Provisional Outturn 2015-16

– in the Scottish Parliament at on 29 June 2016.

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Photo of Linda Fabiani Linda Fabiani Scottish National Party

The next item of business is a statement by Derek Mackay on the provisional outturn 2015-16. The cabinet secretary will take questions at the end of his statement. There should, therefore, be no interventions or interruptions.

Photo of Derek Mackay Derek Mackay Scottish National Party

I welcome the opportunity to update Parliament on the provisional budget outturn for the 2015-16 financial year. Before I do so, I will address the outcome of last week’s European Union referendum as it relates to the public finances.

First, no one can deny the significance of last week’s events for our economy, our communities and, indeed, our constitution. At such a time, it is imperative that the Scottish Government and the Scottish Parliament work together to demonstrate to those whom we serve that we will continue to manage the public finances competently and in their interests. I commit to working with all members—particularly those on the Finance Committee—to ensure that that aim is achieved. I welcomed the opportunity for discussion at the committee this morning.

Secondly, we cannot consider the public finances in isolation from the wider economy, particularly in the light of the devolution of fiscal powers through the Scotland Act 2016. The First Minister has made it clear that we will take all necessary steps to stabilise and grow Scotland’s economy, and that will be a guiding principle in the actions that I will take in managing the Scottish budget. Scotland is a vibrant country that values greatly the contribution that those from other counties make, and it presents excellent opportunities for investment and to do business both now and in the future. The Scottish Government is already engaging closely with the business community, delivery partners and a range of other stakeholders to underline our commitment to key programmes, particularly around support for the economy and public services.

Finally, I assure Parliament that the Scottish Government will engage closely with Her Majesty’s Treasury and our counterparts in Wales and Northern Ireland over the coming months to work together in the interests of our economies and public finances. However, as the First Minister has said, we will also seek direct engagement with EU leaders and institutions to further the interests of the people of Scotland.

With a forthcoming change of Prime Minister, it is not clear what a future United Kingdom Government’s fiscal plans will be. The chancellor has said that there will not now be an emergency budget, which is to be welcomed, but we must not be complacent and assume that nothing will change. It will, therefore, be important to take appropriate time to consider and be ready to respond. I will consequently urge my counterparts in the UK Government to reflect very carefully on the impact of continuing austerity on our economy, our public services and our communities. We have a duty to be prudent and provide stability at this time. Although there may be no emergency budget, there will inevitably be budget adjustments by a new UK Government, the scale of which we do not know.

I turn to the provisional outturn for 2015-16. Financial year 2015-16 represented the final year of the 2010 UK spending review settlement that saw the Scottish Government’s discretionary budget fall by almost 10 per cent in real terms and, within that, the capital budget fall by almost a quarter. It also represented the first year in which the Scottish Parliament became responsible for landfill tax and the land and buildings transaction tax. In being the first finance minister in Scotland for more than 300 years to set national taxes, my predecessor adopted a fair and progressive approach to rates and bands. That prudent and principles-based approach to taxation is one that I plan to replicate over the course of this session of Parliament.

Under the current devolution settlement, the Scottish Parliament is not allowed to overspend its budget. As a consequence, we have consistently adopted a position of controlling public expenditure to ensure that we live within the budget caps that apply, but remain able to carry forward some spending power resources for a future year. That prudent strategy has proved to be the right one, particularly in light of last Friday’s events.

In 2015-16, the Scottish Government has therefore once again demonstrated a sound grip on the public finances. I can report that, within the fiscal departmental expenditure limit—fiscal DEL—representing the resources over which this Parliament has discretion, the provisional outturn for 2015-16 is expenditure of £29,160 million against a limit of £29,275 million. That means that there is a fiscal DEL cash underspend of £75 million in resource spending and £40 million in capital spending, which represents just 0.4 per cent of the total fiscal DEL budget. Both those sums are carried forward into 2016-17.

