Official Report 633KB pdf
08:30
I note that no apologies from members have been received, and we come to agenda item 2.
I am pleased to welcome Kate Forbes, Deputy First Minister and Cabinet Secretary for Economy and Gaelic, to provide evidence on the budget. She is joined by officials from the Scottish Government: Colin Cook, director of economic development; Aidan Grisewood, director of jobs and wellbeing economy; and Kathleen Swift, head of director general economy finance unit. I apologise for stuttering—that title is how it is written in my script, which made me do a double-take because it does not quite flow. Thank you all for joining us.
I invite Michelle Thomson, the deputy convener, to ask the first question.
Good morning. The rest of my colleagues will want to get into specific detail on your portfolio, but I have an open question. Productivity growth is one of the challenges of our times—that has arguably never been more the case—given geopolitical challenges and budget shortages, particularly around lumpy capital.
For the record, I would like you to walk us through how the key elements of the budget will improve productivity growth. It could well be that the trees that you have planted will grow to be big oaks in future years. I would also like you to reflect on the challenges of ensuring a focus on productivity growth across Government, not only in your portfolio. Take it away, cabinet secretary.
That is an excellent question that allows me to set the scene for this budget of choices. It is a tough budget, which makes our choices even more critical. I will respond in detail on the things that you think that I perhaps should or should not have done, although that is the nature of choices, but the choices that we have made are very much to continue to invest in the things that we know will deliver productivity improvements.
Let us start with Scottish Enterprise, Highlands and Islands Enterprise, South of Scotland Enterprise and the Scottish National Investment Bank. Funding is safeguarded for those precisely because of the brilliant performance that we have seen from them in creating jobs, attracting investment and delivering growth in their respective areas. In other words, we know that their approach works. Every cabinet secretary in my shoes would have to make budget choices about whether to do new or fancy headline-grabbing things off to the side in order to make a splash or to double down on the things that they know work. That is point number one.
Point number two is about international trade and investment. Over the past few days, that has been a particular feature of our discussions. Exports and international trade are critical to our businesses. There is £15.3 million to support international trade and investment.
The other two areas that I want to talk about relate to entrepreneurship. We have the Techscaler programme, which works well, and we are investing in innovation. In this budget, we have taken a step forward in response to Ana Stewart’s asks and Shane Corstorphine’s report around scale-up. Both of them say, “Okay, Scotland—international comparisons say that you are doing much better with start-ups. You are actually performing pretty well with start-ups and outperforming some of your comparator nations. That is all well and good until the start-ups have nowhere to go because there is no investment in scale-up.”
The third area that I want to point to is investment in scale-up and building on start-ups. We know, and the data proves, that the impact of new, emerging, fast-growth businesses on productivity is enormous. They have some of the biggest impacts on productivity gains.
The last thing that I want to talk about is what is happening across Government. I point to the programme of public service reform, which my colleague Ivan McKee leads on but which also requires investment in digital. There is significant investment in digital through my portfolio. That goes into Scotland’s digital infrastructure and supports the programme of public service reform—basically, it is trying to make the public sector more productive, as well as supporting infrastructure across the private sector.
Those are some examples of where the budget is built around the things that work and that are most likely to deliver productivity improvements.
Thank you for that textbook answer—it was exactly as I would have expected it to be. I would like to hear more about the second part of my question, which was on how you have been able to ensure that there has been a similar focus across portfolios. Obviously, that is a matter of influencing. You mentioned areas that are clearly in your domain, where you have been able to influence that focus. However, skills, infrastructure investment and so on all contribute. How have you managed to ensure that there is that focus, particularly in the light of what we all recognise are challenging times for public sector funding, with the limitations and challenges in being able to crowd in private capital?
You might recall the question that I asked about the Scottish National Investment Bank when the budget came out. How do you feel that that is going? In other words, do all your colleagues have a similar focus on growth?
From my vantage point, I see that there is a responsibility on me to work with colleagues and to encourage them to make decisions about their budgets that are in line with our approach to economic growth. Economic growth is one of the Government’s four aims, so I am on good soil when I am making that case, because it is an aim not only for my portfolio but for all of the Government.
All my colleagues have their own choices to make. However, you are absolutely right in what you said about skills. There is an additional £70 million for the college sector. That sits alongside the £90 million employability fund, which we fought tooth and nail to protect. We are working closely with Ben Macpherson on the skills side and with Shirley-Anne Somerville on issues around economic inactivity, which creates child poverty. On those two fronts, we are working closely together to ensure that investment is protected in the areas that I know lead to productivity gains and economic growth.
The other issue—which it is hard to miss, because it is so mammoth—is infrastructure. Good investment in infrastructure can lead to significant economic productivity gains and, more than that, it is about having a pipeline. The pipeline has been published, which gives the construction sector and investors more confidence about what is happening in Scotland. That is a massive area that could increase productivity. It includes hospitals and schools and so on; it also includes roads, which have a significant impact.
Those are two areas in which I do not control the vast majority of things that are most likely to lead to productivity improvements. Skills and infrastructure—or, rather, transport—are outside my portfolio, but I can use my very effective skills of persuasion to encourage people that those are good things to do.
I know that other members want to come in, but I have a couple of wee observations. First, my understanding was that it is not £70 million for colleges; it is more like £40 million, because the numbers for the Dunfermline campus of Fife College had already been included in the previous year’s funding. I suspect that that will come up at the Finance and Public Administration Committee, and it is not in your domain. I also suspect that the infrastructure delivery pipeline will come in for a bit of questioning. It is a very good wish list but, in my opinion, it is some way off being a plan.
Michelle Thomson raised with you the importance of scaling up businesses. I think that we agree on that. Can you please give us more details on how the budget will support the scaling up of businesses?
