FINANCE COMMITTEE

Tuesday 1 February 2005

Session 2

£5.00

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CONTENTS

Tuesday 1 February 2005

Col.

INTERESTS ...... 2269 BUDGET PROCESS 2005-06...... 2270 BUDGET (SCOTLAND) (NO 2) BILL: STAGE 2 ...... 2286 CROSS-CUTTING EXPENDITURE REVIEW ON ECONOMIC DEVELOPMENT...... 2291

FINANCE COMMITTEE 4th Meeting 2005, Session 2

CONVENER *Des McNulty (Clydebank and Milngavie) (Lab)

DEPU TY CONVENER *Alasdair Morgan (South of Scotland) (SNP)

COMMI TTEE MEMBERS *Ms Wendy Alexander (Pais ley North) (Lab) *Mr Andrew Arbuckle (Mid Scotland and Fife) (LD) *Mr Ted Brocklebank (Mid Scotland and Fife) (Con) *Jim Mather (Highlands and Islands) (SNP) *Mr Frank McAveety (Glasgow Shettleston) (Lab) *Dr Elaine Murray (Dumfries) (Lab) John Sw inburne (Central Scotland) (SSCUP)

COMMI TTEE SUBSTITU TES Gordon Jackson (Glasgow Govan) (Lab) Dav id Mundell (South of Scotland) (Con) Alex Neil (Central Scotland) (SNP) Iain Smith (North East Fife) (LD) *attended

THE FOLLOWING ALSO ATTENDED : Peter Wood (Adviser)

THE FOLLOWING GAVE EVIDENCE: Richard Dennis (Scottish Executive Finance and Central Services Department) Iain Dew ar (Scottish Executive Finance and Central Services Department) Tavish Scott (Deputy Minister for Finance and Public Service Reform)

CLERK TO THE COMMITTE E Susan Duffy

SENIOR ASSISTANT CLERK Judith Evans

LOC ATION Committee Room 1

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Scottish Parliament Budget Process 2005-06

The Convener: Agenda item 2 is consideration Finance Committee of the Executive’s response to our report on stage 2 of the budget process. I am pleased that the Tuesday 1 February 2005 Deputy Minister for Finance and Public Service Reform, Tavish Scott, is here to answer members’ [THE CONVENER opened the meeting at 10:01] questions on the response. He will also remain for our stage 2 consideration of the Budget (Scotland) Interests (No 2) Bill. With the deputy minister are Richard Dennis, the finance co-ordination team leader and The Convener (De s McNulty): I welcome Iain Dewar, from the efficient government team, in members to the fourth meeting of the Finance the Finance and Central Services Department of Committee in 2005. I also welcome the press and the Scottish Executive. I wish that the Executive the public to today’s meeting and I remind could find shorter names for its divisions and sub- members to switch off their mobile phones and divisions. pagers. We have received apologies from John We have the minister’s response in front of us, Swinburne. so the sensible way to proceed is to invite I welcome three other people to the committee. members to pose any questions that they have. Andrew Arbuckle is our new member. He replaces Alasdair Morgan (South of Scotland) (SNP): I Jeremy Purvis, as was agreed by Parliament last will go first, rather than let the minister go away week. Judith Evans, who is seated to the left of empty-handed. Susan Duffy, is now our senior assistant clerk and Edna Stirrat, who is seated in the corner of the With reference to the Executive’s response to room, is the new committee assistant. We still point 4 on the target for economic growth, the await a replacement for Emma Berry—who is of committee accepts that many factors that course irreplaceable—but somebody will emerge influence economic growth are not within the gift of in due course. the Executive, but it strikes me that those factors also affect other countries—in particular the rest of Agenda item 1 is to ask Andrew Arbuckle to the United Kingdom. Therefore, although those declare any relevant interests. factors might preclude the Executive from setting a Mr Andrew Arbuckle (Mid Scotland and Fife) target for economic growth per se, surely it would (LD): My interests are registered in the “Register be possible to set a target relative to our closest of Interests of Members of the Scottish comparators. Parliament”. The Deputy Minister for Finance and Public The Convener: You have no interests that are Service Reform (Tavish Scott): We have been specific to the committee. down this particular avenue a number of times. I would be happy to consider any suggestion that Mr Arbuckle: That is right—there is nothing the committee might make if it were possible to specific to the committee. define the comparators and what comparisons The Convener: Thank you very much. were being made. The committee is all too familiar with the fact that we have held to the view—I suspect that it is a commonly-held view—that when we are not directly responsible for all the external pressures that apply, a target might be a blunt instrument that would not necessarily achieve anything in terms of economic growth and the strength of our domestic economy. However, if the committee—in particular Mr Morgan—has specific comparative suggestions, we will be more than happy to consider them. Alasdair Morgan: There is not necessarily an easy solution, but the problem is that if there is no solution we are left with a situation in which there is no measure by which we can judge whether expenditure on the Executive’s main political target—economic growth—is successful, which would be the case even if we were to cross the other hurdle that we will face later in the meeting,

