wrote to the cabinet secretary about. We will start with Gordon MacDonald.

Good morning, cabinet secretary. I want to ask about the pressures on businesses. You mentioned that inflation is at 10.5 per cent, and there are the high energy costs and labour costs that flow from that. What support has the Government put in place for businesses in the areas in which it has responsibility, given that businesses are looking for some form of certainty so that they can plan for the recession that is being forecast?

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There are several areas in which the Government is trying to provide support, within our resources and areas of responsibility. First, there is the approach that we are taking on non-domestic rates. The principal request of 16 business organisations was for the rates poundage to be frozen. Normally, there would be an expectation that that would increase in line with inflation. I took a decision to freeze the business rate, but that does not come without a cost to the Government, which is estimated at £308 million. Freezing the business rate means that businesses in Scotland have the lowest business rates poundage in the United Kingdom, and they also do not have to face an inflation increase.

Secondly, recognising the implications of the revaluation that is taking place, we have put in place some transitional relief for businesses. Thirdly, the small business bonus scheme is designed to provide support to companies in sustaining their operations. I do not suggest for a moment that all of that will address all the issues.

We have engaged in dialogue with the UK Government on its successor energy package and have contributed our thinking on that, but those are decisions for the UK Government. I welcome the fact that some on-going support is available, but I think that we are all conscious of the fact that there continue to be significant challenges for businesses as a consequence of those issues.

In addition to those measures, the Government makes other investments, such as in support for skills training, which is important, and, in particular, apprenticeships. That is linked to the points that the convener rightly raised with me about the labour market. We also make other investments in an effort to ensure that colleges are adapting their provision to meet the challenges that are prevalent in the labour market and the shift in the labour market that has to be made to support our net zero ambitions—I am thinking about the need to shift activity to support the development of renewables and the significant opportunities that arise out of ScotWind.

Those are just some of the measures that the Government is taking. We remain very open to listening to the views of the business community, which is why we set up the business regulation task force, which is jointly chaired by my colleague Ivan McKee and the Convention of Scottish Local Authorities enterprise spokesperson, Councillor Macgregor. The purpose of the business regulation task force is to listen carefully to business; where there are issues in the regulatory environment that are causing obstacles and there is no good reason for them to be there, we try to address those as quickly as we can.

You touched on the small business bonus scheme. When it was introduced in 2008, roughly 60,000 premises benefited from the scheme; that figure is now more than 100,000. How is the scheme helping businesses in Scotland in financial terms?

As Mr MacDonald correctly identifies, there are now more businesses benefiting from the small business bonus scheme than there were when we set out that scheme. I should point out that we have put in place further incentives in the non-domestic rates scheme for companies involved in renewables to try to tailor the relief package and encourage more development. I expect the number of properties that will benefit from business rates to be about 100,000. We also have some transitional relief available for small companies in that respect.

The Fraser of Allander Institute carried out an inquiry into the small business bonus scheme at the request of the Scottish Government and Tom Arthur, as the minister responsible, who has answered a few questions in Parliament on the issue. Is there an update on the Government’s consideration of that work? What steps are being taken next in that regard?

These commitments have the hallmark of being part of the fabric of our proposition, but we have to make an active choice to maintain such schemes. The Government has considered the issues that have been raised in this area of policy and determined that our small business community continues to require that degree of support.

We have tried to address some of the issues through the design of the transitional relief scheme that is available, and we constantly monitor and assess the continued appropriateness of the companies that are involved in the small business bonus scheme and the appropriate levels at which business rates relief should be set. Some of the thinking from the Fraser of Allander Institute helps us in that respect.

Colin Smyth has a supplementary question on business rates.

I have a brief question on business rates, Deputy First Minister. Last year, the approach to reliefs was recognised as being less generous than that in England and Wales. This year, the Fraser of Allander Institute, in its budget response, stated:

“This year, John Swinney has seemingly taken an even more hardline approach and there are no additional reliefs applied to hospitality and retail as is the case south of the border.”

Given the real pressures on those sectors, which the committee highlighted, why was that choice made? I appreciate that there is a freeze in the multiplier, and relief for renewables, but why is there no specific relief for the hospitality and retail sectors, given the pressures that they are under?

I understand the comparison that Mr Smyth puts to me, but it is important to recognise that we are not looking at directly comparable schemes with regard to what Scotland offers in relation to business rates and what is habitually offered in England. We have two different propositions, and the small business bonus scheme in Scotland is much more generous than comparable schemes south of the border.

Of course, any measures that we take come at a cost. The overall estimated cost of the business rates measures that we are taking is £744 million, so substantial investment is being made in supporting business.

One of the factors that bore heavily on my consideration of what the right thing to do would be was the representations from business organisations asking us to freeze the poundage, which represents a comprehensive approach across business sectors. I was pleased to be able to do that.

The second relevant factor is that we estimate that half the properties in the retail, hospitality and leisure sectors will be eligible for 100 per cent small business bonus relief in 2023-24, so a substantial contribution is being made to alleviate the issues and challenges that those sectors will face.

Good morning, Deputy First Minister. Thank you for attending today’s meeting.

I want to follow up on a deeply held interest of mine: the role of women and their contribution and entrepreneurialism. Our pre-budget calls mentioned disaggregation of data and progress on the women’s business centre. I thank you for the replies from the Scottish Government, but the ironic thing is that, in our pre-budget letter last year, we also asked about disaggregation of data.