In the past, you and I have slightly disagreed on support for start-ups. It is not that I do not support start-ups, but “start quickly, fail fast” is not a model that I am particularly supportive of. I prefer the idea of creating businesses with the intention that they will last a long time and support communities for a long time. In that regard, I think that taking already successful small Scottish businesses and helping them to scale up is the key.
With regard to where the thinking has come from, there is great material in the work by Shane Corstorphine that was published just before Christmas. It sets out how Scotland has performed in general when it comes to small businesses, and it identifies pillars that we should invest in to enable such businesses to grow. He is fairly open on sector and age of business.
You said that we should support small Scottish businesses that may have been around for a long time, as opposed to ones that are new and emerging. Shane Corstorphine talks about talent and the ability to attract it, capability and resilience, governance issues and internationalisation, all of which, I would say, are the hallmarks of a business that will last. It is a question not of measuring businesses on the basis of performance and how quickly they are growing but of considering what we need to invest in to make them resilient.
That work sits alongside the work that Ana Stewart has been doing. You will know the background of her involvement in the “Pathways” report, which is all about getting people from underrepresented backgrounds into entrepreneurship. The pathways fund has been running in the south of Scotland for a couple of years. The recipients of that fund are all brilliant people who are heavily embedded in their communities.
When it comes to scale-ups, we have identified some funding in the entrepreneurship and innovation funding line, and we will work with Ana Stewart to invest in the areas in which she thinks that investment is most required to build on the high performance that we have seen in support for start-ups and to carry that over to scale-ups.
We have seen a huge breadth in the businesses that have applied to the Techscaler programme or for pathways funding. The young woman I met a couple of weeks ago, who has applied for and received pathways funding, works in the textiles industry, so what she is doing is not very techie, but it is a brilliant business in a local community.
For the past few weeks, the committee has been working on the Community Wealth Building (Scotland) Bill, and I think that there is consensus across the room that it is a good thing to ensure that more wealth is retained in communities and to help to build such wealth across Scotland.
I have heard frustration about the commentary that our enterprise agencies and Business Gateway are not set up to support co-operatives and other democratic business models, which means that, when people are looking to start a business, those models are not presented as options and the advantages that they offer are not mentioned. There is lots of data that shows that such businesses contribute more to their communities than traditional profit-based businesses.
In order to get the best bang for our buck in our investment, do you intend to use the Community Wealth Building (Scotland) Bill to achieve a shift in how our enterprise agencies support businesses so that we can make the optimum use of funding to support the kinds of businesses that will help with community wealth building?
08:45
Yes, and I will let you ask that question of whoever is sitting in this hot seat in the next part of your meeting.
However, I would just point to something that is, perhaps, a little bit different to what you are specifically asking about but which is built on the same principles: the investment in social enterprises that is in our budget. I point to that in recognition of the fact that, in the economy budget, we are not just supporting traditional business models; we are continuing to invest in social enterprises, too. Indeed, we have a long-standing relationship with Firstport and others and have supported them in finding and investing in social enterprises across Scotland.
All those enterprises have slightly different models, too. There is no specific line in the budget for, say, co-operatives, but I do think that in the budget—and our support for social enterprises, which has been safeguarded—there is an acceptance and a realisation that different business models are a critical part of our economy.
I would certainly like to see more emphasis and guidance from you to the enterprise agencies on co-operatives, because they do not have to be small and worthy—they can be enormous and generate huge profits, too. The difference is that those profits stay in Scotland and Scottish communities, so I would love to see a bit more ambition on that front, now that we have the community wealth building bill.
I want to ask a final question about business before I move on to skills. From the breakdown of the budget that we have seen, it looks as if, for the enterprise agencies, capital investment has gone up and resource spending is down. Is that a choice that you have made, or is it something that has been forced on you? How do you imagine that affecting the work of those agencies?
This has been a really tough, really hard budget. As you will probably recall, in a role such as mine, you have to choose a few things to really fight for, and one of the areas that I really went for was protecting the capital budget for the enterprise agencies. Why did I do that? I did it because that is the disposable stuff—I am sorry; perhaps I should have said that that that is the stuff that they can invest in businesses.
We all want a highly efficient public sector, which, for me, means that every pound spent in the economy has to cost as little as possible. As a result, maximising the capital that the enterprise agencies have to invest in businesses and sectors was a priority. When it comes to the revenue side of things, our enterprise agencies were, like all the public sector right now, already looking at how the shape and the structure of their workforce can be made fit for the future.
I am very open about the fact that what efficiency means to me is that every penny that is spent in the economy should cost as little as possible to the public sector. That was the model.
That is an interesting approach. We have taken evidence a few times from the enterprise agencies, and it seemed that there was no clear data on whether it was better for them to give out money or to teach businesses to go and find funding for themselves. It was a sort of “give a man a fish or teach a man to fish” situation. By cutting resource spend while increasing capital spend, we seem to be planning to give out more fish instead of supporting businesses to go and get their own funding. Was that intentional?
There absolutely needs to be a blend. The years of having lots of grant funding to give out are gone—that is not what we have right now. What we have are some brilliant people who are highly skilled at what they do, and who can come in alongside and have an on-going relationship with account-managed businesses.
However, I also think that it is essential that, when required, the enterprise agencies and the bank have capital that they can invest, whether it be for derisking an investment that might be, say, high risk and which the private sector will not go near, for various reasons; for supporting a business in a bridging context; or—and this is even more essential—for those investments where there is scope for the enterprise agencies to get significant income.
One of the changes in this year’s budget has been the agreeing of a number of flexibilities for Scottish Enterprise to retain some more of its income. When it has made an excellent investment that generates returns, it will be able to reinvest that to a greater extent than it could previously.
