Seòmar agus comataidhean

Workers in the oil and gas industry have some of the most critical skills that our economy needs over the coming years. My commitment is to ensure that they have access to skilled work that reflects their talents and capabilities.

Around the world, every society and every Government is grappling with what a just transition looks like. In my view, a just transition means a fair transition in which we do not leave people behind. Right now, there are huge opportunities on the horizon as part of that just transition, including in renewables.

The oil and gas industry is already grappling with the issue. Irrespective of what I say or my Government says, we have seen 18 months of a global reduction in demand, which has led to a lot of people—including those in the wider supply chain, in which Douglas Lumsden will be more well versed than I am—being concerned about their jobs and what their future holds.

The Government’s job is to try to provide certainty by looking at how we diversify the economy, which has been impacted by issues that are outside our control. Nobody could have foreseen Covid or, perhaps, the renewed and intense focus on the climate emergency. Our job is to ensure that every individual who is working in oil and gas right now, with some of the most important skills internationally, continues to be able to use those skills in a meaningful and secure job. In so doing, we will ensure that the north-east continues to be a vitally important contributor to the national Scottish economy.

Thank you, convener. It is great to be with you this morning. I am sorry that I am not there in person. I had hoped that it might be the first in-person finance committee since the pandemic struck.

I want to continue to build on the open and collaborative approach that we had with your predecessor committee in the previous parliamentary session, and I am grateful for the early engagement that my officials have had with your clerking team.

I will raise a few issues at the outset. I am getting quite a bit of feedback from my microphone; I hope that you can all hear me okay.

First, I know that the committee will want as much early clarity as possible on the process and the timetable for next year’s budget. I would like to build on my experience with the past two budgets with regard to contending with the implications of, and uncertainty around, the timing of the United Kingdom Government’s net fiscal event and to move to early consideration, with the committee, of those implications. In light of the uncertainty around the UK Government’s budget, there are pros and cons to going ahead of, or waiting for, the UK Government’s budget. That debate has been informed by the SFC’s forecast last Thursday, and the Office for Budget Responsibility has now been requested by the chancellor to produce its forecast at the end of October.

There are several other areas that the committee will need to—[Inaudible.]—so I will make only one more point before I hand back to you, convener. Needless to say, we are producing Scotland’s first framework for tax for consultation—a new enhanced Scottish approach to taxation. We are setting out our programme of work on tax over this parliamentary session. I look forward to the committee’s views on that.

I will stop there and again make the point that I am getting a lot of feedback, so I hope that you can hear me and that I can hear you.

On the first point, about the outturn report, I understand the premise of your question but it is important to reflect that our income tax policies raised £148 million over and above the block grant adjustment. That £148 million would not have been secured for the public purse if it had not been for the change in policy.

I will make two additional points. First, we have been clear that our income tax policy is endeavouring to do two things. We are seeking to achieve two results. The first is security of public revenue. In order to say that the health service will get £X billion over the next year, I need to know that that money is coming in. We need to be sure that we will raise it. However, we are also trying to ensure that the policy is fair. We have been clear that we intentionally made changes to maximise the progressivity of income tax. It is not perfect, but we have powers only over rates and bands, not over the personal allowance, incentives such as gift aid or the interaction with things such as pensions. It needs to be seen in that context.

Having said that, I clearly want to secure the long-term sustainability of our income tax policies. In other words, I want to continue to ensure that we have the money that we need. We are currently undertaking a policy evaluation to better understand the impact of the 2018-19 policy reforms. We hope to publish the findings later this year on the precise impact of those policy changes. I am sure that that will be of interest. Covid excepted, we have continued to see growth in Scottish receipts exceeding that of the rest of the UK. This is the second consecutive year in which we have seen that growth and we want that to continue. We will wait to see what the impact of this Covid year has been.

I have a third point, which is around the risk that all of that creates. If we look at the reconciliations from the past two years, we can see that the existing borrowing and reserve powers in the fiscal framework are not sufficient to deal with the level of volatility in forecast error. I will stop there, but there are three implications of that. One is to ask whether it is important that we have more than one objective for income tax. Secondly, is it important that we continue to raise more than we would have done from the block grant adjustment? Thirdly, what is the best way of managing that level of risk and volatility? My view is that we need a broader review of the fiscal framework to ensure that it can deal with that level of volatility.

I can be very open and honest about my view on economic growth. Obviously, the co-operation agreement, which I am sure you have already read, had some excluded areas, including GDP growth.

My view is that we need fairer and increased prosperity. We cannot have economic growth without looking at fairness, because that would not secure the outcome that you and I are talking about. If we see a ballooning of income for the highest earning, with the tax revenue that comes from that, but we still see huge levels of in-work poverty, that is not a good result. Therefore, economic growth has to be fair and distributed.