There is also a provisional outturn underspend of £40 million in respect of financial transactions that, through rules set by HM Treasury, are ring fenced for loans and equity investment outside the public sector. Again, that is carried forward into 2016-17.

Overall, including financial transactions, that means that we will be carrying forward 0.5 per cent of the total 2015-16 cash budget. Those sums are carried forward using HM Treasury’s budget exchange facility that was agreed in the last spending review. That will ensure that there is no loss of spending power to the Scottish Parliament.

Given the considerable uncertainty that has now been created as a result of the EU referendum vote, I do not intend to rush immediate decisions on the deployment of these resources. Instead, I will consider their deployment when it is appropriate to do so, taking account of prevailing economic conditions and in full consideration of need and spending pressures.

I turn to the non-discretionary elements of our budget—the non-cash DEL provision—which, I remind Parliament once again, cannot be used to purchase goods or deliver public services. Based on the provisional outturn position, expenditure is lower than budget by £130 million, which is consistent with previous years. As the description suggests, these resources are not cash in nature; rather, they provide very specific budget cover for differences between estimated accounting adjustments and the final amounts calculated. Over £80 million of the total relates to a lower than expected write-down of the carrying value of the income-contingent repayment student loan book. That is an accounting adjustment and has no cash consequences. Other uses for that budget include the depreciation and impairment of assets, all of which have no cash consequences.

Finally, under devolved powers from the Scotland Act 2012, and as I have already indicated, 2015-16 was the first year in which devolved taxes in respect of LBTT have been managed in Scotland. A total of £572 million has been collected, some £74 million above the initial estimates. Again, recognising the uncertainty that has been created in the economy, I have also decided to take a prudent view of the deployment of those resources. I am mindful, in particular, of the impact of the EU referendum decision on property transactions and the need to manage potential volatility in future tax revenues.

The additional taxes will therefore be placed in the Scottish cash reserve—a new facility, created by the 2012 act, that allows excess tax receipts above forecasts to be held for later deployment. That will allow me to have greater flexibility and to carry those resources forward into 2016-17 and potentially beyond, if necessary. I set out my thinking on the budget and spending review process earlier today, and I will consider the deployment of those tax receipts as part of that process.

This statement of the 2015-16 provisional outturn reflects the position against HM Treasury budgetary controls, and it will be followed by reporting on the final outturn against the 2015-16 budget act limits in a suite of annual accounts that together report on the total Scottish budget approved by the Scottish Parliament.

The annual accounts of the Scottish Government and of all the individual bodies that are funded from the Scottish budget will report on their expenditure compared with the budget act allocation. The annual Scottish Government consolidated accounts and a statement of total outturn for the financial year 2015-16 against the final budget for the Scottish Administration as a whole will be provided to the Scottish Parliament later this year.

As we enter a period of considerable uncertainty for individuals and businesses, it is incumbent on the Government and Parliament to demonstrate strong leadership in managing the public finances. We have entered a period of considerable financial and economic turbulence in what was already a challenging climate. The Government’s continuing competence in the management of the public finances has once again been demonstrated in our management of the 2015-16 budget. That prudent approach has served us well, so we must not make any rash decisions now. To do so would risk our ability to respond to as-yet-unknown events.

I therefore commend today’s figures to Parliament and very much hope that members will join me in commending the approach that we are taking.

The Deputy Presiding Officer:

The cabinet secretary will now take questions on the issues raised in his statement. I intend to allow around 20 minutes for that, after which we will move to the next item of business.

As a lot of members wish to ask questions, I ask that questions and answers be succinct.

Photo of Murdo Fraser Murdo Fraser Conservative

I thank the cabinet secretary for his statement and for advance sight of it.

