Seòmar agus comataidhean

There is funding in this year’s budget to enable us to continue to invest in our key trunk roads. You will appreciate that the current plan is to fully dual the A96 between Inverness and Aberdeen. We have agreed to conduct a transparent, evidence-based review of the programme, which will report by the end of 2022. All road projects, including the A96, are subject to detailed review and assessment. We remain committed to making much-needed improvements to the A96, but we need to let that review run its course.

We have frozen the higher and top-rate thresholds and increased the starter and basic-rate bands. Largely, we have echoed what the UK Government has done with regard to freezing bands. I recognise that decisions made in previous years mean that that gap remains frozen this year.

I would be happy to. I remind the committee of our position last year: the budget included £500 million of additional Barnett consequentials, which had not been confirmed, although an assessment had been made that it was highly likely that that funding would arrive, and ultimately those assumptions were exceeded in aggregate. We try to take decisions in the budget based on the best available evidence. As you will all know, because of the way in which the funding position works, additional announcements are often made in year that, had they been baked into the budget from the beginning, might have led to more efficient use of funding.

In next year’s budget, we have made similar assumptions surrounding likely sources of income. Those assumptions include, first, income from the next round of offshore wind leasing, the precise scale and profile of which is expected to be confirmed early in the new year. If the budget had been later—as it has been in the past two years—that would have been factored in.

The second assumption relates to the resolution of a long-standing disagreement with the Treasury on the effect on the block grant of personal allowance adjustments. The methodology was finally confirmed this summer, although it is still part of live discussions and negotiation.

The final element is further Barnett consequentials, including some that, despite being linked to UK spending announcements, were not included in the 2021-22 funding position—in other words, announcements that have been made but for which the funding has not been drawn down in this year.

From my perspective, if the budget were later—let us say, March—it is quite likely that we would have been in a position to factor in all those things. We have considered all those sources individually and collectively, to arrive at a prudent, risk-assessed figure of £620 million of additional expected resource funding.

Lastly, it is important to say that we have not made any assumption on the availability of resource funding from the Scotland reserve. We will see how this year pans out. The additional omicron challenges are putting extreme pressure on this year’s budget. It is quite unlikely that there will be much to carry forward into next year.

In the interests of being fair and transparent, we published our capital spending review last autumn, which set out where we intended to invest over the coming years. Unfortunately, the capital that was allocated to us through the comprehensive spending review from the UK Government was lower than the conservative and cautious estimates that we had provided in the capital spending review. It might be that some of that capital commitment will need to be managed over a longer period, but I still refer the committee to the commitments that we made in the capital spending review, because that has informed the choices that we have made in this year’s budget. Of course, we have also chosen to make use of capital borrowing.

With regard to some of the high-level lines on capital, there is significant investment in infrastructure, decarbonisation efforts and the regeneration capital grant fund. There is a clear and ambitious willingness in the budget to use as much capital as possible, particularly next year, when economic recovery will still be vitally important.

I am happy to unpack any particular line, but I hope that that gives a general overview of our capital position.

It is the hardest part of any budget to identify what must be reduced in order to increase other lines. I have met all the Opposition spokespeople once and am keen to meet them again because, now that they have seen the budget, there might be more clarity on changes to approach. However, although I might hear differently over the course of today, I have heard from the Opposition only about where budgets should increase. I am very sympathetic to that. I would love a budget where every decision is easy because we are able to invest at the requisite level in all areas of the public sector. Unfortunately, the nature of budgets does not allow that. Budgets must be informed by choices, and there are some difficult choices in the budget that I am not hiding from.

There are areas of criticism that I have heard loud and clear over the past two weeks, but I come back to the position that I have maximised the funding that is available to us. You have heard already what I have said about the £620 million of assumed additional funding, so there is no funding that I am withholding or sitting on, not least because I do not need to negotiate a deal this year. Therefore, as with every penny on the face of the budget, if we are to, for example, increase the local government settlement, where should that money come from? If we are, ultimately, to agree that health consequentials should go to health—which the UK Government is pushing strongly and the Scottish Government has incorporated—that leaves very little room for manoeuvre for other budgets.

On the infrastructure side, it is capital. Capital cannot be spent for business grants, and it cannot be spent on day-to-day services. Capital is allocated to the building of a new school, for example. Someone will come to me regarding a hospital, which costs £100 million, let us say. That £100 million will be drawn down, although the hospital might not be completed by the end of the financial year. I cannot turn round and say, “Tough luck. You ain’t getting the rest of your hospital, because the money needs to be spent by the end of the financial year.” What I say is that, if there is £20 million-worth still to build, we will carry that money forward.

You ask me about choices, but I do not hold money back. The only time I have held money back, which was well documented, was just before last December when we were given significant additional funding of more than £1 billion in the final four months of the financial year. You will recall that I allocated it all and I said that I would hold £300 million in case of another wave. What happened on 5 January? We were all locked down and, thankfully, there was £300 million to invest in business.