In my view, we do that by ensuring that the focus of Government is on supporting businesses, industries and sectors that will bring more people into safe, secure and well-paid employment. We have seen the implications of that during the pandemic, because being in employment is a great blessing but, in and of itself, it is not enough to ensure that people are not in poverty. Employment has to be safe, secure and well paid. There are great opportunities in the Scottish economy when it comes to the just transition, the green economy, new and emerging technologies and alternative forms of energy. We must also ensure that each of our local economies is thriving because, to take a more regional approach, if Edinburgh and Glasgow are doing well, the national picture probably looks quite healthy, but I have a vested interest in making sure that the Highlands, the south of Scotland and the islands are doing well and that areas of deprivation are doing much better. Therefore, we must make sure that economic growth is fair, inclusive and sustained and not just economic growth for the sake of it.

I might ask whether Dougie McLaren wants to come in on non-domestic rates. To be clear, that does not indicate that there will be a 17 per cent increase in the tax rate. It refers to, I hope, the strength of the business community in terms of business survival rates and business growth. Right now, Scotland has the lowest poundage rate in the UK, which means that we are delivering a lower tax on more than 95 per cent of properties.

Over the next few years, we must ensure that we continue to provide certainty to businesses and allow them the headroom to recover. That was the reason why, this year, we extended the 100 per cent rates relief. Knowing that they will not be paying non-domestic rates will, I hope, allow businesses to recover and use the funding that they would have otherwise been paying in tax to invest in their businesses or to see them through the rest of the challenges that we face.

I know that there was a lot of discussion about the revaluation. One of my primary reasons for scheduling the revaluation for when we have is to allow the impact of the pandemic to be seen in rental values. I know that the north-east has a particular reason for wanting the revaluation to be earlier rather than later, in the light of the big economic challenges that it faces, but the reason for my decision is to ensure that rental values have filtered down and that the revaluation is fair. Going for a revaluation too soon could have meant that the rental values had not changed. For example, people were waiting until after the pandemic to rewrite their tenancy agreements. My hope is that, after the next revaluation, the rateable values will take into account and reflect the impact of the pandemic, so a fairer amount in taxation will be paid.

I am happy to take any follow-up questions on that. That probably covers it—Dougie McLaren does not need to come in unless he really wants to.

It is good to have a question on the non-domestic rates pool, which probably reflects your wealth of experience as a local councillor. The non-domestic rates pool should not have a direct impact on businesses; it is our way of managing the risks to public finances from non-domestic rates. We have had previous conversations on the matter, so you will know that, in relation to local government spend, we guarantee the amount of revenue from non-domestic rates that local authorities receive. In some years, that means that you and others in the north-east say that that is not fair. In other years, such as those during the pandemic, it means that local authorities can budget with certainty and security.

We manage potential fluctuations in revenue from non-domestic rates from year to year through the pool. It will not have an impact on business, and it does not influence or inform my view on what rate of taxation to implement. My interest is in ensuring that Scotland is as competitive as possible in relation to the poundage. Our non-domestic rates pool is just our means of balancing the account from year to year.

Thank you for the question, as this is an issue that local government has raised with me quite frequently.

I want to make two points, the first of which is that we are waiting for the outcome of the review to try to provide local government with certainty now. There was a request that we provide additional certainty, and I have confirmed to COSLA that I am content to do so. COSLA had raised with us the English model, in which changes can be proactively and prospectively made to capital accounting, and we are already giving an additional two-year flexibility in that respect. I have also confirmed to COSLA that I am willing to extend that further in the same vein as the English model, in which councils have additional discretion on what is the best model to use.

It is still important that we carry out the review, because there are questions to explore about what the most prudent and sustainable approach might be over the long term and how we ensure that it is consistent not just with other public bodies but with our standards, too.

The short answer is yes, but the way we budget involves trying to get a sense for the full year. What we do not want for the budget is to spend and then have to save, save, save and get more money at the last minute because money is suddenly getting cut. That is an ineffective way of budgeting, so my team and I manage the year’s budget by trying to get a sense from every portfolio of what they want to achieve. Most of these projects are not just for one year; they are multiyear projects. Building a new hospital is multiyear. You cannot just turn on the tap for two months and hope that that delivers a project. We try to manage that demand over a longer period, because very few projects can be delivered with, for example, just a month’s extra funding in one year.

The key is being able to carry forward and being able to manage our money over several years. Having that arbitrary break at the end of the financial year and not being allowed to carry capital forward leads to very ineffective budgeting, because it causes you to spend an amount in one month that should be spent over several months in the next financial year.

I will make two points. Whether or not I agree with the SFC, the value of its forecasts is that I have to live with them. I have to live within its forecasts, particularly for revenue but also for spend. That is another area in which there are impacts from higher inflation, which goes back to your earlier question, so we are monitoring that. We will continue to provide the support that we are, quite rightly, obliged to provide for demand-led payments.

I do not want to sound like a broken record, but it is precisely because of that volatility that we need the requisite tools to manage it. After all, any demand-led payment creates a risk for the Scottish Government in managing it within our fixed and balanced budget. The SFC is right to say that I cannot increase the size of the cake, and if one slice of it is bigger than was originally intended, that increase needs to come from elsewhere in the Scottish Government. That is the level of risk and volatility that I have to manage within a balanced and fixed budget.

That is right. I agree that it is by nature demand led. We make a big effort to promote uptake, because we believe that it is right for people to get the help that they need, but that clearly impacts on demand and the budget. We will fund that need and demand, because it is important that, as a fair and kind society, we protect the most vulnerable.