I welcome the cabinet secretary’s comments on the need for stability in the wake of last week’s referendum result. The economic fundamentals in the United Kingdom are sound, as the Chancellor of the Exchequer made clear earlier this week. Now that a decision has been made, I hope that the cabinet secretary would agree that it is important that all politicians avoid whipping up hysteria about the consequences of leaving the EU. I hope that he would also accept that, with the rest of the UK accounting for 64 per cent of Scottish exports and Europe accounting for just 15 per cent of them, the greater risk to the Scottish economy comes from any plans that his Government might have for a second independence referendum.

I have two specific questions for the cabinet secretary. One of the largest departmental underspends is in the Government’s priority area of education and lifelong learning, where there is an underspend of some £90 million in cash. Will the cabinet secretary explain how that figure has been arrived at?

The cabinet secretary mentioned LBTT. He will know that the revenues from domestic LBTT are some £33 million lower than originally estimated, and that is not entirely explained by the forestalling that occurred at the start of the year. I ask this question not merely because I am in the process of moving house. Does the cabinet secretary agree that it is time to look again at LBTT rates to see whether a reduction in certain levels might increase the tax take?

Photo of Derek Mackay Derek Mackay Scottish National Party

I thank Murdo Fraser for his questions. I thought that it was interesting that, having asked me to provide reassurance and calm in this time of uncertainty, he started whipping up fears and engaging in a bit more scaremongering on the prospect of another referendum.

I revert back to what I did at this morning’s meeting of the Finance Committee, which is to say that the First Minister has explained our constitutional position and the aims and objectives that we are pursuing. Of course I want to provide stability and calm. The Government has been very proactive in engaging with stakeholders in an effort not just to calm people on the position in Scotland but to seize the opportunities that may well exist.

As far as doom and gloom is concerned, it was the chancellor, George Osborne, who outlined a number of the risks to the economy of leaving the EU, and some of that is turning out to be accurate. We all have a shared responsibility to deliver the best that we can for Scotland, its people and its economy.

On education specifically, as is the case with every budget line, there is detail behind the line. I can give more information to the member—or any other member—but, as an example of what happened with part of the underspend in education that the member cited, £50 million of accumulated Scottish Further and Higher Education Funding Council reserves were transferred back to the Scottish Government through cash demand changes with no loss of spending power to the higher and further education sectors. That is quite a substantial figure, and I think that it gives a sense of how some of this is more of an accounting exercise rather than a loss of spending power. Of course, education continues to be a priority for the Government, and we are proposing additional resources for it.

Secondly, on the point of general tax, surely even the Conservatives will welcome the fact that we have generated more income than we had forecast. However, I will work on a more consensual basis and look at LBTT rates. I think that the Government had always committed to carrying out a review after the first full year; that was welcomed by stakeholders, and I am happy to commit to taking an inclusive approach to looking at the levels of taxation and the rates to ensure that we have got them right. Given that we have exceeded our forecast, though, it is fair to say that so far we have done an effective job with the new devolved taxes that have come our way.

Photo of Kezia Dugdale Kezia Dugdale Labour

I welcome the cabinet secretary’s words on the impact of the EU referendum. I also reassure him that the priority of Labour members will be to focus on jobs, the economy and workers’ rights and that where we can support the Government we will.

In answer to a recent written question, the finance secretary advised me that the Scottish Fiscal Commission would not be producing its own independent forecasts until the summer of 2017 and that in the meantime the Government would continue to produce its own forecasts. Does the cabinet secretary have any plans to revisit that decision in light of last week’s referendum results, and is he currently confident that he has the data that he needs to monitor and assess the impact of Brexit on Scotland’s economy?

Photo of Derek Mackay Derek Mackay Scottish National Party

There is now a great deal of uncertainty in the economy that was not there before and it is for that reason that, as I outlined to the Finance Committee this morning, we have to look more closely at budgetary timescales. We are dependent on a number of forecasts, some of which come from the UK Government and some of which come from the Office for Budget Responsibility. The Scottish Fiscal Commission will act in an advisory capacity before it takes up its fuller functions.

