Seòmar agus comataidhean

There are two parties involved and—as you will be aware—quite a lot of change is afoot for local government over the next year. I think that we can make some progress prior to the local government elections, but I imagine that the matter will be one of the first that will be picked up after the elections. We are committed to working with COSLA to develop a rules-based fiscal framework to support future funding settlements.

The other part of the issue—again, this is not a cop-out—-is that a big ask from local government is for the ability to set multiyear budgets. Along with the need for additional flexibilities, there is a need to know what will be in a budget from year to year. I sincerely hope that the resource spending review that we will set out will allow local government to look three years ahead. [Inaudible.]

There are a number of different points. The first is a real focus on innovation leading to productivity. You will be mindful of that, and, over the past few days, we have heard in the media a lot about UK-wide productivity challenges. There are real challenges when it comes to increasing levels of productivity. Those are being highlighted by population shortages right now. If we live in an environment in which we are unable to access additional labour from outwith the country, it is even more imperative that we invest in innovation and tech and that we improve productivity levels across the country. That point has been repeated for a number of years by the Confederation of British Industry and others. That focus is on how we incentivise innovation and invest in productivity; that includes investing in our people.

That takes me to my second point, which is a real focus on skills—making sure that we have the right skills in the right places for the right jobs. We have seen, post-pandemic—not that we have got through the pandemic—that unemployment is much lower than was originally forecast; however, that means that there are acute labour shortages in certain sectors. We therefore need to make sure that, through the young persons guarantee and our other interventions such as the national transition training fund, we are reskilling people with the right skills—those that are actually required.

Those are two areas that are coming through loud and clear in the conversations that we are having around the advisory council, that I am hearing regularly from business organisations and that I would like to see prioritised in the forthcoming budget.

In short, your characterisation is accurate. We have, where we can, used softer powers to try to crack down on tax avoidance. I would say that since its establishment Revenue Scotland has taken a firm and effective approach to tax avoidance, because it is working collaboratively with other public bodies—for example, it works closely with the Scottish Environment Protection Agency in relation to landfill. The taxes are small in the grand scheme of things, although they are important for the Scottish Government, but the point is that, since the establishment of Revenue Scotland and the development of other devolved taxation, we have taken a much more robust approach to tax avoidance. However, you are right that it is based only on soft powers rather than on actual legislation, because, ultimately, tax avoidance is a reserved matter.

I will answer that in two parts. First, I support the principle of conditionality across all Government spend. We should consider more carefully where we can embed proportionate conditionality; we have committed to do that, as part of the co-operation agreement.

The second part is perhaps more disappointing. I have looked at non-domestic rates through every lens to consider how we can expand conditionality, but doing so is extremely challenging, if not impossible, in places. We place a huge burden on non-domestic rates—which, we should bear in mind, are a property tax—because we have no other form of business taxation in Scotland.

It is difficult to use conditionality in non-domestic rates in any way but through conditions that relate to the property itself, because it is a property tax, not a business tax. Non-domestic rates are based entirely on a property’s rental value—what that property might get in the open market—which is applied to the poundage. The tax was not established to take into account income generation, nor was it ever based on employees. The various conditions that we might want to attach to reliefs are almost impossible for a property tax.

That is not to say that we have not considered the possibility. During the pandemic in particular, I was keen to see whether we could attach other conditions. However, the methodology behind non-domestic rates—the way in which rates are collected and the principle that underlies them—means that it is almost impossible to attach conditions that are not specifically related to the property.

People might argue that we should overhaul non-domestic rates and set up a taxation regime that is based on income and other factors. That is a perfectly legitimate argument to make, but because it is a property tax, we look to non-domestic rates to do more than it was set up to do or is capable of doing because it is the only form of semi-business taxation that we have in Scotland.

Yes, in short. I note that that applies to non-domestic rates as well, to link in with your previous question. The Barclay review of non-domestic rates specifically talked about what powers we might have in Scotland to crack down on tax avoidance. That was incorporated into a general tax avoidance provision. I am happy to send the committee more information about non-domestic rates in that context.