It is not just about the tension between advice versus capital. The capital part is essential, and the purpose of the capital will be different for every business, but in some cases, it generates significant returns to the public sector, which is to be welcomed.
My final question is about skills. I know that you covered this slightly with Michelle Thomsons, but, in terms of optimising our spend in the skills space with the Withers review and the restructuring of that space, how have you made decisions about where that money is optimally spent, and which elements of the skills landscape are you choosing to invest in?
What is in my budget, rather than in the general universities and colleges budget, is the employability fund, which has protected at £90 million for next year. That funding goes to specialist employability support. For example, last year we launched our specialist employability support for disabled people. It also goes to support the no one left behind scheme, which is about reaching those who are furthest from the workplace.
There is also an approach to support parents back into work. There is an obvious correlation between workless households and child poverty. Yes, I accept that there are children in poverty who are in a home where a parent works, but it is almost guaranteed that where there is worklessness, there is greater poverty, so there is also investment in the parental employability support fund, which is about getting parents into work.
We have some good data on all of that, but, as I have shared with the committee previously, the difficulty that we face is that it costs a lot of money to get someone back into work—it is financially intensive, and it is about working intensively with people. Having that funding guaranteed now for the next few years in the spending review will allow local authorities and the third sector organisations that the money goes through to invest in people for the longer term. We know from the data that we might get somebody into work in one year and the figures look great, but if we come back after a year, will they still be in work? That is what the £90 million goes to. I can go into a little bit more detail if you would like, but that is largely what the £90 million is invested in.
Thank you. I would like to bring in Murdo Fraser.
I have three short questions about different areas, but before that, I want to go back to the questions about the enterprise agencies. In response to Michelle Thomson, you said that the enterprise agencies had given a brilliant performance. I am just looking at our Scottish Parliament information centre briefing on the budget allocations to Scottish Enterprise, SOSE and HIE, all of which are seeing a real-terms reduction in resource budget.
You referenced Scottish Enterprise’s capital budget compared with that in 2025-26 after the autumn budget revision. The capital budget was £95.2 million. In this budget, it is down to £89.5 million. If that is the reward for a brilliant performance, what would you be doing to those agencies if they were not performing well?
They are performing well and I love the fact that, in the premise of his question, Murdo Fraser has put on the record that he agrees that they are performing well.
I said quite openly to Lorna Slater that it has been a difficult budget and, in a difficult budget, we have to choose what to back. The impact of Scottish Enterprise and the other enterprise agencies is in what they can invest in sectors, industries and businesses. That is why we have protected their capital.
I accept that resourcing is challenging across the entirety of Government and the public sector. For a very long time, business organisations—perhaps not this committee—have wanted to see greater efficiency in the public sector. I am proud that the enterprise agencies, particularly VisitScotland and Scottish Enterprise, have led the way in that regard, and the latter is in the process of understanding how its structure can be made fit for the future.
The resource budget is probably born of three things: we have made big progress on the financial flexibilities that Scottish Enterprise was keen to see; the budget settlement, because we cannot create resource that does not exist, and every part of the public sector grapples with that; and the shape of those enterprise agencies, which needs to be as nimble and efficient as possible, and I will continue to double down on that. Businesses that have come through the past few years want to see the economic arms of the public sector acting as efficiently as they have had to in light of rising costs.
You emphasised the need for our enterprise agencies to be nimble and efficient. I recently met SPRI, the Basque Country enterprise agency, which disburses grants of around €130 million and employs 80 people. I recognise that Scottish Enterprise is restructuring, but it employs more than 1,000 people. I also recently met Enterprise Singapore, which employs about 1,000 people, but it also supports small and medium-sized enterprises and undertakes a role that is Singapore’s equivalent to the British Standards Institution. Finland is a comparably sized country with a comparably sized scope, and Business Finland leads on innovation but employs fewer people. Do we really have the right balance between people and the money that goes out the door?
One thing that we struggle to get out of enterprise agencies is a clear articulation of how much money they get out the door versus how much they spend running themselves. Do we need to question those balances and whether we get the best bang for our buck from our agencies?
If Daniel Johnson were sitting where I sit right now, Murdo Fraser would have even more exciting questions to ask about budget settlements. The point is well made and goes back to exactly what I have said. The balance is essentially between the funding that is spent in the economy versus the cost of spending it. There is no doubt that the performance of our enterprise agencies reflects the brilliance of the people who work there. However, in the past few years, the enterprise agencies have also led the way in looking internally at how to be fit for the future.
I do not know whether anyone wants to say anything else on the figures, but I have almost accepted the premise of Murdo Fraser’s question without challenging him by noting that funding for our enterprise agencies has increased, albeit the increase for capital is greater.
That is not what the Scottish Parliament information centre’s briefing says.
The figures that are published in the budget that relate to the agency’s 2024-25 outturn, its 2025-26 autumn budget revision position and its 2026-27 budget allocation are not comparable. Scottish Enterprise’s opening budget position for 2025-26 can be compared with the opening budget position for 2026-27, which shows that it will receive an increase of £1 million. That includes an increase in resource of 1.2 per cent. I am more than happy to share those figures further, but, by comparison, the capital increase is 8 per cent.
Do you recognise that, when the Government presents the budget, it compares it with the budget revision rather than with last year’s budget position?
Absolutely, but it is important to see how those budgets have shifted. You cannot just disregard what has happened in the intervening period. The point is that there has been an increase from the opening budget last year.
However, it is a relevant comparison, because the Government makes it in its presentation of the budget.
09:00
It is a very relevant comparison, but it is not the only one. That is my point. Obviously, in-year changes are presented in the budget, because they are important. Previously, they were disregarded. My point is that it is relevant to compare where we were this time last year with where we are now.
I do not know whether Kathleen Swift or Colin Cook wants to add anything further.