I also addressed the issue of capacity and support for the commission at today’s Finance Committee meeting.

I am therefore satisfied that I have as much data as can be given at this time. Despite the new level of uncertainty that has been generated, we will work very hard not only in the reciprocal arrangements with the UK Government but with the other devolved Administrations to put ourselves on the strongest possible footing, to understand the impact of the proposed exit and to respond.

Photo of Michael Russell Michael Russell Scottish National Party

Given that the variation is only 5 per cent of total fiscal DEL, the figures show commendably tight financial management. However, as both of the previous questions have pointed out, there are troubles ahead, and it is obviously right for all options to be examined.

With regard to those options, I wonder whether the cabinet secretary will say a little more about the cash reserve process. It is encouraging to know that we now have the opportunity to create that reserve, but it would be useful to know the conditions under which it can be used and his policies and plans for using it, should that become necessary.

Photo of Derek Mackay Derek Mackay Scottish National Party

It is fair to say that I have inherited a strong position from my predecessor. The 0.5 per cent underspend is welcome, given that resources that are carried forward can be deployed in any way that we think appropriate. That is why I am not making any spending announcements today, just days after the Brexit decision and in light of the uncertainty that exists.

When we raise more tax than has been forecast, we are allowed to put that money into the cash reserve. That is what I am proposing to do, and we can draw on that as and when required. However, the constitutional position and the financial and fiscal position of the Scottish Government and the Parliament will continue to evolve as the Scotland Act 2016 is fully implemented. We have increasingly more flexibility to use the carry-forward and, indeed, the cash reserve.

The kinds of issues that we would want to consider would include our not meeting income targets in future. That might happen because of the impact on the property market, which in turn might impact on LBTT, or indeed the impact on income tax, on which we will be more heavily reliant.

I will consider the taxes that are generated, the pressures on public expenditure, and how we respond to the pressure on our country as a consequence of the outcome of the referendum while pursuing the Government’s objectives.

Photo of Alex Johnstone Alex Johnstone Conservative

I note from the supporting documents an overspend of £128 million under health, wellbeing and sport. Does that reflect the growing problem of deficits in a number of Scottish health boards? Does that outstanding high figure indicate a growing problem that may destabilise budgets in coming years?

Photo of Derek Mackay Derek Mackay Scottish National Party

No, I do not think that that is a fair characterisation at all. As with the education question, I am happy to give more information—an almost line-by-line analysis—specifically on that particular issue.

On the particular spend on health, there has been an issue around Office for National Statistics classification and there have been other matters that relate to capital. It is very important that we focus on the detail and understanding the difference between revenue and capital. I am happy to write to the member with a fuller position.

I am sure that, with the Cabinet Secretary for Health and Sport, we will pay close attention to those matters, but I do not accept that characterisation. There are specific classification issues on which I am happy to give information in much fuller detail to the member if that would be of assistance.

Photo of Willie Coffey Willie Coffey Scottish National Party

Can the cabinet secretary confirm that the Scottish cash reserves can and will be used to support our public finances and public services during this period of economic turbulence, which has been caused entirely by the shambolic UK Tory Government?

Photo of Derek Mackay Derek Mackay Scottish National Party

It must be reassuring that we have the ability to carry forward any underspend. That was not always the case.

The figures are only provisional. We will be able to draw on the specific cash reserve, and we have a great deal of flexibility. It is right not to rush to new spending decisions, but to take a prudent and cautious approach in light of circumstances and use the mechanic of the financial flexibility that the Government now has.

Photo of James Kelly James Kelly Labour

I note from the documentation that has been provided that there is a £67 million cash underspend in the communities portfolio, which includes housing. That comes on the back of yesterday’s statistics, which show that more than 5,000 children stay in temporary accommodation. I am sure that, like me, the cabinet secretary finds that unacceptable. I ask him to look at how the cash reserve can be managed to address that situation and ensure that our children do not stay in vulnerable and insecure situations.