2271 1 FEBRUARY 2005 2272 when we try to work out which expenditure is The Convener: What is important from my point targeted at economic growth. Even if we can do of view is how we close the gap between an that, we would not have a clue whether that aspirational objective, which as you say is to move expenditure is successful. to the first GDP quartile, and the mechanism for moving in that direction. That might be a useful Tavish Scott: I am sure that Mr Morgan will subject for debate. agree that on the devolved areas for which we have responsibility—education, transport or any I will add one other issue to the discussion other particular expenditure programme—we have before I bring in Wendy Alexander. You said that set targets and objectives and that he, the you do not have control over many of the issues committee and other portfolio committees rightly that are involved, which is obviously true in the hold the Government accountable on those. I context of the role of the UK Government and of argue that in that sense there are checks and external factors that are not affected by balances and that there is appropriate scrutiny of Government. Is there dialogue between the the Government’s expenditure levels in order to Scottish Executive and your Westminster create the conditions within which the Scottish counterparts about setting forecasts and economy can prosper. Parliament rightly holds expectations in relation to economic growth, and Government to account for such expenditure. That about how such expectations might be met? Is is how we have dealt with portfolio expenditure. I there a process of informal or formal dialogue accept Mr Morgan’s point about the lack of a about how you can work together to deliver central big number at the top of that, but because stronger economic growth for Scotland? of external factors we are not convinced that that Tavish Scott: There is normal contact at official is achievable or possible. We have discussed and ministerial levels on economic development these matters before, so I will not repeat all the and growth in general, which is an on-going and slightly academic arguments again. I say again very live process—we would not expect it to be that we will be more than happy to consider any otherwise. Obviously, in the context of the suggestions that are made. spending review in the summer, for example, we The Convener: When we took evidence from Dr take decisions about strategic long-term Goudie in our economic growth inquiry, I took it investments, such as the significant increases in from his comments and from some of the higher education spending, in transport spending documentation that we had seen previously that and in tackling health. Those decisions are taken the Executive was in the process of considering by us. Although there needs to be dialogue and some comparative measures of performance in engagement at official and ministerial levels, the economic development. That is little more than a portfolio choices that we make are ultimately step and a jump from where the committee wants matters for us, so we must make judgments as to go. There is not necessarily a huge distance best we can. between us on the matter. If you are saying that The Convener: I was trying to make the point you are happy to engage in a dialogue with the that dialogue between the Executive and the UK committee to see how we could provide an Government geared towards economic growth appropriate mechanism for considering might be beneficial in promoting awareness of the comparative performance as a benchmark, the choices that ministers might make and the committee might be content with that suggestion. consequences of choices that the UK Government We would certainly welcome an opportunity to might make. have that discussion with you. Tavish Scott: Indeed. That process is on-going. Tavish Scott: I am happy to do that. I do not see any point in having a sterile or negative Ms Wendy Alexander (Paisley North) (Lab): I political argument; I would rather have a positive approach the issue from a slightly different one in which we looked for an agreed basis for viewpoint. It is known that I am less interested in such comparators. We might not reach targets than I am in forecasting. The minister agreement, but there is certainly some merit in invited the committee to suggest a constructive pursuing the matter. way forward. The committee is also familiar with the fact— The Executive recently committed itself to because ministers have mentioned it and spoken drawing up a long-term financial model, which will about it in finance debates over the years—that be hugely valuable, given that we are currently in the Executive has an overall objective in relation to a difficult position because we look only three the top quartile of gross domestic product years ahead, although we make policy performance. We will continue to pursue that commitments for 10 or 20 years ahead. The long- objective. We are happy to consider comparators term financial model will try to forecast spending. It that would be meaningful to all of us. strikes me as being a little odd that the Executive, which probably employs more economists than

