This is my maiden speech as convener of the Finance and Constitution Committee. I can safely say that I have had a steep learning curve over the past month. I also concede that I had not anticipated spending quite so much time considering the timetable for the draft budget.
There are two main areas that I want to cover on behalf of the committee. First, there is the immediate issue of the timetable for 2017-18; and, secondly, there are issues arising from the new financial powers, which will have a significant impact on how we conduct our budget scrutiny this year and beyond.
On that specific matter, the committee and the Cabinet Secretary for Finance and the Constitution have agreed to establish a budget process review group. The group’s work will include examining the impact of the new powers. I am delighted that a number of senior public finance experts, including the Auditor General, have agreed to join the group. Along with the cabinet secretary, I welcomed the external experts before they began their work at the group’s first meeting last Thursday. The group has a huge challenge in considering the impact of the new powers and redesigning the budget process, together with its timetable, prior to the publication of the draft budget for 2018-19.
With regard to the draft budget timetable for 2017-18, it might be helpful to the Parliament if I provide some procedural context for the debate. Under the terms of the written agreement, the Scottish Government is required to consult the Finance and Constitution Committee on a revised timescale for the budget process if it believes that it might not be able to publish the draft budget by 20 September. As a result, the cabinet secretary wrote to the committee on 23 June, indicating that his preferred option would be for the draft budget this year to be published after the United Kingdom Government’s autumn statement.
As we now know, the autumn statement will be published on 23 November, and the cabinet secretary has indicated to the committee that he intends to publish the draft budget three weeks thereafter, which takes us to the week beginning 12 December. The committee recognises that the timescale is challenging but emphasises that it is necessary in order to allow some evidence to be taken prior to the Christmas recess. The committee has sent the cabinet secretary a draft timetable for scrutiny of the draft budget 2017-18 that fully demonstrates that point.
In order to more fully understand the financial and fiscal context in which we are operating, two weeks ago the committee took evidence from the Fraser of Allander institute on its excellent, detailed and challenging report on Scotland’s budget. One of the main themes of that discussion was the potential impact of Brexit on the public finances at the same time as the new tax powers are being devolved. As the Fraser of Allander institute report points out,
“Delivering these new powers in ‘normal’ times would be challenging enough. But ... they are being delivered at a time of significant fiscal challenge and economic uncertainty.”
The Fraser of Allander institute report includes a number of hypothetical scenarios for the resource block grant arising from the autumn statement. If on 23 November the UK Government announces a further reduction compared with what was set out in March this year, the Scottish block grant could bear significant consequential effects. One of the report’s scenarios involves a further cut to the resource block grant of around £200 million for 2017-18. As the institute’s report points out, given the budgetary commitments that the Scottish Government has already made, the implication of a further reduction to the block grant of £200 million is that unprotected areas of spend could experience a real-terms cut of 2.2 per cent between 2016-17 and 2017-18. The FAI report further points out that an added challenge is that those areas
“have borne a significant share of the burden of fiscal consolidation since 2010-11.”
The committee recognises that the Scottish Government faces significant challenges in preparing the draft budget while there is so much economic and fiscal uncertainty arising from Brexit. It also recognises that a number of subject committees have already begun their budget scrutiny in advance of the draft budget being published. That is an approach that we and the previous Finance Committee have encouraged as part of a move towards more outcomes-based financial scrutiny. For example, I know that the Education and Skills Committee has begun to scrutinise a number of public bodies that fall within its remit. That work includes seeking information on the performance of those public bodies against the outcomes that are expected of them by the Scottish Government.
Although the committee supports a move towards a more flexible approach to financial scrutiny that may be carried out throughout the year, that should not be viewed as a replacement for scrutiny of the Government’s actual spending proposals. However, the committee recognises that this year is different, given the unique set of circumstances that currently exist as a consequence of Brexit and the imminent devolution of further tax powers.
Therefore, the committee has sought to work with the Cabinet Secretary for Finance and the Constitution to consider what level of information could reasonably be provided to support scrutiny prior to the publication of the draft budget. On 7 September, the cabinet secretary informed the committee that he would be willing to produce as much scenario-planning information as possible. There followed an exchange of letters between the cabinet secretary and the Finance Committee. I make it clear to the cabinet secretary today, as the committee did in its letter of 21 September, that the committee would find it unacceptable if he confirms that he is not prepared to publish any such information in advance of publication of the draft budget.
To move forward on a more positive note, it is also important to emphasise that the Government has agreed that the arrangements for scrutiny of this year’s budget process should not be viewed in any way as setting a precedent for future years. Part of the important work that the budget review group will now do over the coming months is to examine the effectiveness of scrutiny of the draft budget for 2017-18.
I want to touch briefly on some of the very important and complex issues that the review group will have to grapple with as a consequence of the operation of the fiscal framework; I understand that the deputy convener will also address some of those issues in his closing speech. The process will be highly complex and I am no expert, but it is essential that colleagues across the Parliament are well aware of how the money that will be available to the Scottish Government is calculated each year.
There are a number of elements to the process that are worth highlighting. As is obvious from the settlement, the budget will increasingly depend on the money that we raise through the devolved taxes as well as the block grant from Westminster. As the money that we raise increases, there will be a corresponding reduction in the size of the block grant. However, that will not necessarily be a zero-sum calculation, as the reduction to the block grant will depend on the impact of the relative performance of the UK and Scottish economies in respect of tax receipts. If, for instance, the Scottish economy outperforms the UK economy, the Scottish budget should benefit, but it will suffer if we underperform against UK economic growth.
The size of the annual Scottish budget will initially be based on forecasts, which will then be subject to a reconciliation process. The annual adjustment to the block grant will be based on forecasts that the Office for Budget Responsibility has prepared, and the expected tax receipts will be based on forecasts that the Scottish Fiscal Commission has prepared. That is quite a complex set of information that the review group, the Finance and Constitution Committee and the Parliament will have to grapple with.
Understanding the interrelationship between those forecasts and the subsequent reconciliation process will be one of the main challenges that face the budget review group and, in due course, the Finance and Constitution Committee and the Parliament. Obviously, we wish them well.
These are challenging times, and it is essential that we redesign our process to ensure that the Parliament can rise to meet those challenges. I look forward to hearing the contributions of members of the Finance and Constitution Committee and of other members in this important debate and to hearing the cabinet secretary’s response to my speech.
On behalf of the Finance and Constitution Committee, I move,
That the Parliament notes the timetable for the Scottish Government’s Draft Budget 2017-18.