Photo of Derek Mackay Derek Mackay Scottish National Party

I think that that was the first, immediate bid for access to the cash reserve—it was only a matter of time. We will, of course, consider all those issues when we take forward our spending proposals through the budget. We will do so earlier than that if that is required. I take very seriously the challenge that has been identified. In supporting people through this period of austerity and through difficult times, we will, of course, be very mindful of the choices that we make with the available resources.

Photo of Patrick Harvie Patrick Harvie Green

I thank the cabinet secretary for the advance copy of the statement.

Normally, there might be great value in having a relatively low level of underspend, but we face the strong possibility in the future of further cuts from Westminster and increased procurement costs right across the public sector as a result of the low value of the pound. Would it be useful to assess the impact on procurement costs in the public sector as a result of that circumstance? Has the Government begun to undertake such an exercise?

Photo of Derek Mackay Derek Mackay Scottish National Party

Mr Harvie is right to raise that as one of many issues of uncertainty that we will have to wrestle with. The situation will have an impact on procurement and borrowing costs and will inevitably lead to impacts on the capital plan and the other choices that we will be able to make.

We are looking at a range of analyses, and it is clear that some of the impact is as yet unknown as the markets settle. We are actively looking at the area along with a whole host of funding streams that deliver services in Scotland, many of which relate to EU funds, of course. We will have to consider all those matters in the round.

Photo of Ivan McKee Ivan McKee Scottish National Party

What measures will the Scottish Government take to support economic growth and help Scotland to weather the economic shocks caused by Brexit?

Photo of Derek Mackay Derek Mackay Scottish National Party

The Government has outlined its economic strategy, which includes a focus on internationalisation, innovation and infrastructure-led recovery, and clearly all those things will be impacted by the outcome of the referendum. We will continue to focus on delivering the manifesto on which we were elected. We have made some announcements on the review of the enterprise agencies, which will continue to enable infrastructure investment, including digital infrastructure. We have a competitive rates scheme and we will continue to deliver on modern apprenticeships.

We will look at how we can support the economy, deliver stability and take advantage of any opportunity that may exist in these uncertain times.

Photo of Willie Rennie Willie Rennie Liberal Democrat

I thank the cabinet secretary for providing an advance copy of his statement.

Can the cabinet secretary provide some information as to why the financial transaction arrangements budget has been more underspent this year than in previous years? He rightly warns us of the potential cuts that might result from Brexit

. Will he therefore reconsider the Government’s approach to the use of income tax powers? He talked of using all necessary means in order to deal with the troubles ahead, so will he consider a more expansive use of the income tax powers?

Photo of Derek Mackay Derek Mackay Scottish National Party

Some of the financial transactions underspend might be to do with the uptake of particular schemes and the complexity around that. I would be happy to provide the member with further information.

We will have to take a strategic approach to the budget process. When I engaged with the Finance Committee this morning, I put my view that we should bring a one-year budget to Parliament because I do not think that a three-year spending review would be wise in the circumstances.

When I approach the budget process, I will engage with all political parties and hear what they have to say on spending and tax choices. We outlined our position on tax during the Scottish Parliament election and we were elected on that mandate. However, given the current degree of uncertainty, we will have to look at the financial pressures that we face and the decisions made by the Chancellor of the Exchequer—whether George Osborne or his successor. We will have to consider the autumn statement to see what tax and spending decisions the United Kingdom Government makes and what their impact will be on Scotland.

We aim to see through the manifesto on which we were elected, but I am happy to engage with all political parties to secure the passage of the budget through Parliament.

Photo of Dean Lockhart Dean Lockhart Conservative

I thank the cabinet secretary for the advance copy of his statement.