The capital position of Scottish Enterprise has increased from last year by 8 per cent. Scottish Enterprise and other agencies have had significant in-year transfers. For example, through the ABR, £23 million came in to Highlands and Islands Enterprise to support the offshore wind programme. That is what changes the figures and makes the comparison very difficult.
We could debate the figures all day. Figures from SPICe show that the 2025-26 capital budget for Scottish Enterprise was £90.1 million, whereas it is £89.5 million in the budget that has just been presented. That is a reduction, not an increase.
Funnily enough, I recognise neither of those figures.
We will let the Scottish Government and SPICe fight it out.
It may be to do with the combination of capital and financial transactions, potentially. I do not know. I would need to rapidly get my calculator out.
My reason for answering the question in the way that I did is that, rather than getting into a tussle about numbers, the principle of my opening answer to Murdo Fraser’s question still stands. It is about what we are seeking to do. I am proud of what we are seeking to do when it comes to the shape of those agencies.
Okay. I will ask about VisitScotland. According to table 9.14 in the budget document, the tourism spend is down from £55.8 million, after the autumn budget revision, to £52.2 million. I am sure that you will agree that tourism is a vital driver for the Scottish economy. Tourism businesses are really struggling at the moment, due to rising cost pressures—not least, rates revaluation. Why has the spend on tourism gone down?
The figures in front of me indicate that the resource allocation is £39.86 million next year. Alongside that, there is capital for things such as the rural tourism infrastructure fund.
Two additional funds were allocated last year for VisitScotland, as a one-off, to reflect some of the challenges that the tourism economy was facing. One was about trying to distribute visitors over a wider area. There were big problems with tourism congestion in certain areas, so there was £1 million to support areas that are less visited. The other was about increasing international marketing because of the challenges around that. Those were both one-off budgets. However, our funding continues to support VisitScotland, which has a key role to play.
In addition, we should not lose track of the fact that this summer in particular is likely to be quite busy, and there are huge opportunities for VisitScotland in people travelling to or watching big sporting events, for example. It can do a lot out of that to support the accommodation and hospitality sectors.
It is going to be busy, so you are going to cut the budget that attracts people to Scotland—is that it?
A lot of—
My wider point is that we continually hear from the Scottish Government that economic growth is a key policy outcome, yet I do not see that being reflected in the budget figures for your department.
I think that you do. My point is that VisitScotland’s brilliant work is largely in attracting people to visit the country. We literally have a Commonwealth games through which people will visit the country, and we also have people inclined to watch football while spending money on food and beverage in accommodation and hospitality venues. My point is that VisitScotland does brilliant work, and I do not want to take away from that, but we also have the potential for a real bonanza this year through other people doing our work for us—through, for example, the Commonwealth games.
VisitScotland has a key role in enhancing connectivity and bringing new investment to Scotland because it is a high-performing agency, but I have a budget in front of me. I have to make it go as far as possible and, in doing so, must understand where I need to invest in order to increase performance. VisitScotland will do another outstanding job this year, but hopefully with a bit of help from other sources.
I have one more question. We have mentioned tourism. If you are anything like me, your inbox will be full of concerns from hospitality and self-catering businesses about the rates revaluation. People are extremely concerned about the impact that that will have on the viability of their businesses, should the proposed rateable values be solidified. Some will see two, three, or four-fold increases and will not be able to survive. There was disappointment that the announcements about reliefs and rate poundage in last week’s budget would help some but would go nowhere near to addressing those concerns. What more can the Scottish Government do to address that serious issue?
I accept that that is challenging for many businesses. There is a challenge every few years for businesses that see an increase in their valuation because of the work that is done by independent assessors. If I think back to the previous tone date, and to where the economy was then, I can see that we are in a very different place now and that it makes sense to see such a significant variation, but I know that that does not make it any easier.
You are right to say that reliefs have been introduced in the budget. There is a 15 per cent relief for retail, hospitality and leisure and a 100 per cent relief for island businesses. The cabinet secretary made another point that I took a lot of comfort from, which is that, if there are additional consequentials from what the Chancellor of the Exchequer does for pubs, the Scottish Government will reinvest that in further reliefs. That is to be welcomed.
Murdo Fraser can remind me of his position, but I have heard a lot of people calling for the revaluation to be suspended or stopped. I took some views on that from business organisations and found quite a degree of hostility in many quarters. Some sectors of the economy are relieved with their valuations and will see an improved picture with their bills. We know that simply delaying a revaluation, even if you assume an inflationary increase in all the rates, would have led to a significant loss of revenue because businesses would not be paying. We also know, from engaging with some sectors, that they have more to gain. With any revaluation, some will win and others will face challenges.
I have a follow-up question. Do you accept that there are legitimate issues with the methodology that is being applied to a sector such as self-catering, where, in the view of many people, the assessors are not accurately reflecting the way in which the sector operates and its profitability? Do you agree that that must be addressed? I understand that the assessors are independent, but the framework under which they operate is set by legislation.
I am extremely sympathetic to some of the criticisms of the methodology. That is why I strongly supported the approach that the Government took last year, which was to have a formal and independent review of the methodology. I appreciate the need to receive and implement the recommendations of that review. I am also conscious that there will be big questions for the next session of Parliament on the issue of reviewing non-domestic rates and implementing any changes to the methodology, but there are also far bigger questions. The issue comes up a lot in Parliament.
Obviously, the approach in England and Wales was in essence to bring the assessors more in-house. That would be a fundamental change in how assessors operate, which I personally do not favour, because independence of the assessors means that Governments are less likely to tamper or interfere with what the assessors do. However, I accept that non-domestic rates need to feature significantly in the next session of Parliament.
Thank you.