You will remember that in discussion about tax havens there was a lot of public debate about whether or not the Scottish Government had the power to act. Where we have powers or softer means of cracking down on tax avoidance, we will use them, but the issue is, ultimately, reserved. When it comes to having real teeth that can crack down on tax avoidance, the powers are still reserved to the UK Government.

No, I apologise for not grasping what you were asking. We have had a lot of engagement with the UK Government on those points, and Dougie McLaren might be able to give you a brief update on whether there will be full compensation.

Discussions about the fiscal framework have often focused on the volatility that is inherent in tax forecast, and perhaps we focus less on the inherent volatilities in social security demand. There are two reasons for forecast error in relation to social security: one is that we have been through quite an uncertain 18 months with Covid, so it would make sense that getting a grasp of what demand truly is has been challenging.

Secondly, it is likely, as the SFC’s forecast illustrated, that demand for social security will increase. Revenue borrowing for forecast error is capped at £300 million, which needs to cover not only tax volatility but also social security volatility, and we have an obligation to fund social security because it is a demand-led budget.

Therefore, there are two challenges. One is that I have to fund a significant demand-led budget line from a fixed budget and, secondly, the limits on our revenue borrowing for forecast error are quite low to meet the errors that occur. It is an area of concern. We must ensure that we can continue to meet that demand-led budget, which we are obliged to and must meet, but if we do not have any capacity in the revenue borrowing limit we have to fund the forecast error from within our budget.

The primary, but not the only, means of reaching that age group is the national transition training fund. That supports people who are unemployed, at risk of redundancy, or in need of upskilling or retraining. There are other schemes, including the no one left behind scheme, which is about supporting people who are furthest from the jobs market—for a whole host of reasons that we could go into—and helping them into work. There are a number of different schemes, but the one that I point you to is the national transition training fund.

I might ask officials to comment and give a straight-bat, technical answer, but Scottish Fiscal Commission analysis shows that income tax reconciliations could exceed Scottish Government borrowing limits up to four times every 10 years. That answer may not feel as tangible as you would like. Our own analysis suggests that there is up to a one-in-six chance that funding volatility as a result of income tax forecast error will breach the current limits of our resource borrowing powers, but you must remember that the borrowing limits also have to cover forecast errors for other devolved taxes and social security benefits. We cannot look only at income tax when it comes to forecast errors.

Governments around the world have to manage their budgets within fiscal rules, and that is right and proper. The difficulty for us is that we are dealing with a fixed budget. We still have to take a very prudent approach in how we spend our money, but what we are talking about here is the ability to use our spending power to benefit public services rather than to resolve errors, which are no fault of our own, from previous years.

This year, the reconciliation that applies to the 2021-22 budget is higher than the current borrowing limit—somebody can correct me, but from memory it is about £319 million, which is higher than £300 million. It does not get more tangible than that. The only reason why it has not breached the borrowing limit this year is that a Scotland-specific shock due to a timing difference between our forecast and the UK Government’s forecast allowed the resource borrowing limit to be temporarily increased. If anything, this year’s position demonstrates why it is essential that we have had that temporary increase, which should perhaps be made permanent.

Does that give you enough of a tangible hook to hang the argument on?

It is worth celebrating those figures, because it is clear that we have significant strengths in our tourism and hospitality offering in Scotland. I represent one of the best bits of Scotland, which saw a lot of visitors over the summer months, and I can see how hard businesses have worked after a phenomenally challenging 18 months to be in a position to welcome people. We need to build on that.

There are particular pinch points. We have a commitment to invest in infrastructure alongside what we are doing to support businesses themselves, particularly in rural areas. The rural tourism infrastructure fund is among the most obvious examples of that. Rural areas that were not prepared and geared up to deal with the huge numbers that came have received financial support to put in place parking places and toilets and to expand roads, for example, to relieve congestion. We need to look at what support is needed in urban areas as well to deal with the challenges of increased numbers, which are good for our economy.