The cabinet secretary mentioned the competence of the Government in managing public finances. A significant number of cost overruns have been experienced recently in information technology and other projects overseen by the Government and its agencies, including the system for European Union farm payments, the NHS 24 project and Police Scotland’s IT project. Can the cabinet secretary confirm the total amount of additional expenditure made by the Government and its agencies as a result of those overruns?

Photo of Derek Mackay Derek Mackay Scottish National Party

I do not have such a figure to hand. We take very seriously our duty to look after the public finances, to deliver solid public services and to deliver sound procurement. I am happy to discuss further some of the challenges that we have had in relation to some of those schemes. Where there have been challenges we have tried to recover the position to deliver the best that we can for the people of Scotland. In all the areas that have been identified we are working very hard to recover our position.

Photo of Kate Forbes Kate Forbes Scottish National Party

Before I ask my question, I briefly mention that the First Minister has appointed me to serve the Scottish Parliament as the parliamentary liaison officer for the Cabinet Secretary for Finance and the Constitution


Brexit poses a number of specific challenges in relation to the forecasting of tax revenues. What steps is the Government taking to ensure that we continue to manage tax volatility during these turbulent times?

Photo of Derek Mackay Derek Mackay Scottish National Party

I have engaged with the chancellor, the UK Government and Her Majesty’s Treasury. There is a reciprocal arrangement around information and a degree of pragmatic co-operation, because our position is still dependent on a number of UK factors. The specific decisions that I have taken and brought to Parliament today around the use of the underspend and the allocation to the cash reserve shows that we are taking a sound, prudent and cautious approach, and giving ourselves the ability, as a Government and as a Parliament, to respond in due course.

On forecasts, given the level of uncertainty, a number of things will change. We do not yet know the impact on our devolved taxes, never mind the impact on the UK taxes. However, it was the chancellor who said that he thought that the UK would be poorer, that taxes would be likely to go up and that public spending would be likely to go down. Knowing that austerity will be prolonged is very concerning for us all.

We will make the best assessment that we can, and I will come back to Parliament. Fundamentally, we will make the right decisions to deliver stability and to offer protection in very challenging circumstances.

Photo of Daniel Johnson Daniel Johnson Labour

I note Dean Lockhart’s question about the general cost of IT project overruns. Within the rural affairs, food and the environment budget line, I note £46 million-worth of overspend in financial transactions. We note with concern the issues that have been faced with the administration of common agricultural policy payments. Does the cabinet secretary have details of the amount that is attributable to the issues faced by that department—or indeed figures for other items in that budget line?

Photo of Derek Mackay Derek Mackay Scottish National Party

Again, I am happy to engage on the fine detail of that issue. The £54 million overspend on financial transactions reflects the loans in respect of the less favoured area support scheme, which will be recouped in 2016-17. I am happy to come back on the detail of that portfolio rather than take even more time now to explain it across the chamber.

Photo of Ash Denham Ash Denham Scottish National Party

What steps will the Scottish Government take to provide businesses with reassurance and certainty during the current precarious economic climate to help ensure that we continue to attract investment and build a strong and competitive Scottish economy?

Photo of Derek Mackay Derek Mackay Scottish National Party

First, we want to ensure our continuing place in the EU and to seek the opportunities that that would bring for Scotland. We will engage with business stakeholders. Indeed, just hours after the referendum result, cabinet secretaries were engaging in meetings and dialogue with key stakeholders not only to provide that stability and reassurance, but to hear from them about what else we could do to give further support at this time.

Scotland’s economy is fundamentally strong and there are great opportunities ahead, despite the uncertainty that has been created. We will continue to recalibrate our efforts to deliver that stability and economic opportunity, and although the climate in which we are operating has changed, we will also continue to deliver on the Government’s economic strategy, which has been outlined to Parliament. I will continue to engage with all relevant parties to take forward our agenda.

Photo of Christine Grahame Christine Grahame Scottish National Party

Thank you very much. That ends questions on the statement. I will allow a minute or so for a changeover on the front benches.