What are the key economic challenges over the remainder of the spending review period? How will future budget decisions need to change to support sustainable growth? The committee has spent a lot of time talking about the just transition and the need to invest to protect jobs, but where are the big opportunities?
With a question like that, it is always easier to focus on the biggest concerns and risks, so I will start with the biggest concerns and risks, as I see them. Right now, there are probably three that I would point to.
Yesterday, I answered a question on what the proposal on new tariffs might mean for business. We know that the whisky industry has lost about 1,000 jobs and that tariffs are costing the industry millions every month, and we are now talking about the risk of increased tariffs on top of what the industry is already grappling with. That uncertainty alone makes it almost impossible for businesses to plan. We are a small nation. We rely on export and international trade, and we are dependent on high-performing sectors that are disproportionately affected by global headwinds and so on, all of which you know.
The big issue for us will be how to invest in new markets and support trade to new markets. Some of that might be quite uncomfortable, and some might run counter to what some parties in the Parliament believe that Scotland should or should not be doing, particularly on international trade. However, it is now becoming a bit of an existential risk for us if we do not build some of those strong links. There is a lot of interest. Just before Christmas, we hosted the first Investopia global event from the United Arab Emirates here in Scotland, at which we showcased some really exciting Scottish businesses. We will need a real intention to work with new markets.
The second risk is the continued increase in costs. From looking at this morning’s inflation figures and some of the challenges that remain on energy costs, we can see that the situation is really challenging. I therefore do not think that the Government should be adding costs. Although I am in favour of our doing the right thing and ensuring that regulation makes sense, given the burden of costs that businesses could potentially be carrying over the next few years, I think that, in the next session, the Parliament needs to carefully consider how it adds to or removes from that burden.
My last point is about backing key sectors that have the most potential to grow the economy. You talked about the just transition. We have a huge opportunity with the supply chain for offshore wind, but that supply chain will not get orders if the offshore wind industry does not get through the various gateways that it needs to get through on consenting, auction rounds and grid connectivity. Both Governments should just say, “Look, this is the greatest opportunity to create jobs and support local economies—let’s absolutely back it. We will do our level best on rapid consenting—obviously, while making sure that it is right—and we need ever more projects to get through auction rounds.” Although I very much welcomed the fact that two Scottish projects got through in auction round 7 last week, that has not dealt with the transmission charging issue for some of the more expensive projects, which is where the real value lies.
I am sorry if that answer was a bit broader than you anticipated, but those are three risks and three opportunities that I think could remain as risks if we do not deal with them.
09:15
That actually lets me come on to my supplementary question in an even better way than I had imagined.
And we had not even prepared that.
Given your points about investing, ScotWind is a massive missed opportunity. The planned capital utilisation in 2025-6 reduced from £341 million to £153 million. Some of the money went into resource spending. Is it not a massive opportunity for us to invest in the sector? You have talked about the challenges, but only four out of the 29 companies that own ScotWind developers are headquartered in the United Kingdom. There are companies from other European countries, including Ireland, Sweden and Denmark, as well as regional Governments in Germany and Belgium, that own projects in ScotWind. Could we not take equity stakes and generate income?
You have started off by talking, quite rightly, about infrastructure, productivity and skills. If we made those projects deliver on fair work principles and support supply chain initiatives, would it not be a win-win all round? Is that something that you could advocate?
Last year, Future Economy Scotland carried out some work and basically said that it was a massive economic missed opportunity. We could just get on with taking those equity stakes and making profits, as well as building and using the supply chains and recruiting people.
I am somewhat distracted by the choral soundtrack that I can hear.
We always have a band playing for us. [Laughter.]
I blanked that out; I could not hear it.
Oh, it is outside. Sorry—forgive me.
We do not have to leave the window open.
No, it is fine. I was just wondering where it was coming from.
Sarah, there is a lot in your question. You started with how we are spending ScotWind money. Last year was a really big year. We have committed £500 million over five years to invest in developing the supply chain that is required for offshore wind—the argument being that in previous renewables revolutions, we have not done as well to derisk the supply chain investments that are required up front—so that when those projects get over the line, they have a supply chain to draw from and to place contracts with.
With that £500 million we have made very substantial investments. Last year, we invested £150 million, which was funded from capital that is raised through ScotWind—it is a great example of recycling.
Secondly, I reject the suggestion that it is a missed opportunity, and I reject it because focusing only on revenues that were directly raised from the leasing misses the big opportunity with ScotWind, which is the commitment that every single successful bidder made to invest in the supply chain and in the economy. I know that a pound that comes back to Government is not half as valuable as a pound that is directly invested in the supply chain.
I know you want to come back in, but I will just add another point. At the time—in 2021 and 2022—all of those successful bidders committed to about £1 billion of investment in the supply chain per gigawatt. I hear my colleagues talk about £1.5 billion, so that figure has obviously increased since then. That was done in the light of the suggestion that deployment of ScotWind projects would be costly—which turned out to be true—coupled with our desire to see an investment in the economy.
Thirdly, you asked about whether it would be more valuable if those companies invested in the supply chain and in jobs. We have pushed our powers as far as possible in compelling an investment in the local supply chain. There are limits to what we can require around local content. A lot of the issues have been well covered in and around the Alexander Dennis situation and other situations. We have used a number of different mechanisms to compel as far as we can investment in local content. There are questions around penalties and what we cannot do around penalties, but that is an issue that could be resolved between the UK Government and ourselves.
Lastly, you were talking about fair work, and in what we did with green freeports we have led the way on that. After Labour came into power, other freeports have now followed suit in replicating what had already been implemented in respect of fair work in the green freeports in Scotland.
There are two things to follow up on from that. First, you did not really address the issue about potentially taking equity stakes, which would involve using existing Scottish Government funding and having resources coming back in that you could reinvest, which would empower you to go further in terms of the decisions about your supply chains and where you get your manufacturing done.