Before I ask my questions, I say that I recognise the worthwhile efforts of the Scottish Government to promote this area, and we all look forward with interest and anticipation to Ana Stewart’s review.

Setting that aside, I have three simple questions to move us away from the review and get under the skin of what is a structural issue. First, can you play a part in ensuring that all data that is collected by the Scottish Government is routinely disaggregated by gender?

I think, generally, that that would be the case. If you have specific data sets in mind, I would be happy to look at whether we can enhance them but, generally, we try to look at all issues through the prism of gender. The point that you put to me about entrepreneurship is particularly relevant, because the data that I have seen shows that there is a deteriorating position in relation to women’s involvement in entrepreneurship, hence the work that Ana Stewart is taking forward for the Government.

I do not know the data sets in their entirety, so it is hard for me to say that something is missing. That, perhaps, speaks to the problem, because if we do not collect the data routinely, we will not be able to see the complex patterns. In principle, I am asking you to, as a minimum, commit to undertaking a review of when data is disaggregated by gender—and, critically, when it is not—and you could then return to us with a compelling reason why it should not be.

We know already from data that the percentage of women-led small and medium-sized employers in Scotland has reduced from 20 per cent in 2015 to 14 per cent in 2019. That is an issue of real concern to us, and it prompted Ana Stewart’s review. We also know from other data that females in Scotland are about half as likely as males are to be early-stage entrepreneurs. The data already tells us that, hence the action that we are taking.

I would not want the committee to feel that we do not have the data to prompt the action that we need to take, such as the review, because I think that that data exists, and I have placed it on the public record today.

I am certainly happy to take away the questions on data and to respond to the committee. Some of those issues might be part of what Ana Stewart ends up recommending. That is speculation on my part, but I think that it would be sensible for me to wait to see what Ana Stewart produces and then to reflect on the issues that you are putting to me in the context of our response to her.

As I said, we all await that report with great interest and anticipation, and, having had Mark Logan before the committee last week, I have high hopes for it.

I have a follow-on question. Are you able to make it compulsory for any agency that receives money from the Scottish Government as part of its fair work agenda—or, indeed, any other business initiative—to routinely collect data disaggregated by gender? I have asked about that a number of times in this committee, so I can tell you categorically that they do not routinely do that, which I find quite shocking.

What kind of questions have you asked?

Two examples spring to mind. I asked whether a business agency routinely disaggregated its research data so that it could understand the breakdown by gender, and the answer was that it did not. I also asked a commerce and development agency whether it routinely did that, and I received the same answer. I would expect that to be done, as a minimum.

I suppose that what I am asking is whether, regardless of Ana Stewart’s review, you agree that, as a minimum, any agency that receives money from the Scottish Government should routinely gather and disaggregate that data.

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I think that that is an entirely reasonable proposition, but I will take it away and consider it in detail.

I have a final question on the same theme. You might not be able to answer this just now, but I would like you to give consideration to setting targets to increase the participation of women, particularly with regard to entrepreneurialism, and to give firm consideration to—and, if this is not possible, to say why you cannot do it—making any funding conditional on meeting those targets.

On the first part of your question, I would be very surprised if we do not end up in such a position as a consequence of what Ana Stewart recommends to us. I am simply trying to get my process correct: we have commissioned the review and we will hear what the outcome is. I would be absolutely staggered if we do not end up taking specific measures to enhance the participation of women in entrepreneurialism as a consequence of Ana Stewart’s review. I think that that is highly likely but, regardless of what the review produces, the Government is committed to taking such action. That is why we have commissioned Ana Stewart to do the work that she is undertaking.

Your question about conditionality is much wider. If I play back what you were proposing, that would mean that, in the future, we would fund Scottish Enterprise only if it met particular targets on particular aspects of women’s participation in entrepreneurialism. There is nothing wrong with that as an idea, but I think that it would have wider implications for the future sustainability of organisations such as Scottish Enterprise.

We have not used the conditional funding model for public sector agencies. I am not saying that there is not an argument for it; there is a perfectly legitimate argument for it. Indeed, it might be a way of prompting the type of performance outcomes that we want to achieve, so I am not dismissing it. I am simply saying that it would require wide consideration of the nature of public expenditure and how we go about that. I think that Parliament would have some pretty broad views about that.

I completely agree. I agree that it is complex and that it is a case of being careful what you wish for, particularly when it comes to early-stage industries. However, we should look at such an approach with an open mind and stress that agencies will have to do so, too, as a way of shifting the dial. Mark Logan, who appeared before the committee last week, was clear about the fact that the initiatives that are under way are good in and of themselves, but what he emphasised, and what drives me, is that we should start to plant the trees that will effect structural change. Unless we ask such hard questions and start to look much more firmly at conditionality in areas in which we can be clear about, or at least make a good assessment of, the outcomes, we will carry on producing worthy reviews—I agree that reviews such as the Stewart review are worth while—but we will not shift the dial.

I will highlight our experience in relation to the point that Mark Logan made to the committee about the health of early-stage entrepreneurial activity in Scotland today. I attribute that to seeds that were planted pretty close to 10 years ago, when I took a decision to invest in Scottish EDGE, which has created a vibrant entrepreneurial community.