2273 1 FEBRUARY 2005 2274 does any other institution in Scotland, does not try need to see both sides of the equation; it seems to forecast what will happen on the eminently sensible that we should do so. I am macroeconomic scale. There have been three sorry that I cannot give a more precise answer. private forecasts, which I think were joined by a The Convener: The matter will be included in fourth in December. the dialogue. The committee would welcome a I presume that we want our spending patterns to written response. be to some extent countercyclical. We therefore Ms Alexander: It would be very helpful if the need a deep understanding of what is happening minister could write to us about the matter in due in the Scottish economy. Although the Scottish course. economy is highly integrated into the UK economy, we know that the different composition The Convener: I will bring in Elaine Murray. of the Scottish economy, which was demonstrated in the period 2000-2002 in relation to electronics, Dr Elaine Murray (Dumfrie s) (Lab): I wanted to raise a different issue. has led to a different growth profile in Scotland. The Executive might want its spending patterns to The Convener: In that case I will bring in reflect blips that affect Scotland differently from the Alasdair Morgan first. rest of the UK. The Executive has committed itself to producing a long-term spending model and it is Alasdair Morgan: Even if we had forecasts certainly the pattern for Governments in other about the growth of the Scottish economy, what jurisdictions—small nations or regions—to forecast flexibility in Government expenditure would there expected growth in their economies. Such an be? Our total expenditure is very much approach might have allowed a focus on, for constrained by the Barnett formula. Even though example, the downturn in electronics, which was we might want to spend in a cycle that was well known to microeconomists in the Executive different from that of the UK economy, the totality but could have been considered throughout the of our spend is pretty well determined for us— Executive in the context of the implications for the unless the central unallocated provision will take a forthcoming spending review. Currently, any much larger proportion of the budget than I am dialogue that is based on the differential aware of. composition of the Scottish economy is entirely Tavish Scott: Of course that is true, but I am dependent on the three private organisations—I sure that Mr Morgan is not arguing that we should think that they have been joined by a fourth—that cut expenditure. We need to consider carefully forecast the Scottish economy. where the argument goes; it is about considering Has the Executive—in close concert with the the disciplines that are on us in financial terms. Treasury and no doubt making use of the For example, we will soon publish the capital Treasury’s model—considered complementing its investment plan using the model and providing the long-term financial model with a long-term practical document that the committee has been economic model of the Scottish economy that asking for for some time. The plan will illustrate the would have some short-term forecasting capacity? balance between capital and revenue over 10 Such an approach is very different from using years across portfolios such as transport. It is targets, which I do not regard as being particularly important to have that consideration vis -à-vis wise. I cannot understand why we moved to capital and revenue and it is important that we do targets without first attempting to forecast that transparently and in a way that illustrates that accurately. we are investing for the long term, particularly in capital terms. I suspect that we all share that objective. 10:15 Dr Murray: Up and down Scotland, people are Tavish Scott: I have a lot of sympathy for that awaiting the decisions of their local authorities on argument. Perhaps all that I can say now is that next year’s council tax. In its response to the there are discussions on the issue and that I can committee’s report on stage 2 of the 2005-06 come back to Wendy Alexander with more detail. budget process, the Executive says that it Ms Alexander: Sure—that would be excellent. “sees no reason for any council tax levels to rise above Tavish Scott: Wendy Alexander is also right to 2.5% for 2006-07 and 2007-08.” pick up on the convener’s point, which is that we The submission continues: can draw on the Treasury’s experience. The “For the coming year, w e expect councils to keep rises discussions that are taking place in that context as low as possible”. are more at official level than at ministerial level—I have not yet found many economists at ministerial Does that mean that you think that it would be level, which is probably a good thing. There is acceptable for this year’s council taxes to increase considerable room for examining the matter. We by above the inflation rate?