The Scottish National Investment Bank is doing that, to an extent. It invests in equity, and has invested in some of those supply chain and power generation schemes—that is probably the primary route in that regard. It is able to retain the income that it generates from those equity stakes.
The point that you make was put to me frequently in 2021. At the time, Scotland’s capital budget was about £5 billion, and we had 25GW agreed through leasing, with a promise of £1 billion per gigawatt. Obviously, that would mean £25 billion of promised investment in the supply chain, which was five times more than the annual capital budget of the Scottish Government.
I am very sympathetic to the notion of taking equity stakes but I think that you need to make the arithmetic add up in terms of the capital budget that we have. The Scottish National Investment Bank can do things at that scale.
It is useful to get that feedback, because the arrangement works in other countries.
The planned capital utilisation has reduced from £341 million to £153 million. There is money there, but we are not spending it, and we are not reinvesting it.
We are. I absolutely reject the suggestion that we are not reinvesting it. Last year, £150 million was pledged to invest in the supply chains of these companies. We are reinvesting the money through enterprise agencies and the Scottish National Investment Bank. Where it is appropriate to do so, the bank can take an equity stake.
You mention other countries. I would be really interested to know what the annual capital budget is of some of those other countries, because I would venture a guess that it is somewhat larger than £5 billion a year.
On the amount that came in from ScotWind, I will park the question of whether we could get more income from it, and focus on the question of why we are not spending the money that is coming in from it.
We are.
I would like to see a detailed list from SNIB of the equity stakes that have been taken, because that is not in our briefing, and there is still that issue about not spending the money that has already come in—it is going elsewhere.
We will draw the Scottish National Investment Bank’s attention to what you are saying. Obviously, it is independent of me—I do not tell it what to do—but I am sure that it can take into account what has been said in our exchanges. However, I reiterate the point that £150 million of the £500 million that has been pledged is being invested in the energy transition in those businesses, and that will generate a return. I guess I am agreeing with the principle that you are outlining; I am just disagreeing that we can do that at the scale that some other countries might.
Okay. I just think that it is a missed opportunity. We do not have anything in those projects, and other countries are going to get resources out of our natural environment.
I am really sorry to say this, but that makes absolutely no sense. If the funding is generated by those businesses when they bid for the leases, you cannot simultaneously take an equity stake in the companies that have just bid for the leases. It is just a question of timing. What you can do is reinvest the funding that was raised through the bidding on those leases and invest it in the projects that come after the initial leases, which is what we are doing with the £500 million that has been pledged to the supply chain. I would point to what is happening in Ardersier and Kishorn, and I think that the Pentland facility might be another example—someone can correct me if I am wrong. That all involves funding that came from the leasing rounds and has been reinvested. However, we could not have taken an equity stake in the companies at the point when they were bidding, using the money that they were pledging to spend.
You need to plan ahead; you cannot just do it.
But you—
On the other thing that I wanted to finish with, you did not mention Berwick bank, and we have a huge opportunity—
If you could make this question brief, please.
I am stopping at this point.
I was keen to try and finish as close to 9.30 as possible, and there are another two members—
My last point is about Berwick bank and the port of Leith. I will stop at this point, however, as that project is not happening yet.
Sorry: is there a question there?
No—it is just a reflection. The Deputy First Minister mentioned some projects, and I have just mentioned the fact that we have not heard anything about the Berwick bank project and the potential for building the turbines in Scotland—in Leith.
That is a good example of getting through consenting and auction rounds. The company has some issues still to resolve, but that will be up to it. The project represents a huge opportunity in terms of supply chain. We need to get the manufacturers over the line, one of which is currently caught up in an international security question.
I have had indications from Willie Coffey, Stephen Kerr and Kevin Stewart that they wish to ask questions. I will bring them in in that order.
Good morning, Deputy First Minister. I would like to ask you just one question. How does the budget help to address the plight of our high streets? I notice that there is a regeneration line in the budget that has dropped—it has been cut.
The issue goes beyond the matter of rates, which some members have raised already. It is wider than that. Retail is leaving town centres and going to business parks. People are shopping online, and that puts retail on the high streets under severe pressure. The level of rent and rates for the main streets in our towns is beyond the business bonus scheme that we have introduced over recent years. What can the Scottish Government and partners do to help turn things around and address the plight that our high streets are facing?
That has been a feature of our debate over the past few years, with the enormous growth of online in particular. With our budget, it is a matter of understanding areas that we can influence and areas that we perhaps cannot influence. That is one of the reasons why I am so keen to support high-growth, small businesses. The impact that they have on local economies in particular far outstrips what has happened.
That is also about empowering local partners to take action. In my town of Dingwall, Highland Council has recently refurbished and made available three or four new units. Considering that those units had been lying derelict for years, the council was taken aback by the level of interest in using them. That could mean three new businesses occupying those units.
My point here is that interventions of that sort are best done at a local level—by local authorities that see the value of the economic opportunity.
Can you see how, from our point of view, the budget line shows that the budget for that has almost been cut in half?
Is that for regeneration?
The regeneration budget, yes: it has almost been cut in half.
We have continued to fund regeneration. The first year of the capital spending review includes income of £12 million from the Scottish partnership for regeneration in urban centres fund—SPRUCE—which was the repayment of a final outstanding loan. That was supported with investment of £12 million through the building Scotland fund, which is expected in 2026-27.
Aidan Grisewood may wish to say more on that.
Because that income is factored in for the year ahead, that reduces the overall headline number. In terms of spending power, however, that £12 million is there, too. I appreciate that there is still a reduction, but it is not as big as the headline figure makes out, because of the SPRUCE income.
In the interests of time, I will let other colleagues in now.