There was a lot of risk involved in that. When I was being advised on what I should consider when supporting such a scheme, I was properly advised of the degree of risk involved because of the likelihood that there would be business failures and reputational risk to the Government as a consequence. However, my view was that that was a risk worth taking. What has it done over all those years? It has created exactly what Mark Logan said to the committee.

That was not always the case—10 years before that, there was substantial concern about early-stage entrepreneurial activity in Scotland. I think that we largely arrested and resolved that problem by taking appropriate decisions about eight or nine years ago.

The challenges that we now need to focus on—many of our other measures, particularly those around the Scottish National Investment Bank, are supporting this—relate to scaling up business activity when we have the necessary investment capital to enable new-start businesses in Scotland to flourish and become much more significant contributors to the economy.

Thank you.

Before I bring in Graham Simpson, I have a quick question about our budget letter. We asked about the women’s business centre, which the Government had committed to. The Government’s response does not provide much confidence that that remains a policy commitment—it seems to be conditional on Ana Stewart’s review. Is there still a commitment to a women’s business centre in relation to the £50 million?

We have a continuing commitment to the women’s business centre. However, for completeness, the Government believes that we should look at how we will take that forward in the light of Ana Stewart’s review.

One of the points that I put on the record when I set out the budget statement to Parliament was that, given the financial challenges that we face, there might well be some policy commitments that take us longer to deliver than we would have wanted, simply due to the financial pressures, including higher inflation, with which we are wrestling.

The question was about how the £50 million will be spent this year. If we could get a note about that following the meeting, that would be helpful.

Okay.

I want to follow up on that last question. I am a little confused by your answer. Is there going to be a women’s business centre or not?

We remain committed to the policy concept of a women’s business centre. However, for completeness, it would be best to consider how we will take that forward in light of the review by Ana Stewart, once we have received it.

Okay, I will leave that there.

You mentioned the Scottish National Investment Bank; I will ask you about that in a moment. First, I want to ask about the line in the budget that relates to Ferguson Marine Engineering Ltd, which had £47 million in 2021-22, then £35.9 million in 2022-23, which will go up to £60.9 million in 2023-24. When we look at the money that has been given to the yard, it is almost like watching an episode of “Ant and Dec’s Limitless Win”—there does not seem to be any kind of cap. Can you guarantee that the £60.9 million that has been allocated for 2023-24 is it, or will there be more?

I certainly hope that that is it.

That is not a commitment.

I am required to give the committee honest answers. I hope that that is the last that we will have to contribute for the construction of vessels 801 and 802.

Do you have a maximum in mind?

Let me be crystal clear—it is my hope that that money will be the last. The assessment by the yard of what it requires is what I have provided for in both the additional commitment of about £15 million that I have allocated in the current financial year and the sum that is provided for in the budget for 2023-24. I am responding to the plans that have been put to me by the yard. The Government scrutinises the propositions that are put to us. I hope that that is the last contribution that we will have to make.

I have a question about the Scottish National Investment Bank, because it is also receiving a real-terms increase in funding. What is that based on? Are you expecting the bank to deliver anything in particular? Has it come forward with particular projects that have whetted your appetite and prompted you to give it that extra funding?

The Government made a commitment to invest about £2 billion in the Scottish National Investment Bank over a 10-year period to support investment in ventures that would generate significant economic impact and financial return in the Scottish economy. The budget provides for building up that investment. As we build it up, the Scottish National Investment Bank takes decisions about what investments it makes.

For example, in early December, the bank announced investment in a company called North Star Shipping Ltd. It is providing £50 million in a £95 million capital expenditure facility to allow the business to expand its fleet of service operation vessels, which are expected to support offshore wind projects in Scotland. That is a very good example of the bank using its resources.

The bank considers all the risks of an investment, because, as committee members will appreciate, there are no guarantees about such investments. Organisations such as the Scottish National Investment Bank must assess their investments. The bank considers whether there is a long-term business opportunity and whether there will be a return on the investment that it provides.

There will be other ventures of that type, where the bank will make an assessment and will draw down from resources that the Government has provided.

You have decided to give the bank a real-terms increase. What are you expecting in return for that?

I expect the bank to invest in companies that will deliver economic and employment benefits to Scotland, and that investments will generate financial returns for the bank, so that we see a return on our investment that can then be utilised in future years for long-term patient investment.

Can you or your officials tell us how investments are monitored? I have looked at one company that the bank has invested in, called TravelNest. It was awarded £5.5 million last year. The company helps property owners to advertise their holiday rentals on sites such as Airbnb.com, Booking.com and others. It struck me that such companies might be able to fund that themselves. I looked TravelNest up on the Companies House website: it appears to have an address in London rather than in Scotland. How is that monitored?

The Scottish National Investment Bank looks at propositions that are designed to create economic and employment benefits within Scotland as a consequence of their activities. They might not be uniquely concentrated in Scotland, because companies operate in a far wider context. I highlighted the £50 million investment in North Star. I suspect that not all of that money will be spent uniquely in Scotland, because of the nature of that company’s activities.

I assure the committee that we expect the Scottish National Investment Bank to assess the business case for an investment and what the returns are likely to be, because there must be a return.