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Tavish Scott: No. Again, I do not want to repeat meet the Convention of Scottish Local Authorities, the formulations that Tom McCabe and other which is the umbrella body for local government ministers have used in previous weeks, but we throughout the country. We have formal meetings hope and trust that local government, given the throughout the calendar year; that matter will considerable resources that are available to it—in undoubtedly be a standing item on those excess of £10 billion by 2006-07—can keep meetings’ agendas. I suspect that COSLA will council tax increases to a minimum. Obviously, choose to make sure that its view is made known those are matters for the judgment and publicly and that we will all hear it regularly. The consideration of local authorities, but we very committee can be assured that those discussions much hope that authorities will take an extremely will take place. It is appropriate that local responsible and prudent approach on the matter. government make known its views, both as Dr Murray: Local authorities are putting the individual councils and collectively. Like you, counter-argument that although they have convener, I was a councillor and I do not received a lot of additional money, much of it has remember any year in which we did not make been accounted for by the duties that have been representations on the overall settlement. imposed on them by legislation that Parliament The Convener: The difference this year is that has passed. I have the definite impression from the Executive appears to acknowledge that there councillors and officials in local authorities that is a particular problem. We are interested in they do not think that they will be able to hold monitoring how it proposes to resolve the issue. council tax rises down to the rate of inflation this year. That causes concern, particularly for people Alasdair Morgan: The minister says in his who are just above the council-tax benefit level, response that who will probably be the hardest hit. Is the “The Spending Rev iew 2004 settlement for local Executive considering the consequences of government is robust”. above-inflation increases in council tax for people I have been reading Mr Humphry’s book on the at that income level and taking them into account use of language, so I wonder whether the minister in its wider review of local government finance? can tell us what “robust” means? Tavish Scott: The Executive is not doing that; that is why we set up an independent inquiry. Tavish Scott: Which Mr Humphrys is that, Mr However, Elaine Murray’s point is fair in the sense Morgan? that the inquiry will give the committee an Alasdair Morgan: Just tell us what Mr McCabe opportunity to take evidence on that. Obviously, means by “robust”. there will always be a cut-off point in whatever level Government policy pitches benefits, and Tavish Scott: I agree with Mr McCabe that the therefore there will be some people who do not settlement is robust. Maybe I can— benefit from them. The independent inquiry was Alasdair Morgan: What does “robust” mean? established last year and has just called for evidence, which will include those points. Tavish Scott: May I put the matter in context? We made conscious spending review decisions in I cannot add much to what I said on Elaine relation to substantial increases in higher Murray’s other point, because these are matters education spending, in long-term transport for local government. I honestly do not think that it spending and in tackling some particular is any finance minister’s job to second-guess what challenges in health. Mr Morgan may correct me if local authorities will want to do. I accept the point I am wrong, but I did not notice any great dissent about legislation that has been passed by from that long-term investment and the strategic Parliament—we all take responsibility for that. In overview of where we want to take expenditure the two years during which I have done my current patterns during the period of the spending review. job, we have discussed the relationship between That inevitably meant that, after a considerable central and local government a number of times. I period of substantial growth in local government guess that it is a live and on-going relationship, spending since 1999, local government got a given the point that has been made. tighter settlement in the current spending review The Convener: The minister, Tom McCabe, than in previous ones. I simply suggest that, in the acknowledged that the settlement is tight, context of overall spending, the Government made particularly in the later years of the spending a conscious decision to invest strongly in the review, and he said that there would be longer term, particularly in those three areas. I discussions with local government about it. Can accept that it is a tight settlement in terms of local you give any indication of what discussions have government. taken place so far, what discussions are intended Alasdair Morgan: Right. So that is what and when the process might reach a conclusion? “robust” means. Tavish Scott: I cannot give any detail on that today but, as the committee knows, we regularly

