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Traditional capital is obviously cheaper than borrowing or other options. However, when it comes to either being able to do projects or not, the questions are different, so we need to take them in the round. Some of the considerations will include the nature of the project, how long it will take to deliver and how complex it is. All those things need to be assessed against where they leave us with the revision to the capital spending review that we will bring forward as part of the budget process. However, we will lay out why we have come to some of those decisions. Alison, I can see that you want to come in.

Thanks very much, convener. I will be brief.

Thank you for the invitation to join the committee today. I welcome the opportunity to discuss the preparations for the 2024-25 budget. I am aware of the committee’s long-standing interest in transparency, and I recognise the importance of my appearance here to engage with the committee in advance of the budget.

With the 2024-25 budget, the Scottish Government will look to deliver the vision that has been set out by the First Minister in the policy prospectus and the programme for government. We will be clear. We will be anti-poverty and pro-fair and green growth, and focused on delivering high-quality public services.

We also need to recognise the challenges that Scotland’s public finances face, including the economic shocks that we have faced over the past three years: sustained high inflation, the war in Ukraine, the fallout from the United Kingdom’s mini-budget last year, Brexit and the on-going impact of the Covid pandemic. The budget will be a budget of difficult decisions. In making those decisions, we will be required to address the scale of the challenges that our public finances face.

I met the Chief Secretary to the Treasury at the finance interministerial standing committee on 20 September. We had a frank conversation in which we discussed the current economic and fiscal context alongside the Welsh minister for finance and officials from the Northern Ireland Executive. It was made clear to the chief secretary that the UK Government needs to provide sufficient support to the devolved Governments to ensure that we can adequately manage the pressures arising from those challenges.

I can confirm that the Government intends to publish the draft budget on 19 December. I would like to reiterate the reasons behind that decision.

We are restricted in our planning for the budget by the timings of the UK Government’s autumn statement and the accompanying Office for Budget Responsibility forecasts. The agreement between the Scottish Government and Parliament to deliver a budget within three weeks of a UK Government fiscal event was made at a time when fewer policy and tax options were available to the Government. The forecasting produced by the Scottish Fiscal Commission is therefore now significantly more complex, as are the associated decisions to be made by ministers. Adhering to the three-week timeline is therefore no longer practically possible, unfortunately. However, I am keen to deliver a December budget. Our proposed date of 19 December ensures that we will lose only one sitting day of Parliament. I hope that the committee will agree that that is a reasonable compromise that will provide sufficient time for the scrutiny and passage of the budget bill once Parliament returns from recess.

I look forward to answering members’ questions. I am happy to confirm that I will make myself available to the committee throughout the budget bill process.

Let me end on a point of consensus: yes. The points that you make are legitimate. Doing it is sometimes a little more complex. Think of some of the reforms that we took forward—I am sure that there will be debate around these matters—such as the formation of Police Scotland, which has been a success with regard to the more effective use of resources and the solving of serious crime, although I accept that it has not been without its challenges. It was difficult and took a long time. It is only after a time that you begin to see some of the benefits roll out from a painful process.

I am up for structural public service reform, but, sometimes, when you get into the weeds of the changes that need to be made, opposition begins to grow. You have people asking, “What about this?” and people with vested interests saying, “This will be to the detriment of A, B and C.” You have my absolute assurance that I am keen to push to the maximum the opportunities for public sector reform, and that includes how organisations deliver their services, how they work together, the landscape and how we get that to make more sense, not in a detrimental way but in a way that is more effective. On that point, you will not get any pushback from me. My only point is that making it happen is sometimes more complex.

We hope to complete it as soon as possible. I can come back to the committee with firmer timeframes, but we want to conclude it as quickly as we can.

To be clear, in his letter to the NZET Committee, Neil Gray stated that officials were preparing to undertake due diligence, drawing upon the value-for-money assessment that was completed earlier this year, and to provide that committee and the Public Audit Committee with further information on that when the assessment was complete.

We have made our expectations clear to Ferguson’s, and I have been pretty clear with the committee about what those expectations are. Those two committees in particular will get that updated information, which I hope they will find helpful.