May I ask the Deputy First Minister some very quick questions and go through a number of different issues very quickly, just to tie up some loose ends?
As long as the number of issues is relatively contained.
Yes, I will be very quick. Deputy First Minister, you mentioned Alexander Dennis. How much of the £4.1 million has been drawn down by Alexander Dennis?
I do not think that any of it has been drawn down yet. That money will be drawn down only when the company can evidence orders.
Where are we with all of that?
That would be a commercial decision for Alexander Dennis. I am not going to go into detail on where it is with orders, but we remain confident because it remains confident.
09:30
We have discussed the enterprise agencies. Scottish Enterprise has had a 3.4 per cent real-terms cut in its resource budget. My sources inside Scottish Enterprise tell me that the effect of that, taking into account last year’s salary increases, which have to be brought into the calculation, is that it will have to make redundancies.
This is a very general question. Given Scottish Enterprise’s 3.4 per cent reduction in budget, Highlands and Islands Enterprise’s 4.6 per cent reduction and South of Scotland Enterprise’s 4 per cent reduction—those are real-terms figures—how many of the 11,000 jobs in the public sector that the Government is going to cut in order to be able to balance the budget do you expect to come from those agencies? What impact will that have?
Scottish Enterprise is currently engaging in a restructuring process—that is public knowledge.
Do you have a number in mind?
That is a matter for Scottish Enterprise. I do not believe that it goes into the process with that approach. I believe that it takes the approach of thinking, “What do we need Scottish Enterprise to be doing? How do we make it fit for the future?” It is engaging in conversations with people.
I do not have a number, because there is not a number.
Right. I presume that there must be a number, because people inside Scottish Enterprise know that there will have to be redundancies on the basis of a third year of real-terms cuts.
I accept that Scottish Enterprise is going through a restructuring process, but we have not given it a number. We do not do that.
I have some quick questions on employment. Do you have statistics on the employability funds and programmes that you have cited a few times this morning?
We do.
Do you have statistics on the number of people who have gone through those programmes and have then gone into full-time work?
We do.
Can you share those?
Happily. We have brilliant data on that.
Excellent.
I turn to the Scottish child payment, in relation to which I have frequently raised a concern about the cliff edge that exists when it comes to encouraging people to take promotions, salary increases or different jobs. There is a cliff edge in the sense that, at a certain point, they will lose all their benefits if they do that. That acts as a disincentive for people with regard to employment. Is that a concern for you? If it is, what discussions have you had internally with a view to moving away from having that cliff edge?
It is not a concern that I have to any great extent right now, but it could be a concern, so we must keep an eye on that. Right now—unless my colleagues tell me otherwise—we are not getting lots of feedback to tell us that that is a particular issue.
If there was an issue, we would expect to get feedback from employers telling us that so-and-so did not proceed. I make that point because, in the past year in particular, we have done a huge amount of work on economic inactivity with brilliant employers, who are trying to retain in work those who are most at risk of leaving the labour market. I would imagine that the people you are talking about are in that category.
I get such feedback from employers, particularly when it comes to asking people to work extra hours—in other words, overtime. People are reluctant to take overtime.
Is that information in a shareable format? Could you share it? Could you anonymise it?
Let me see if I can do that. It is based on conversations that I have had.
I would be interested in that.
It is not data that I can share with you; it is anecdotal evidence. However, that situation seems to be quite widespread. When people are offered a few extra hours of work, they say, “Hang on a minute. That means that I would be at risk of losing this much.” There is no tapering effect. It is all or nothing. We should be concerned about that.
There are many other questions that I could ask, but I promise that this will be my last one. It is about the freeze on the thresholds for the higher, advanced and top rates of tax. There has been a lot of commentary by economists about the impact that that has on Scotland’s attractiveness as a place to move to, particularly for high-worth workers. Because of the freeze, people who are already paying higher rates will have to pay more, and more people will fall into the top brackets.
Are you concerned about the effect of that on the attractiveness of Scotland as a labour market? Have you had conversations with colleagues on the issue? Will action be taken?
About three quarters of taxpayers are expected to be unaffected by our maintaining the higher-rate threshold at the same level.
Which level do you mean?
The higher rate.
Are you saying that more people will not fall into that category?
The 74 per cent is the figure that we expect to be unaffected by maintaining—
That is still a lot of people.
It is, but it means that three quarters of people are unaffected.
For almost the past 10 years, there has been a recurring question—so at least it is expected—about the behavioural impact of the tax decisions that we take. We now have data from His Majesty’s Revenue and Customs that runs up to about two years ago and which demonstrates that, with every budget when members—to be honest, it was mostly Murdo Fraser—were telling me that it was going to have a devastating behavioural impact, that was not the case, because there was on-going inward net migration to Scotland. That is because people make decisions based on more than just income tax positions.
Is that people in the top brackets?
We have, however, always accepted that we need to keep the issue under review, and we need to make sure that we are taking a fair approach. What the Labour Party has done in England on freezing has set a different context for the tax decisions that we take. Actually, I think that Rishi Sunak did that as well, in terms of freezing, although I cannot recall precisely.
I am not saying that you are the only Government that has done it. I am just saying that we have higher burdens of taxation for people who are earning—
My point is that we keep the divergence under review, and decisions taken by the UK Government are also taken into account. The short answer to your good question is that we keep it under review.
But it is a concern that you have.
We keep it under review. At the moment, it is not a concern, because of the data that we are seeing, but we keep it under review.
Okay—
Thank you very much.
I think that lots of people—outside the Government, obviously—have concerns about the effect on the Scottish labour market.
Thank you very much. I would like to bring in Kevin Stewart.
Good morning, Deputy First Minister. The Government pledged £500 million over 10 years for the north-east and Moray just transition fund. Does that pledge still stand?
Yes, it does.