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The Convener: I do not think that Scotland is that we have, and they are laid out in the Scotland short of people who can testify to Tom McCabe’s Act 1998. From one political perspective we could robustness. want more and from another political perspective we could want less, but we are where we are and Jim Mather (Highlands and Islands) (SNP): I we will take matters forward as effectively as we make no apologies for going back to targets and can within that context. forecasts. The discussions with the Westminster Government to which you referred in an earlier Jim Mather: On effectiveness, and to look at the answer did not sound too protracted. Have you matter from a different angle, in what way is that discussed the absence of targets and forecasts compatible with the demographic challenges that with the UK Government, given the implication that we face and the need to reverse population it is easy for competitor nations to construe the decline? How can we create a feedback loop to matter and to decide that we are not serious about allow forward planning to meet the changing economic growth? Equally, that thought could start economic climate if we do not have a forecast to to percolate through to the minds of inward give us some indication of what we anticipate will investors, young Scots and potential immigrants, happen in Scotland in the future? who might think that we are not serious, given that Tavish Scott: I said in response to Wendy we do not have a forecast for economic growth. Alexander’s question that we will look at the Tavish Scott: I am not convinced that the particular long-term point in relation to forecasting, groups that Mr Mather mentions are hugely but we make the best judgments that we can, in influenced by what we might say about a particular policy terms, on attracting new people to Scotland number at a particular point in time during a and encouraging expatriate Scots back to particular parliamentary year. Based on the Scotland. Mr Mather will be familiar with the evidence that I have seen and the feedback from programmes that we run in relation to those ministerial colleagues who have just come back matters across various portfolios—I will not run from China, where they were promoting Scottish through them again this morning. If it would be business interests, I argue that our overall helpful, we can put together a list or a briefing note approach and the environment that we seek to on them, but they are on the public record and create, within the powers of the Government in together they add up to a concrete platform of Scotland, are moving in the right direction. initiatives, programmes and policies to deal with the issues. Mr Mather will have to forgive me, but I cannot set out exactly what is discussed vis-à-vis the Jim Mather: My final question is, can you name issues between Edinburgh and London, but he one other country or organisation that sets and can be assured that they are discussed. trumpets a top priority yet does not have a forecast or a target for it? Jim Mather: The point that I am keen to register is that, given the nature of the powers that are Tavish Scott: These are political games and I dispensed across the two legislatures, the am not going to get into them. Executive and Westminster have a joint and Jim Mather: It is a managerial game. several responsibility to step up to the plate on the matter. Inward investors, young Scots and Mr Ted Brocklebank (Mid Scotland and Fife) potential immigrants all work on the basis of (Con): Given the fears that have been expressed enlightened self-interest and seek the best return by a number of members of the committee about for themselves, but we have an Achilles’ heel: our the problems that are likely to be caused by the economic management is a bit of an own goal proposed grant support levels, has the Executive because we do not have a forecast. We are sitting done any work to examine the impact of council here with no powers on tax, no powers to save tax on households that have low fixed incomes but and no powers to borrow. We are talking up a are above the rebate threshold? deficit, and on top of that we have no forecast. That situation will rot in people’s minds unless we 10:30 do something about it. Will you seriously consider Tavish Scott: I am not aware of any. We have talking to your colleagues at Westminster with the set up an independent inquiry to allow such work objective of coming up with a joint target and a to be done in an independent and extra- joint forecast for economic growth in Scotland? Government fashion, which has considerable Tavish Scott: I have said what I have said on merit. I am sure that Sir Peter Burt’s committee will be interested in the area to which the member the issue. I will not go back over it, and I will not refers, among others. add to it and then be picked off in terms of wordings. We have on-going discussions and we Mr Brocklebank: Do you accept that, given the will continue to participate in those in the reservations that you have heard and the things appropriate way. I can only respect and reflect on that COSLA and various local authorities have the devolution settlement. We have the powers said, there could be real problems?

