Seòmar agus comataidhean

To clarify, I was saying that, in the finance and economy portfolio, the budget for some areas will go up, but that cannot happen for all areas. For example, the budget for training and employability is going up.

The national strategy for economic transformation calls on all parts of the enterprise and skills landscape to focus on fewer objectives and to do them really well. For example, it calls for a focus on productivity, some of the new markets and entrepreneurship. I like to think that focusing on those key objectives means that enterprise and skills organisations will align all their spend and workforce to achieving them.

Looking across the board, some public bodies will be better at some things than others. For example, the Scottish National Investment Bank has an important role to play in scale-ups and Scottish Enterprise has a great track record when it comes to start-ups. Scottish Enterprise focusing on start-ups, the Scottish National Investment Bank focusing on scale-ups and both of them trying to ensure that they do not just duplicate each other’s efforts would be an example of aligning to NSET and to the agencies’ track records of success. Scottish Enterprise has generated significant revenues for the public purse as a result of very attractive investments.

A second example is something that I have already talked about, which is a recurring theme when it comes to business grants. Where does a business go first for grant support? Does it go to Business Gateway, SE, Highlands and Islands Enterprise, VisitScotland if it is in the tourism community or the Scottish Government? Right now, it is confusing for businesses but, in each of those organisations, there are teams that do similar things. The question is how, through collaboration and discussion, we make a more effective relationship for business. There is good practice on that already. The enterprise agencies are completely on board and have already started some of that work.

The way that we are doing the former is through embedding conditionality. Businesses should not, for example, be able to access grant support without signing up to fair work principles. Rather than being a particular focus, it should be the status quo and the norm that businesses can access Government support only if they adhere to fair work principles.

It is not an easy either/or situation, because we also know, from the NSET work that was done, that Scotland has some of the greatest potential in the high-growth sectors—for example, in the areas of technology and renewables. I do not think that we can neglect some of our core industries, although they should expect to receive support only if they meet those conditions. With regard to future growth ambitions, which is where we maybe have a slight difference of opinion—

With regard to our growth ambitions, we want to see far greater rates of successful scale-ups, because we know that that is where a lot of jobs are created.

The question is hugely important, because it goes right to the heart of how we build a budget or a resource spending review. The notion that I would base a May publication on December figures, considering all that has changed since then, is flawed.

I will go through the assumptions that underpinned our budget in December and the resource spending review framework in December. They included SFC forecasts for social security in December 2021; assumptions around pay growth; assumptions around health growth and social care growth; and assumptions around inflation. All those forecasts have been updated—not by me, because it is not my job to forecast; it is the SFC’s job to forecast. In order to build a budget or a resource spending review, we use the latest figures that the SFC provides me with, which it has now published, and I must balance my budget based on that. Forecasts change constantly.

There is no black hole. These are the basics of the budget that the Scottish Government sets—

We should bear in mind that, in cash terms, we are trying to protect as much of the public sector as possible, including universities. You have quoted 8 per cent, which is a real-terms figure based on the fact that inflation is at a 40-year high and is eating into our spending power. In the same way as I have given a commitment in relation to the employability and training lines, my commitment to universities is that we will protect them as far as possible. I say “as far as possible” because the overall block grant that I receive will not increase significantly over the next few years, and inflation is currently at 9 per cent. If there is not real-terms growth in the funding that you have available, by necessity, you can go only so far when it comes to allocating funding. Like many other spending lines, universities are hugely important, and we will protect them as far as possible. If you want funding in any part of the public sector to increase, you need to either take it from elsewhere or increase the pot.

I do not know whether we have those figures immediately to hand, because I am giving evidence on the future budget, but we can probably write to you.

You make a very good point. As we have just been discussing, forecasts are, by their very nature, uncertain. The SFC—not me—is trying to predict our budget position in three years’ time based on tax and on receipts from the UK Government. Inevitably, I am still to see a forecast that is 100 per cent aligned with outturn—they are forecasts, so they are based on assumptions. Over the past three or four months, we have seen how assumptions can wildly fluctuate. For example, who predicted war in eastern Europe back in December? It is inevitable that forecasts change.

What other Governments around the world can do is accept that those forecasts should be managed, nearly always, through resource borrowing, so that you smooth the trajectory and do not require the NHS or education to give up funding in order to manage forecast error. However, that is what we are expected to do if the forecast error is greater than £300 million. That is where it hits next year and in subsequent years, where you see the impact of the pandemic and of—through no fault of their own—two different forecasters working on different assumptions as well as forecasts that did not come to fruition.

The reconciliation that is required in that year significantly exceeds the borrowing capability to meet it. Therefore, about £500 million has to be found from front-line services. All it would take for the UK Government to deal with that would be for it to adapt the fiscal framework in that one area to ensure that there is £500 million more for front-line services.

The other aspect of that, which goes back to my answer to the convener, is about smoothing the trajectory. You cannot expect the public sector to suddenly, in one year, absorb £500 million, when we are talking about a workforce, and then see that climb again the next year. That is why most Governments borrow for that.

The fiscal framework review is on-going. For me, this is one of the most obvious areas where I would like to see progress. One of the arguments that we have made in the past, for example, was for the ability to use one of the borrowing powers for cash management, which we have not used or needed to use, and redeploy that to manage forecast error. That is one of the biggest areas where I would like to see progress. It would make a big difference for resource borrowing for forecast error to be indexed or even aligned to inflation.

We set out public sector pay policy in advance of every budget. I have been clear in this year’s budget that I cannot inflation-proof public sector pay policy, because of the high level of inflation and the fact that it is due to rise.

I am conscious of the SFC’s forecast on inflation, which it thinks will average 8 per cent across 2022-23 before falling back in line with the Bank of England’s 2 per cent forecast from 2024-25. That is in very stark contrast with the inflation assumptions that the UK Government used to underpin its spending review in October 2021. Therefore, the difficulty for me in answering your question when it comes to the years beyond this year and perhaps next year is that the funding pot that is available to me is based on assumptions that were made last autumn and have been completely overridden by the inflationary outlook that is inherent in the SFC’s forecast.

I am happy to bring in anyone else who wants to come in; I do not know whether your question has been sufficiently answered.

That is the necessity of the art of resource spending review. Again, we cannot afford not to make those reforms. The four pillars of the reform agenda in the resource spending review include procurement. The agenda is to encourage public bodies to look at four areas where we might drive efficiencies. The first is on estates, which you have already touched on. The second is on shared services; the third is on procurement, and the fourth is on brand management.

The RSR does not, in one go, give all the answers as to how we are going to achieve that, but it sets out a plan—over the next few years—for driving that reform. The reason why we need a resource spending review to do that is that it is difficult to drive reform within one year and difficult to do it within annual budgets, so we need to have that longer-term perspective of a three or four-year spending review. The changes that we make in year 1 might be expensive, but we will see the benefits in year 4.