However, there is, on my part, an acceptance—which I would prefer was not the case, but I have to live in the real world—that some investments might not be successful. That has always been part and parcel of the issues that we have wrestled with in relation to Scottish Enterprise. Some of the investments that it makes do fantastically well, but others do not do so well. We have to look at things in the round. I remember an early conversation that I had, when I became a minister many years ago, with the leader of Scottish Enterprise, who wanted to go through some of the challenges with me so that I would be aware that I might have to defend investment that was not successful. I accept that; the quid pro quo is that other investments must be successful, to balance that out.

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That is the nature of investment—some will work, but some will not. I am not picking on that particular company; I just happened to look at it and it struck me that it might not be particularly Scottish. I appreciate that you want a return from our investment, for Scotland. I am happy to leave it there.

Jamie Halcro Johnston has a supplementary.

My question is on the Scottish National Investment Bank. About a year ago, on 27 January 2022, Eilidh Mactaggart resigned as chief executive of the SNIB. Sarah Roughead has been the interim chief executive. Obviously, leadership in the organisation will be key, going forward. Can you give an update on where the bank is in terms of appointing a new chief executive?

The process has been ongoing. In the bank’s last appointment consideration a candidate emerged, but decided not to take the post. That is the fairest way for me to capture what happened. Sarah Roughead continues to exercise chief executive responsibilities, under the leadership of Willie Watt as chair of the Scottish National Investment Bank, and the bank continues to make the progress that the Government envisaged. The recruitment process continues.

Will the process have to restart because that one candidate did not want to take the job, regardless of the reasons?

The process is being undertaken by recruitment consultants, so the short answer is yes.

Do you have an estimate of when there might be an appointment?

We would like the process to be completed as soon as possible, but only with the right candidate.

I will continue on the SNIB, to get a better understanding about the funding side. SNIB has, largely, been capitalised using financial transactions, which come with certain restrictions on use and have to be repaid over the long term. In the back of my mind, I have a memory that the period is 30 years or something for repayment, but that might be historical; I do not know. The bank has said that it is pursuing regulatory approval that would enable it to manage third-party funds and increase its total capital resources. Have you considered allocating other forms of funding outside of financial transactions, which might give SNIB a bit more flexibility?

That option is available to me, but it is very much conditional on the wider pressures on the public finances and the programmes that we would be expected to fund and support. Financial transactions are really quite appropriate as a mechanism for securing investment in the Scottish National Investment Bank. The nature of the repayment that is required for financial transactions leads them to be appropriate in relation to issues that Mr Simpson raised with me about the need for recognition of the importance of getting a return. The mechanism is appropriate at this time, but there is a wider agenda about the regulatory strength of the Scottish National Investment Bank. It is pursuing steps in developing the critical foundations for the bank to take forward its investment activities.

Have the nature of the capitalisation and restrictions around it impacted on the range of investments that SNIB is able to make? I am aware that, although there are restrictions, it can still invest in private capital, private equity and so on. Are there areas in which SNIB might have wanted to invest, but which it is precluded from investing in?

I do not think so. All SNIB investments have to be made on a commercial basis. The bank is able to make judgments on the ventures that merit its support and investment. It has successfully developed a strong view on the role that it can perform in being an enabler of other investment. When the bank is able to invest in a particular proposition, that gives rise to potential investment from other parties, a consequence of which is that ventures are better supported.

I do not think that the bank operates under any particular constraints on its being able to fulfil the remit that the Government has set for it, but the bank is on a journey to develop its financial strength and reputation, and the steps that have been taken are encouraging.

You mentioned that the Scottish Government wants to put £2 billion over 10 years into SNIB. Do you anticipate that the same form of capitalisation will be used, and is there confidence that that type of funding will continue to be available, given its nature?

SNIB is a long-term proposition for the Government. I describe it as, in essence, a long-term source of patient capital in the Scottish economy. We envisage SNIB being able to perform the role on a long-term basis; obviously, that has to be a long-term commercial basis. The issues of repayment and returns are significant, and we are keen to ensure that over the long-term lifespan of SNIB, it continues to perform that role in the Scottish economy.

On the nature of the capitalisation, is there a risk that funds from that source might not be available in the future, or are you comfortable that they will be?

Use of financial transactions is relevant to the United Kingdom Government’s current arrangements and plans. The Scottish National Investment Bank is an effective means for the Government to utilise the financial transactions funding that is made available by the United Kingdom Government. Financial transactions cannot be readily used for many other aspects of public sector activity, so that arrangement is quite suitable.

I am not privy to the future direction of United Kingdom Government policy on the matter, but the option remains available for the Scottish Government to continue its investment alternatively through traditional capital investment in the Scottish National Investment Bank.

For completeness I point out, on the earlier points that I made on levering in investment, that the bank has so far committed £366 million to 24 projects, which has levered in £526 million of private sector investment. I say that to provide some detail on the point that I made about the bank being an enabler—its being able, by its actions, to encourage and enable investment from other sources.

Good morning. It is clear that the tourism sector provides sustainable economic growth across Scotland. We know that the sector is under particular pressure for lots of reasons, but we also know that spending by international visitors is one of the areas that can help the sector to recover. The committee previously expressed the view that support should be given to VisitScotland—in particular, for its international marketing. VisitScotland’s budget was £65 million in 2021-22 and is proposed to be £49 million in 2023-24, which is a 2.7 per cent reduction since last year. The response from the Scottish Government to our request simply said:

“The VisitScotland Board will fully consider scenarios that will enable them to successfully carry out their marketing activity in light of the Scottish Budget.”

