Seòmar agus comataidhean

I will bring in Matthew Elsby on that. You have made a really important point, and those issues need to be looked at in the next phase of negotiation.

Earlier on, the point was made that the principles and agreements were established in a very different economic climate. The economic shocks that we have seen since then have exposed some of those issues. In the longer term and in the next phase of negotiation, we need to look at those issues in more detail and expose them to the true light of what we have come to know over the longer period of time rather than what we knew in the earlier years of devolution, which were economically reasonably stable.

That is because of the changes to resource borrowing. We can borrow up to £600 million, some of which can be regarded as baked into the normal fiscal framework.

The latest inward investment figures show that Scotland is second only to London and the south-east in attracting inward investment. That is testament to Scottish Development International and the work that it does in being very effective in bringing inward investment to Scotland, as well as to the skills of the workforce. Investors will look at a whole range of issues in a country. They will look at our strengths, including the key pillars of our economy; the sectors that we are known for; and our universities and the skill sets there. The fact that we, as a country, continue to do well on inward investment gives a perspective. There are always improvements to be made, but the fact that investors make those decisions to come to Scotland tells a very strong story.

I accept that the Scottish Government has made active choices around where to invest in social security spend. A good example is the Scottish child payment. I hope that everyone would agree, particularly when you think of the cost of living crisis that we are going through, that the fact that that has lifted 50,000 children out of poverty in families that would otherwise be struggling even more than they are shows that we made the right investment.

Of course, deciding to invest in social security supports that go beyond the block grant adjustment means that we have to raise that money somehow. The key pillars of spend are social security, the national health service and health more generally—and, of course, local government. All of those have been impacted by inflation and by the need to pay for inflation-busting pay deals. None of that is resented, but it has had an impact on the budget.

A lot of headwinds—not just social security spend—are impacting on the budget, and they are all coming at the same time, putting on pressure beyond that which was budgeted for when the last budget was set. We have tried to manage that in a way that focuses on how we keep people’s heads above water in a cost of living crisis, so we have prioritised spend on things that are absolutely critical. That has meant making difficult decisions elsewhere.

The local government budget rose by 3 per cent in real terms, but it will not feel like that, because inflation was running at 11 per cent at its peak and we did not have an 11 per cent inflation-proofed budget to be able to pass on that funding to local government or health. Although we have tried to protect the health budget in the decisions that we have made, the 11 per cent inflation rate has had an impact on health as well.

There is no getting away from those very difficult challenges. We have tried to make the best choices with the resources that we have available in a very difficult context, and those choices are pretty clear for everyone to see.

Yes, it has lifted 90,000 children out of poverty. I was underselling its impact, convener, so thank you for the correction.

Clearly, there is a lot in that. In the MTFS, we talked about the need to focus on seizing opportunities in areas in which Scotland has a competitive advantage; supporting entrepreneurs, start-ups and scale-ups; and helping businesses to raise productivity. Boosting labour market participation was also discussed, and one of the important things in the programme for government in that area was our enhanced childcare offer.

The university sector has a hugely important role in all of that. We need to listen to that sector—that is the first thing—and make sure that we are maintaining Scotland’s competitive advantage.

You are right: it is a two-way street. Sometimes we have been successful not just in retaining key research and development opportunities and businesses but in attracting some to Scotland. However, that has not always been the case. In such instances, we need to pay attention to what attracted the companies elsewhere and what we can do to try to avoid that happening in the future.

There are huge opportunities for us. For example, we have invested £42 million in our national Techscalar network to support the next generation of Scottish start-ups over five years. CodeBase, which I visited recently, was awarded the contract, and it will act as the service provider for Techscalar. It is very excited about the opportunities for Scotland in that sector.

However, we must not be complacent, and I would not want anybody on the committee to think that we are being complacent in any way, because it is a very competitive world and Scotland needs to compete on the global stage. We need to make sure that, where we deploy public money to lever in private finance, that is done in a strategic way. We cannot pay for everything, and we need to use our public investment wisely in order to lever in private investment to Scotland, particularly in those key sectors.

Let me be clear: the process was limited. Nobody will put bells and whistles on it and say otherwise, but, given the headwinds that we face in the immediate financial term, the agreements that we got were important ones to get. They will help, particularly with next year’s budget.