The shorter-term figures from NRS, which are important, show that we are still seeing net in-migration to Scotland from the rest of the UK, but you are absolutely right that—

You are right that the outlook goes beyond the next budget. When I set out the medium-term financial strategy—the MTFS—I was clear about the projections of the gap that had to be addressed and the levers that we would use to do that. It is about ensuring that we make decisions that prioritise and target, that we grow the economy and the tax take from that, and that we take the decisions that we need to take in order to close that gap. However, that is very challenging, given the headwinds that are here and those that will come at us next year and beyond. I cannot overestimate the impact of inflation in all of that. Its impact is profound in every single part of the public sector.

No tax system is perfect—let us put that out there as a point of agreement. When the Parliament and its tax powers were established, the starting point was the UK tax system, so we did not start from a blank sheet of paper. With the additional tax bands, we have tried to bring some fairness and more progressivity to our system by recognising that it is not fair to have such a wide-ranging income band in the UK tax system that is taxed at the same rate. That is very difficult to defend. By bringing in the additional bands, we have tried to make the system fairer and more progressive.

We continue to look at what needs to be done. One of the reasons why we established the expert group, which has met twice now, was to look at a number of issues around a longer-term view of the tax system and what it will look like. It was also established to take a more strategic approach to tax, which the UK certainly has not done—we are at the foothills of trying to do that—and to try to get more transparency in people understanding what the tax system does. There is still some confusion about the interaction between the UK and Scottish tax systems, so there is a genuine attempt to try to make that more visible and to be quite frank about some of the decisions, and the consequences of those decisions, on what we do with our tax system. As I started off by saying, the revenues generated by taking decisions that are different from those of the UK Government have been important in really difficult financial times. If we had not done that, we would have to have made even more difficult decisions.

Public sector reform is really important. I lead on that across Government in order to ensure that a strategic view is taken across the whole of Government. First, there is some low-hanging fruit that all public sector bodies should be aiming for around efficiency and digitisation. There are some great examples of organisations that have become far more efficient—in difficult financial times, that is important—and that are able to deliver an improved service to the public, but for less money. All those things should absolutely happen.

We then get into the more complicated territory of potential mergers and amalgamations and of whether people can share services or buildings. That brings us back to our earlier discussion. All those things are on the table, along with the workforce level that each public sector body requires and, frankly, a bit of a presumption against new public bodies. We now have a system of needing explicit ministerial approval for the creation of any new public bodies. There are still some in the pipeline, because parliamentary decisions lead to the creation of new public bodies. I am not pushing back on those decisions or saying whether they were right or wrong, but I guess that there is a role for Parliament in taking a step back and looking at the multitude of public bodies that we have that are in the parliamentary space. For example, we have a number of commissioners, some of which overlap. There is a bit of a need—which should not be pushed by Government—for Parliament to look at what makes sense in that landscape.

We all have to be acutely aware of the need to leave no stone unturned when it comes to how can we extract better value for every public pound, every public sector body and every commissioner’s office, given that the finances are so constrained. Not only the Government but all of us have a responsibility to consider such matters.

You are right. The capital investments that we make are important for economic growth. That is why it is extremely concerning that the UK Government did not inflation-proof its capital budget, which has resulted in a 7 per cent real-terms fall in our Barnett capital funding over the medium term between 2023-24 and 2027-28. That has significantly impacted on our ability to deliver on the capital infrastructure commitments, and it will impact on it going forward. We are looking at the choices that we have to make. That alone, plus the fact that construction inflation was running at 25 per cent last summer, has an impact on the money that we have, what it can purchase, what it can build and how far it goes. There is a double whammy of less capital and that capital not going as far as it once did. That is a huge issue for us.

What do we do about it? I have set out in the MTFS and since then that we are revisiting our capital budget and our infrastructure investment plan. We will set those out alongside the budget for 2024-25. We are also looking at how we might be able to lever in some of the private finance that we talked about in relation to additional capital that is available from other sources.

We will leave no stone unturned as we continue to make progress on the infrastructure that we have. The Audit Scotland paper “Investing in Scotland’s infrastructure” identified all the issues and the challenges that are left in terms of the decisions that we have to make. As I said, we will have to make those decisions in a way that prioritises the projects that we think will have the biggest impact. That may slow down the delivery of some other projects over the next few years; there is no getting away from that.

I will bring Andrew Scott in with further detail in a second. First, public awareness is an issue. Some research that was presented to the expert group showed that the fact that there are two tax systems is not entirely understood. People’s awareness of what they get for the taxes that they pay is also an issue. The Scottish Government has attempted to lay that out in clearer terms in—