That does not really leave us with much comfort.

I want to provide reassurance to the committee on that question. One of VisitScotland’s formidable strengths is the brand marketing activity that it has done by itself. VisitScotland has also gathered together the marketing activity of a range of organisations—essentially, to promote Scotland to a wider audience. That has been a long-term ambition of the Government; Ms Hyslop played a significant role in enabling it to happen.

VisitScotland’s record speaks for itself. It has an absolutely colossal reputation for marketing success and marketing recognition from many of its activities. That has persuaded a number of organisations to collaborate with VisitScotland through pooling resources to support international marketing activity.

I can reassure the committee on two fronts. First, VisitScotland is able to undertake domestic and international marketing activity. Secondly, it can do so in concert with a range of other organisations and can, I contend, as a consequence deliver much more effectively.

To put VisitScotland’s financial position into context, I highlight the fact that there has in recent years been a strategic shift in VisitScotland’s activity, in the direction of digital marketing. I do not mean this disrespectfully but, in some respects, the model for distribution of tourism and marketing information around the country in the past was a bit of a bricks-and-mortar model. Now, it is a much more digital model that can deliver much greater value for public expenditure.

I politely point out that that was happening in 2021-22, and that the shift in that regard probably took place about five years ago. I agree, though, that VisitScotland is very effective with its marketing spend.

I will move on to another area, which is the need for Scotland to improve its productivity rate. It is great that the gap between Scotland and the UK on that has been closed, but recruitment and retention are key issues, particularly in the current labour market. The programme for government mentions support and funding for a pilot of a four-day working week. Where is the funding support for that in the coming year, and what is your view on the policy going forward? We are about to see the results of a UK-wide pilot, which I think will be positive. I do not want the Scottish Government to fall behind on that agenda.

Obviously, we take a range of steps to try to enhance productivity. A lot of what we do is associated with, for example, investment that we make through the university research channel. Our universities have responded positively over a number of years to our appeal to them to engage more closely with the wider business community to collaborate on business and economic research. We are now seeing much higher levels of collaboration and co-operation, which will in part help us to answer the question on productivity.

Our wider investment in skills is designed to do likewise. Obviously, we are operating in an incredibly tight labour market, which is putting additional pressures on the work that we can undertake to ensure that the needs of the business community are properly and fully reflected in the support that we make available to ensure that businesses have access to the productive skills that they require. However, I acknowledge that that is an on-going and significant challenge that we have to face.

10:30  

Work on the four-day working week pilot is being undertaken under the budget lines on fair work. We will take forward work on the four-day working week pilot as part of the 2023-24 programme. That will obviously be part of the wider agenda of improving the productive capacity of the Scottish economy, on which the national strategy is focused.

Finally, I will move on to the issue of jobs and skills in the renewable energy sector. Yesterday, in the Net Zero, Energy and Transport Committee’s session on the budget, the cabinet secretary Michael Matheson talked about the opportunities in that sector, and I questioned him specifically about hydrogen. He said that the constraints in the renewable energy sector are largely to do with the availability of labour—we know that there are real pressures on that—as well as planning consents and skills.

In a tight labour market, it is important to be able to transfer the skills that we have already. Looking at the budget lines, however, and the pressures in this portfolio, Scottish Enterprise now has a clear emphasis on the issue and finally has hydrogen as one of the key sectors. There is also a big focus on inward investment. If all the funding is focused on inward investment, how can we ensure that domestic companies are being supported in relation to jobs and manufacturing? It would be helpful if you could go through that.

That is a fundamental and critical question for realising the opportunities that will arise in the offshore wind environment. I will just make one comment in relation to what Michael Matheson said yesterday about planning consents. I recognise that the issue is of great significance to ensuring that those who are involved in that activity are assured of an efficient and effective planning consent process to enable them to make decisions about the investments that they make within a reasonable timescale.

It is important to address the substance of Ms Hyslop’s question across a number of areas, such as the roles of colleges, the skills environment and the work of the Scottish National Investment Bank, to take just three particular elements. I do not particularly want to live by anecdote with the committee this morning but, as an example, I had a conversation that warmed my heart with an entrepreneur who is involved in the offshore wind sector and who wanted to develop a facility in Ayrshire. The particular skills that he needed were not available in Ayrshire, but he wished to pursue his venture in that area. He engaged in a constructive dialogue with Ayrshire College, and the college put in place a course to train employees to meet his requirements in partnership with the college.

That is a splendid example of the college sector adapting its provision to meet the needs of a substantial economic opportunity in its locality. That must be reflected and mirrored in other parts of the country. Ms Hyslop knows the college sector intimately, particularly that of her constituency of West Lothian, and she will therefore know that the outlook of colleges is that they wish to seize such opportunities.

The second area is skills development. Obviously, there has been some interruption to the progress of the apprenticeship scheme. Prior to Covid, we were on course to have 30,000 modern apprentices. Skills Development Scotland is now ready and programmed to deliver the 25,000 modern apprenticeships that are envisaged in the budget programme, and obviously they will be available to the renewable energy sector.