Your point about population growth is important. Of course—you have heard me say this today, and I will say it in other forums—having control over migration, for example, would be hugely important in enabling us to attract folk with the right skills to live and work here and to contribute in Scotland. If we had those levers, I have no doubt that we would be able to use them to great effect, but that is a debate about the powers of this Parliament, which is a wider debate than we were ever going to be able to reconcile through the negotiation on the fiscal framework. We had to deal with what was in front of us, and we have probably got the best deal that we could have got in the circumstances.

Not yet, but, interestingly, Michael Marra was on a Convention of Scottish Local Authorities political panel last Friday for which there was, of course, a local government audience. Local government has the same challenges as every other part of the public sector. I made an offer to those from all the parties on the panel. I told them that my door is open for me to hear any constructive suggestions for different choices. I said that we will set out very clearly our choices but that, if others want to make particular choices and provide suggestions on where the money could be redirected from, they could do so.

There might be some attempt to make out that the position that we are in with the Scottish budget is a particular, peculiar Scottish problem. I can say categorically that it is not. Having sat in the room with the Welsh and the Northern Irish, I know that we are in exactly the same position. If anything, we have levers at our disposal that they do not. The Northern Irish do not have politicians to be able to articulate some of those issues, so they are in a particularly difficult position. We stand absolutely together in saying that the ability of devolved Administrations to manage the headwinds as a result of the constraints that we have is exactly the same whether we are in Scotland, Northern Ireland or Wales. We made that point collectively to the Chief Secretary to the Treasury.

There are no easy answers. There is no obvious tool sitting there that we have not deployed; we are deploying all the tools that we have. As I said, my door is open. If there are parties that want to have a genuine, serious discussion about the choices that we have to make, I am very much up for that.

Those are all really important questions. Considering taxpayer behaviour is a vital part of our tax policy decisions. You pointed to some of the academic and empirical research. There is quite a lot of uncertainty when it comes to estimating taxpayers’ behavioural responses. It is important to say that the Scottish Fiscal Commission is, of course, responsible for producing the independent forecasts for the Scottish budget. That includes taking a judgment on the scale of the behavioural responses, so that is already built into its forecasts.

We absolutely need to be cognisant of that. We have limited levers, and we have to deploy them very carefully. The decisions that we have made to date have taken all that into account. Of course, the issues around the decisions that people make about where to locate and why are quite complex. It is not all about tax. In fact, for a lot of people, it will not be about that; it will be about not only some of the other supports that they may get in Scotland that they would not get elsewhere but the many other issues that they need to take into account.

National Records of Scotland data show that we have net in-migration from elsewhere in the UK. Some of that is from the working-age population. We have to look at the empirical evidence and then make judgments in the round. It is a key issue, and one that we are looking at very carefully, particularly in the midst of pressures on household budgets and on the cost of living.

You are right. Obviously, we are looking at all those issues, and we will continue to do so right up to the budget. I think that, when I was last in front of the committee, I talked about some of the on-going work on all our programme spend and whether it all delivers on the priorities that have been set out. The First Minister clearly set out the policy prospectus, which followed through into the programme for government, with the three key missions of community, equality and opportunity. We asked ourselves whether those programmes, some of which have been around for quite some time, meet the test of those missions. We are continuing with that work.

On the other levers that are open to us, the limited tax lever that we have must be considered very carefully. We need to consider the consequences of any changes further to the changes that we have already made. As a consequence of the changes that we made in last year’s budget, £520 million was generated from income tax. That has been critical in helping us this year, not least because we have had the almost equivalent figure of over £500 million in additional pay pressures beyond what was budgeted for.

All those things have to be taken in the round. We are looking at the need for reform of the workforce in our organisation and across the public sector. How can our public services work better and more efficiently? That work has been going on for some time. The digital programme across the public sector has been working well in generating opportunities for more efficient services.

We will continue to look at how we can address a very challenging set of circumstances next year, when the budget will reduce in real terms, and we will have to look at using all those levers and at making some very challenging decisions. We will try to be as open and transparent about that as we can, and we will set out the conclusions of all that work as we get to the budget. I am very happy to try as best as I can to keep the committee updated on that work as it proceeds.