There has been less spending in the first few years. Do you see that accelerating as we move forward?
Yes. Since launching in 2022, £85 million has been spent, involving 28 projects across the region, and 230 jobs have been created and safeguarded. The fund has opened up more than 750 training places via skills-focused projects and attracted more than £30 million in private investment and £4.7 million in public and third sector investment—that was from £43 million of the initial just transition fund investment. Those are strong figures that are based on an independent evaluation of the first two years of the fund, which will continue to grow.
I take it that the Scottish Government will continue to pressure the UK Government to match that funding to get the transition right for workers in the north-east of Scotland.
We live ever in hope.
So do I, but I am a little bit more cynical.
One thing that has been of huge benefit has been just transition participatory budgeting, which has allowed community groups to get involved and to fund projects that help in the transition and, in many cases, create good employment. However, one of the bugbears is that all of that is capital money. Will the Government consider having some revenue inputs, which could lead to greater community participation and an increase in community jobs?
I will take that away. You will see from my budget that resource is particularly challenging compared with capital, but I will certainly take that away.
Could the Deputy First Minister talk to colleagues to look at the cross-cutting nature of some of that work and to see whether other budgets could come into play to find that revenue?
Happily.
My final question is on the Scottish National Investment Bank’s role in the just transition. As it stands, is SNIB investing enough in support for companies that are moving to a just transition position, and in particular manufacturers and the supply chain? There have been some very good investments, but I am not entirely convinced that the area is being considered enough.
The just transition is one of SNIB’s three core missions. In the past two years, the level of investment, particularly in the supply chain, has been quite impressive across enterprise agencies and the bank. Highlands and Islands Enterprise has been one of the biggest recipients of the £500 million supply chain funding.
The bank has also made substantial investments. I will leave defending the investments that it makes to it, because of its operational independence. That level of investment across the board has been very encouraging, and I would like to see more this coming year.
Thank you. That is probably the briefest I have ever been, convener.
It is, and we thank you for it, Mr Stewart, although we always enjoy hearing from you.
In closing, I would like to ask two final questions; the first is very specific and the second is more expansive. Does the Deputy First Minister recall that in the autumn I raised with her a point around thresholds for full accounts for charities, given her remit on social enterprise? I note that the Scottish Government raised the threshold to £1 million at roughly the same time—I do not know whether we should take credit for that or whether it was just a coincidence. Notwithstanding that, £1 million is still considerably lower than it is for private businesses. For private businesses, the threshold is a turnover of £10 million and a balance sheet of £5 million or 50 employees. Given your remit, should we keep that under review? We should be encouraging social enterprises and the third sector, but that seems to be a disparity.
I hope that the committee can take comfort from the fact that I listen to its suggestions and then act promptly. On the question of moving from £1 million to £10 million, having now set the standard of acting promptly, we will go away and see what else can be done.
Thank you very much. I cannot ask for more than that.
On the more expansive side, this is probably the last time that you will appear before the Economy and Fair Work Committee regarding a budget. It is striking, both for the committee and in general, given some of your answers, that many of the broad range of levers that are available to the Scottish Government exist outside the budget lines that belong to you—you have named the infrastructure and skills budget lines.
As you reflect on these issues, and as we are in the last 100 days of this parliamentary session, do you think about formally restructuring some of those things? Do some of those things need to come into the economy portfolio, or should we think about other ways that they could be linked?
For example, should skills be in the economy portfolio? Given the debate that we had last night, should that budget line belong to the economy portfolio, in order to maintain that economic link, given that delivery, which is going to the Scottish Funding Council, will probably be in the education portfolio? What are your thoughts about how we make the proper linkages between the things that deliver economic growth, such as infrastructure, skills, planning and housing?
I do not think that there is a perfect science to this at all. I have had responsibility for finance and the economy at times, because there was an understanding that tax was so integral to the performance of the economy that it should be linked, and I listened to questions about tax and so on. That is not the case now. There have been times when skills and the economy have been linked, because of the reflection of the importance of skills. There have been times, I believe, when economy and infrastructure have been linked.
There have been various iterations. There is also a strong argument for economy and energy to be linked, because energy is such a critical driver. The danger and the risk is that you end up with too much responsibility and too many junior ministers doing a lot of the work, and you are therefore not able to get your teeth into it.
We need to be responsive to the issues that become the primary issues. For the past year and a bit, I would say that skills and energy have been the biggest issues. I cannot predict what will be the biggest issue next year. Perhaps it will be issues of international security, and very different issues will suddenly become dominant.
09:45
The key is for the Cabinet as a whole to understand that we are all in the business of economic growth and prosperity. When I came back into Government around 18 months ago, I used the example of Marine Scotland—is Marine Scotland tasked with economic growth and prosperity or not? It is not in its remit, as it is for enterprise agencies, but when we look at consenting issues, it suddenly becomes critical. It is about having that Cabinet-wide understanding. Mercifully, I will leave it to the next Government to determine what that looks like.
I thank the committee for making every appearance such an enjoyable experience. Having done committee appearances—or performances, because that is what they are, are they not?—over the past six years, I know that I always value those committees that will ask me difficult questions. Sometimes, you put in all the preparation and then only get asked simple, easy, political questions, so I pay tribute to the committee for asking me difficult and probing questions and revealing just how well informed it is with the quality of those questions. I am hugely grateful to all of you for all these enjoyable appearances.
Indeed. If I knew that the Deputy First Minister wanted difficult questions, I might have taken a different approach. I thank her for her contribution over successive committee examinations, both in this committee and others that I have sat on, and for her answers this morning. They have been very interesting and instructive.
I thank the Deputy First Minister and her officials for appearing before us this morning. With that, we will have a brief suspension.
09:46
Meeting suspended.
09:50
On resuming—
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