Thirdly, part of the Scottish National Investment Bank’s mission is to invest in the Scottish Government’s net zero aspirations. In my response to Mr Simpson, I cited an example of specific net zero related investments that the bank has made. The committee should be assured that investment vehicles are available to support and nurture the development of Scottish companies that can realise some of those manufacturing ambitions within Scotland.

Michael Matheson made it clear that the planning constraints are being addressed by upskilling and expanding his areas of responsibility in terms of staffing. I hope that you can support that, as finance secretary.

Could you address my question about Scottish Enterprise’s focus and that of Scottish Development International? Will the focus be only on inward investment, or can you reassure us that Scottish Enterprise’s work will also support the supply chain?

It will be about assisting the domestic supply chain. Just before Christmas, a range of interested parties, principally from the Government and Scottish Enterprise, along with ministers—Michael Matheson and Ivan McKee were involved in the discussions—met to ensure that we have an aligned approach to the development of the hydrogen proposition in Scotland. Mr McKee and I met the board of Scottish Enterprise shortly before Christmas for its annual strategy discussion, and we spent most of that meeting speaking about hydrogen and the net zero opportunities. Scottish Enterprise, with the leadership of Adrian Gillespie as chief executive, who has formidable experience in that area, will be concentrating and focusing on that proposition.

It is widely recognised that we are in a recession. The Deputy First Minister said that, despite the fall in the level of labour inactivity, we could be at a labour market turning point as we are seeing vacancies fall and redundancies rise. However, in addition to the funding cut to VisitScotland, as highlighted by Fiona Hyslop, the enterprise agencies will also have their overall funding cut. Scottish Enterprise will have 4.9 per cent cut in real terms; 5.5 per cent will be cut from Highlands and Islands Enterprise; and South of Scotland Enterprise will have a 9.7 per cent cut, which continues a longer-term trend. What are the reasons for those cuts? What assessment have you made of how they will impact support for businesses?

It is important that I put a few things on the record about those numbers. For example, the Scottish Enterprise resource budget is projected to increase from £135 million to £141 million. The budget for Highlands and Islands Enterprise is projected and resourced to increase from £29.6 million to £29.8 million. The South of Scotland Enterprise budget is projected to increase from £14.8 million to £15.1 million. All three of the enterprise agencies’ budgets are projected to increase in cash terms.

Deputy First Minister, those are revenue budgets. You have not mentioned the cuts in capital. The overall level of reduction is quite clear in both real and cash terms for all three of the agencies, if we combine capital and revenue investments as well as other changes. It is not just revenue; it is capital.

No, I do not accept that. Scottish Enterprise’s resource has gone from £135 million to £141 million, which is an increase of £6 million, and its capital budget is going from £80 million to £76 million, which is a reduction of £4 million—so there is a net increase of £2 million. For South of Scotland Enterprise, there has been an increase in resource and capital when those are put together.

What happens when you include financial transactions funding?

As I have said, financial transactions are a slightly different proposition. However, I would make the wider point—I was very candid about this in what I said to Parliament—that inflation is sitting at 10.5 per cent, whereas the budget has not increased by 10.5 per cent; it has not even increased by the gross domestic product deflator, hence the real-terms reduction from 2021 to 2022. I cannot allocate money that I do not have, so there have been tough choices.

I have multiple pressures—we are in the Economy and Fair Work Committee, but the Health, Social Care and Sport Committee is probably meeting somewhere else in the building just now and considering the colossal pressures in the health service. All budgets will be an attempt to deal with financial strain when resources are tight. I have tried to strike the most reasonable balance that I can. I will not disguise the fact that organisations face financial challenges and that they will have to change the ways in which they are working. I was explicit about those requirements when I set out the budget proposition to Parliament.

My question, before we started debating figures, was about how that will impact on support for business. What direction will you give to agencies about how to implement what, as you have said, is a very challenging financial budget for them?

We will set out letters of guidance to the boards of the three organisations that are involved, which will reflect the priorities of the national strategy for economic transformation. The agenda will be entirely consistent with the Government’s wider agenda. We will look to those organisations to take forward those priorities, as they always do, within the constraints of the resources that we are able to make available to them. That might involve organisations changing the way in which they work and moving to more digital propositions—there is scope for greater digital propositions in the delivery of services.

Fundamentally, as I said in answer to Fiona Hyslop, we want the enterprise agencies to be engaged in working directly with companies to increase and improve their performance.

Will we see a scale-back in direct investment for businesses from the agencies?

I do not think that that necessarily has to be the case. I have tried to provide a financial settlement that allows organisations to adapt to a much more pressured financial environment and to adjust their way of working to enable that to be the case.

Good morning, Deputy First Minister, and thank you for joining us. I want to pick up on a couple of points that we have touched on and to expand on them a bit.

In response to questions from Fiona Hyslop on tourism, you talked about digital connectivity and its importance for organisations in shifting marketing strategy. More broadly, digital connectivity is clearly important for local and regional economies and because of the shift in working practices as more people work from home. Entrepreneurs often start off at home and therefore require digital connectivity.

In the budget, we see a reduction of more than 6 per cent in digital funding, which is significant in cash terms compared to last year. The Government has noted that that relates to new spend profiles over the life of the programme. Can you give us a bit more detail on that? Importantly, what are the impacts on people who have been waiting for connectivity? How will that materially affect their ability to be connected?