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Tavish Scott: If Mr Brocklebank is asking me t o issue. It would be interesting to see the scale of accept a hypothetical situation in relation to increases in council tax in the last two or three council tax increases, I will not go there. Council years of the previous Government. A number of us tax changes and increases are a matter for local experienced those increases, which took place at government. We will deal with the matter once the same time as reductions in services and staff. councils have set their taxation rates, which they It would be interesting to see what changes have will do in the coming weeks. taken place in staff numbers in local government since 1997 and the way in which council tax Mr Brocklebank: The Equal Opportunities figures are arrived at. We could then have an Committee recommended that the Executive honest debate about whether the level of develop national performance targets in relation to expenditure is right, without intruding on the rights equality. In its response, the Executive said that it of councils to determine the level of council tax would consider what more it might be able to do to and to take the consequences of their decisions at draw together information on what public bodies the ballot box, one way or the other. are doing to promote equality. What else do you think might be done to promote equality? What work has been done on such issues, especially in relation to fixed-income households? Tavish Scott: Richard Dennis may be able to I refer to people who have a basic state pension respond to Mr Brocklebank’s question in greater and a works pension and are above the threshold detail. However, as our response to the for council tax benefit. A substantial section of the committee’s report says, we would be happy to community falls into that category. Is the review work with this committee and the Equal team considering that issue specifically? Is it just Opportunities Committee on the issue. I argue that an add-on or will it be analysed in detail? we have made considerable progress in the area. Tavish Scott: The issue that Mr McAveety Richard Dennis (Scottish Executive Finance raises is not a detailed part of the independent and Central Services Department): The inquiry’s remit, for the simple reason that we did Executive tried to point out that many of the not include such detail within the remit. As the organisations in which the Equal Opportunities then Minister for Finance and Public Services, Committee would like targets to be set and further Andy Kerr, explained when we announced the measures to be taken are not strictly within the establishment of the independent inquiry, the Executive’s control. However, we can write to terms of the remit were broad in order to provide those organisations and collate information. We an opportunity for such issues to be raised. We do can ask bodies such as local authorities what not expect the independent inquiry to report until steps they are taking to meet their best-value the summer of 2006. I take Mr McAveety’s point duties in the area. Once we have collated that that that is a long time for those who are in the information, we can give it to the committee. That financial position that he describes. There is is rather different from the Executive specifically nothing to prevent individual MSPs or the Scottish setting a target for bodies such as local authorities Executive from taking up the issue, through the to promote equality. That is the distinction that we benefits system or in other ways. tried to draw. I also take the point that we need to have a The Convener: In our report, we made the point reflective debate about the previous situation. that there was an apparent loss of momentum with Those of us who were formerly in local the pilot studies on equality proofing. Will that government will be familiar with the points that Mr issue be addressed? Will you ensure that the pilot McAveety makes. I am sure that we will have that studies are taken forward and that other studies debate on Thursday, when we consider the Local are considered? Government Finance (Scotland) Order 2005. It will Richard Dennis: We are in discussion with the be important for us to set out some comparative Equal Opportunities Committee about how best to statistics, so that people do not think that this is a pick up the momentum. dreadful day, compared with past settlements. Mr Frank McAveety (Gla sgow Shettleston) Mr Arbuckle: I am sorry that the electronics (Lab): There is clearly an issue of how council tax have not yet caught up with the physical reality impacts on households with low, fixed incomes. If that I am here. we are engaging in relative comparisons, it would I was surprised to see in paragraph 11 of the be helpful for us to know when the review of Executive’s response a criticism of local council tax concludes and whether everything authorities, which suggests that they should depends on its observations. Are there actions improve their council tax collection rates. Council that could be taken at the moment to assess tax is notoriously difficult to collect. People impacts of the sort that I have described? inconveniently move house; other people It would also be useful for colleagues around the inconveniently die. As a councillor, I know that table to engage in a political debate about the considerable efforts go into collecting council tax.