I do not hold money back. All of the funding is allocated. The question is whether it can be drawn down, for example by vaccination teams or by the new hospital that is being built. Those are the choices, and the choices are determined, particularly during Covid, by a very volatile situation. I would much rather that we budgeted intelligently, than suddenly trying to get rid of money at the end of the financial year.

You will remember 24 December last year, as I do. On 22 and 23 December, we had been pressing the UK Government to say whether there would be additional consequentials, and we were told that there would be no further consequentials. Late on 23 or 24 December, we suddenly had hundreds of millions of pounds of additional funding. That had to be spent intelligently on business support in very short order. Managing significant additional sums of money late on in the financial year leads to poor decision making if you cannot carry it forward beyond 31 March.

You started out talking about income tax, and I will refer to that quickly. When it comes to income tax, the choices that we have made have created additional spending power for the Scottish budget—there is often a misunderstanding about that. The challenge falls in the relationship of the block grant adjustment and the fiscal framework. A lot of that is to do with unequal growth between the highest and the lower earners. That is accounted for in the Welsh fiscal framework but not the one in Scotland, and I think that that needs to be part of the review of our fiscal framework.

Moving on to productivity, the report was very useful in its breaking down of the detail, particularly of where the challenge is. It is an issue that all developed economies need to grapple with. All developed economies have suffered from an extended period of weak productivity growth over the past decade or so. Tackling that challenge is not made any easier by the fact that we are facing into huge productivity head winds as a result of labour shortages, supply chains disruption, disruption to our trading relationships with our nearest and largest trading partners, and our demographic challenges.

What are we doing about it? I have a number of points. One is that, again, I see this as a top priority. I am not shying away from the fact that we need to grapple with our productivity challenge. One of the primary ways that we will do that is to set it out in our national strategy for economic transformation, which is our 10-year outlook. It will include core data on productivity and set out three recommended interventions, which have been informed by the strategy’s advisory council of about 17 people. I am keen to publish that strategy. The committee will, however, appreciate that there are tensions around publishing an economic strategy that looks 10 years hence when businesses are in severe difficulty right now—three days before Christmas—so there is a bit of a timing challenge in doing that.

However, a lot of it will look at the need for public investment in core infrastructure, at private investment, or how we incentivise business to invest in businesses, and, lastly, at skills, or how we ensure that the workforce are in the right jobs, for the right businesses, during the right times. Those are the three areas that I would quickly recommend we step up our activity on.

No. As a Highlander who knows the importance of such roads and who has driven up and down the A9 far too often to count, I think that it is really important that we continue to invest in Highland, northern and north-east communities.

I hope to be able to build a constructive relationship with the new Chief Secretary to the Treasury. I had a good first conversation with him just over a week ago. I am due to see him on 14 October for a quadrilateral meeting about the spending review and I may be able to answer the question better after that meeting. I am happy to provide the committee with an outline of that meeting and an update about how it goes.

Thank you for the invitation to join the committee, convener. I am sorry once again not to be with you in person. I hope that the committee has not started to draw any conclusions from the fact that I seem to have to self-isolate only when I have a Finance and Public Administration Committee evidence session. I also thank the committee for its engagement to date with regard to the budget timetable.

I know that you asked for very brief opening remarks, convener, but I wonder whether I can make some comments that will be helpful to the committee’s scrutiny. I am grateful that, in agreeing 9 December as the date, we have duly balanced the time to develop our budget proposals with the time for due scrutiny. As the committee knows, our position is as ever contingent on our settlement from the Treasury on 27 October, but this year at least we should have firmer and fuller information than we have had for the two previous budget processes. The timing of the United Kingdom spending review and the autumn budget seems to be a return to the pre-Brexit and pre-Covid cycle, but as yet I do not have any insights into whether that means that the Treasury plans an update in the spring.

With this budget, the fiscal framework and the wider devolution settlement will continue to be tested with the related volatilities having increased and the levers and the flexibilities remaining constrained. That applies as much to our in-year management, with the UK Government repeatedly indicating consequential funding of “up to” a provisional amount that is subject to confirmation later in the year, by which time the moment or the need for that funding has often passed. As I have always said, additional funding is generally welcome when it comes, but what I want to emphasise is that the arrangements for confirming the funding generally fall short of what is required, especially during a real-time pandemic response.

I will continue to engage positively with the UK Government as we recover from Covid. I had a meeting with the new Chief Secretary to the Treasury last month, and in the coming days I am due to attend a finance quadrilateral that is focused on the spending review. We will, of course, take our strategic lead from the programme for government, and the budget will reflect and fund the Government’s priorities. Moreover, as indicated in our recent correspondence, we are continuing to carry out preparatory work on a multiyear resource spending review, and we plan to publish a framework for consultation around the time of the budget.

Finally, I will be pleased to answer the committee’s questions on the fiscal framework outturn report, the publication of which fulfils the Government’s commitment to transparency in the operation of the fiscal framework and provides the Parliament with information to support its scrutiny. That report shows a total provisional reconciliation of -£14.8 million that will apply to the 2022-23 Scottish budget, with the final reconciliation confirmed once the final outturn data are published later this year.

I look forward to the committee’s questions.