That principally relates to the completion of the reaching 100 per cent—R100—programme, which as Maggie Chapman and the committee will know, has been taken forward over a number of years and is now operational in all parts of the country.

The commitment exists to achieve the objectives of the R100 programme. In essence, we are looking at the detailed delivery of that programme year by year. That approach takes into account the changing picture of investment by telecommunications companies as they roll out their investment programmes, too. As we have seen in recent years, as changes take place in the technology available and the ability of telecoms companies to broaden their networks, it reduces the scale of the challenge under the R100 programme. It is a combination of those two factors.

10:45  

I recognise all the relevant issues that Maggie Chapman raises about the importance of digital connectivity and its centrality to the ability to live and work in a range of locations around Scotland. It is important to remember that we have made absolutely colossal strides forward in the availability of such digital connectivity around Scotland.

Thanks for that helpful response. The geographical areas that are the most disconnected, in a wide variety of ways, have yet to see some of that connectivity. It is imperative that we get that right.

I will shift to another issue, which follows on from Fiona Hyslop’s question about financing the just transition. We have spoken about skills and the importance of getting that element right. If we think about the Scottish economy and break it down into regional and local economies, we find an issue around ensuring that we sustain local supply chains. What do you see as the major challenges, other than the total sum of the budget, in the financial and investment decisions that regional economy boards and forums are or are not making around securing sustainable local supply chains?

That will vary around the country. Let me provide the committee with an example of a discussion that I had with the convention of the Highlands and Islands last autumn. I have chaired the convention of the Highlands and Islands on every occasion that it has met in the past 15 years—since we entered Government in 2007. I have rarely taken part in a more optimistic conversation about economic prospects in the Highlands and Islands; despite all the challenges, it really was a very buoyant conversation about opportunities.

However, one of the common themes of concern about the realisation of those economic opportunities was the availability of housing and of people. It was not just about the availability of affordable housing; it was about housing across all the different strands of the market, simply because of the challenges of delivery in more sparsely populated areas.

It is a different proposition to develop sites in West Lothian, for example, where vast housing expansion is being undertaken, compared to sites that might be 10 or 12 houses in a rural part of the Highlands and Islands. The availability of housing and the ability to put in place specific solutions—I stress that it is not just about the affordable housing programme but applies to other stages of the market—as well as the availability of people, are concerns. That is a challenge in many other parts of the country.

The committee will be familiar with the Government’s concerns about the loss of migration as a consequence of the Brexit process. We are undoubtedly seeing greater pressure on our labour market as a consequence of the reduction in the number of people who are available. That emphasises the importance of trying to maximise the potential of the people who are living here and enabling them to be economically active.

As I said, I think that we are seeing the early signs of progress on that. It is a fundamental part of the Government’s policy programme to do more in that respect, because that will help us to address the issue of child poverty in our society by enabling parents to enter the labour market. By ensuring that there are good economic and employment opportunities for young people in our economy, we can enable more people to join the labour market.

We are verging on a discussion of the national strategy for economic transformation, so I will hand back to the convener.

We are coming to the end of our time on this subject. If questions and answers can be as concise as possible, I will be able to get a few more people in.

I have a couple of quick questions about tourism and hospitality.

As was said earlier, Scotland’s tourism budget has been cut, while the Irish tourism budget for next year has gone up by €30 million. What impact do you think that that has on our ability to compete with a country that has a similar sort of tourism?

For the record, the VisitScotland resource budget has gone from £41.4 million to £41.6 million, so it has increased slightly in cash terms. I put that on the record.

VisitScotland does a fabulous job. It is a really successful agency. It is well led and its marketing propositions are absolutely first class and inspiring. VisitScotland wins a host of global awards and recognition because of its strengths, which helps our competitiveness.

The question was about what happens when a competitor nation increases its tourism budget while we are providing less.

It does not necessarily follow that spending more money achieves better results. I do not think that follows. What matters is effectiveness, and VisitScotland is a supremely effective organisation.

Are you not at all concerned that a country that we compete with for tourism on the global stage is increasing its tourism budget? Do you not think that that has an impact?

I cannot allocate money that I do not have, Mr Halcro Johnston. I can do my level best to fulfil the needs of the budget cycle. I have had to increase tax to enable myself to meet all the commitments that I am taking forward. I have taken some hard decisions to enable us to have the position that we have. I have great confidence in VisitScotland.

It is also really important to recognise the strength of the investment and commitment made by the tourism sector itself. Scotland’s tourism proposition is of formidably better quality now because of the investments that have been made by a range of private organisations over many years. The Scottish National Investment Bank has taken some significant steps to assist that. VisitScotland has invested in a major tourism and visitor development that will enable people to develop their surfing skills at Ratho, on the outskirts of Edinburgh. That is not a sentence that I ever thought I would utter, but I have uttered it.

There is a future media opportunity for you there.

Maybe for us both, Mr Halcro Johnston.

I do not think anybody wants to see that. I will move quickly to wider issues for tourism and hospitality. Colin Smyth talked about the business rates relief package that is available in England. There was a lot of disappointment from the tourism and hospitality sector that that is not available here. I think that there was around £200 million of Barnett consequentials, but you have decided—as is your right—to put that money elsewhere.

You may dispute this, but we are seeing less money for tourism funding and for some of the enterprise bodies but are seeing more regulations for the sector, including the deposit return scheme and short-term licensing.