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Why did the Executive take that pop at local The Executive has indicated an aspiration for a authorities? further £900 million to be found over three years starting eight weeks from now, and, given what I Tavish Scott: I accept that there are difficulties will call the confusion, rather than lack of with council tax collection. However, it cannot be transparency, surrounding the issue in the past, it in the interests of any of us, whether we are in is appropriate for the Executive to agree a process local government or in central Government, to of reporting to the committee and the Parliament have collection rates that are not maximised. It is on the composition of that saving. important that Government sets out the objectives that all politicians should share of maximising Tavish Scott: I do not dissent from the desire to collection. That applies to council tax as well as to agree a process. I was at an efficient government national taxation. Local government leaders seminar in Inverness yesterday and one of the recognise that it is in local government’s interests chief constables present was at pains to tell me to maximise collection rates. We have not had a that he wanted us to ensure that we built up the pop at local government, but we always seek to savings from the smallest detail upwards. I was at point out that it is in the interests of both central pains to make the point that this and other Government and local government to ensure that parliamentary committees, never mind Audit council tax collection is maximised. Scotland, would closely scrutinise all the figures. That requirement is understood in the public Ms Alexander: It will not surprise the deputy sector. I do not want to incur Wendy Alexander’s minister that I want to return to the issue of wrath, but there will be an awful lot of detail in the efficiency, which is dealt with in paragraphs 15 technical notes. The chief constable was able to and 16 of the Executive’s response. Paragraph 15 demonstrate to me what cash and non-cash is somewhat encouraging, but paragraph 16 is savings he would be able to make. That is exactly somewhat discouraging. what we want and I suspect that that is what the Paragraph 15 commits the Executive to have committee wants, albeit that it will come in a heck discussions with the Finance Committee about of a lot of detail. how best to report progress. That is an Ms Alexander: I have had the opportunity to encouraging response. Given that some of the look at some of the technical efficiency notes from efficiency savings are meant to commence in eight departments elsewhere. Those notes run to 150 weeks’ time, it would be helpful if the Executive pages and, given that the departments have could have an early discussion with the different approaches, it is vital that the Finance committee’s budget adviser and then write to us. and Central Services Department should clarify Paragraph 16 is less encouraging. We asked precisely where the £582 million saving to which we have committed and the £300 million and “that, in order to provide transparency in the Draft Budget 2005-06, the Executive should prov ide a complete list of possible further £600 million savings will come the savings items per portfolio”, from. I will leave that point on the table. so that we could have a full picture over the You might be aware that I had a helpful written spending review period. The Executive’s response answer from the Minister for Finance and Public refers to the technical efficiency notes. Service Reform, in which he indicated that Audit Scotland would review the technical efficiency I want to put on the table an issue for discussion notes in advance of their publication. However, we between the Executive and the committee. At the have a slightly different formulation in the moment, the Executive is committed to £582 Executive’s response. In all scrutiny, there are two million of cash-releasing savings over three years. dimensions. Will Audit Scotland sign off the It has indicated an intention to find another £300 process in advance and be involved as million of non-cash-releasing savings and a appropriate in scrutinising it? That is precisely the potential further £600 million over the same three- question that we asked the Minister for Finance year period. That produces a total of £900 million and Public Service Reform and on which he wrote of potential savings, on which we have not a single to us. As the technical efficiency notes will be line of detail. complicated, validation by Audit Scotland at the I accept that it takes time for that detail to be outset would give many who are involved in the worked out and that some of it will become process a high level of comfort. It will be an apparent in the technical efficiency notes. enormous job for Audit Scotland, but that is the However, given that £900 million is double the statutory responsibility that we give it. cost of the Parliament building, it would be a great Tavish Scott: I will let Iain Dewar respond to shame if one had to scuttle through 20 different that, but I am sure that the Minister for Finance technical efficiency notes—one for each and Public Service Reform and I have not said two portfolio—to discover the composition of the different things in two different places. guaranteed £300 million and potential further £600 million in savings.