The Scottish Beer and Pub Association said that the budget

“puts Scotland’s pubs at a significant disadvantage in their recovery given the challenges they are facing”

The Scottish Hospitality Group welcomed the freeze on business rates but said that the budget was

“simply nowhere near enough to see the sector through. There is now a clear differential between England, Wales and hospitality businesses in Scotland. It is a fact that many small businesses will not survive.”

The Scottish Tourism Alliance again welcomed the freeze but said that 23 per cent of Scottish tourism businesses are in “survival mode”.

Do you recognise those pressures on the sector and do you think that you are providing enough support?

I absolutely recognise how tough things are out there. I hear that in my constituency caseload and also engage much more widely with the economy, so I, of course, recognise that. I have tried to address the issues that are put to me by a number of organisations. As I said earlier, 16 business organisations asked me to freeze the business rates poundage, and I have done that, but that does not come without a cost. It is estimated to be a saving to taxpayers of about £308 million. About half of all retail hospitality and leisure businesses will be eligible for 100 per cent small business bonus relief, so a very big part of that sector will be relieved of that pressure.

Obviously, we rely on the UK Government to come forward on some of the issues that are forcing the increase in costs for business, and energy costs are probably the biggest factor of change in businesses’ cost base. I hope that the successor scheme that will take effect in March is able to support businesses to the extent that they need. I would point out that, in a tough budget settlement, all of the agencies are actually seeing modest increases in the resources that are available to them.

In short, I feel as if I have done as much as I can within the resources that are available to me to help those sectors out, but I appreciate that they face tough times.

Deputy First Minister, I would like to pick up on a couple of the cuts and get your comments on their impact. Cities investment and strategy funding is reduced by 12.5 per cent, and the regeneration programme’s budget by 20.9 per cent. I guess that both of those reflect the changing spend profile of programmes and projects. Can you perhaps say a little bit more about what the impact of those reductions in spending will be?

Essentially, that is us responding to the profile of the range of city deals or growth deals, to use the summary title, because they span a number of years. The shortest was 10 years and the longest has been 20 years, and there has been quite a variation in the financial commitments during those years. As projects come forward, they will place varying demands on the public purse.

Some of those projects will also be wrestling with some of the issues that we are facing in our wider capital budget, which are around cost because of the increase in input prices. That might create some challenges for project timescales because, if costs are rising because of rising input prices, there might be an argument for developing a proposed project at a later stage.

I assure the committee that the commitment to such schemes remains in place. We support their delivery in concert with a range of local authorities around the country to reflect the varying timescales that have been put to us.

International trade and investment spending has seen an increase of 11.2 per cent. The Government’s target is to increase international exports by 25 per cent towards the end of the decade. The document that directs all that was published in 2019 and within priority 1 markets was the European Union. Obviously, that relationship has changed, so can the cabinet secretary give us an update on what it is hoped the increased spend will achieve and whether we will see a refreshment of that target in the export strategy?

The increase in expenditure is designed to support the increased international activity of the Scottish economy, and to ensure that we are able to assist companies with that activity. Obviously, that has become more challenging because of Brexit, which highlights the importance of us supporting activity that will enable companies to trade internationally. We will periodically review the focus and emphasis of that strategy.

It is very much like the agenda that Ivan McKee takes forward on the Government’s behalf. We have no immediate plans to revise that strategy, but we keep it under review, and if there are any updates, we can certainly share those with the committee.

Thank you. I have a final question on consolidated accounts, which the Public Audit Committee is looking at at the moment. The 2021-22 accounts show an underspend of £536 million in the finance and economy budget. I suppose that we will know the consolidated accounts for the year that we are currently in in December, but there have been a number of areas—I mentioned employability and Ms Hyslop mentioned VisitScotland—where we believe that, if it was available, small amounts of money could make quite a big difference. Is there any expectation that there will be flexibility in the coming budget as we move into the 2023-24 period?

You alight on my greatest worry just now, convener. As I said earlier, and as I shared with the Finance and Public Administration Committee last week, my current estimate of the overspend on resource budgets lies in a range between £200 million and £500 million, and the variability there is about my assessment of the likely financial performance of a lot of organisations and whether they can come in on budget. My current focus is on trying to reduce that number. We go through these arguments often in Parliament, particularly with the provisional outturn statement that Tom Arthur delivers and the publication of the consolidated accounts, and some of the underspends do not translate into resources that the Government can actually spend. For example, last year there was a large underspend in student loan funding but we cannot spend that on other priorities because it is ring-fenced annual managed expenditure.

My priority is to balance the budget between now and the end of March. I am here in a temporary capacity but, in my nine years as finance minister, there is no way that I was dealing with the likely overspend of this magnitude in the middle of January in any financial year; it would be well settled by this time. I am therefore acutely anxious about that position.

Obviously, if we are able to constrain spending between now and the end of the year, or if something comes our way from the supplementary estimates of the UK Government, which we do not yet have sight of but expect to see within the next four to six weeks, the position might change and there might be some resources to carry forward. However, this is the first year that the Government has set a budget without anticipating carrying forward any resources from this year into next year.

Thank you. That brings us to the end of this evidence session. I briefly suspend the meeting.

11:03 Meeting suspended.  

11:07 On resuming—