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Iain Dewar (Scottish Executive Finance and and demonstrable improvements in back-office Central Services Department): The efficient functions, but be ploughed back into front-line government plan identifies £745 million of cash- services. That is how we envisage the process, releasing savings and contains aspirations for but we will not prescribe it. We will definitely play a £900 million of cash-releasing savings, which we role in supporting such local government believe that we can deliver. The plan goes on to initiatives—for example, through the improvement say that we will not commit to making £900 million service, which Colin Mair heads up. I ask Iain of cash-releasing savings until we are certain that Dewar to respond to the point about the technical that can be done. We are keen to ensure that the notes. technical notes are robust. Therefore, we need Iain Dewar: There will be a technical note for time to get them right and to involve Audit each efficient government project, which will Scotland, which will assist in ensuring that the describe how each project will be measured and technical notes are up to the task. It is better for us monitored and how the efficiency savings will be to take our time and to get things right. delivered. The local government saving of £325 The Convener: I presume that the question- million is made up of an efficiency assumption that and-answer session in Inverness that you were at has been factored into the spending plans for the yesterday was different from the one that the First next three years. However, the last sentence of Minister was at. the paragraph to which Elaine Murray referred illustrates the point that we have identified areas in Iain Dewar: I beg your pardon? which local authorities can make efficiency Tavish Scott: That question is not for you, Iain. savings, retain the money and direct it as they see fit to front-line activities. Dr Murray: On the efficiency savings, the committee expressed some concern about the Dr Murray: How will local authorities be way in which local government was treated. You informed of those opportunities? Will the Minister responded by saying that a blanket efficiency for Finance and Public Service Reform write to saving of 2 per cent was presumed because local their chief executives to advise them of the opportunities? government is autonomous and makes its own decisions about efficiency savings. Therefore, I Tavish Scott: No, the approach is collaborative. was a little bit surprised that, at the end of your We will certainly not tell local government that it response to recommendation 14, you say: must make its savings in those areas, as that would be entirely the wrong approach. We seek to “w e have identified other opportunities for savings w here local government can retain the money realised.” ensure that the separate areas of efficiency can be built up individually and collectively, regionally and The implication in that phrase is that the Executive throughout Scotland, and we will support local is somehow determining some of the savings for government in building them up. local government. I do not expect any The Convener: I am anxious to wrap this announcement before March, when the technical agenda item up, but Jim Mather has a brief final notes will be published, but will you confirm question. whether the notes will include some aspect of local government savings and whether you will advise Jim Mather: It is a tidying-up question. When I local government on how to achieve some of asked the Minister for Finance and Public Service those savings? Reform whether the efficiency savings were net of redundancy, information technology and other 10:45 capital equipment costs, I was not sure that I got a Tavish Scott: Many local authorities are already clear answer. Will you confirm that the efficiency heavily involved in e-procurement and will be able savings are net of IT costs, possible redundancy to demonstrate significant savings because of it. costs and other capital equipment costs? We take the view that, if any such saving exceeds Tavish Scott: No, I do not think that they are 2 per cent, local government should be able to net of such figures. plough that money back into front-line services. In Jim Mather: Are they savings, then? If there is a addition, local government is now considering 22 cost to be set against them, can they properly be separate areas, such as procurement and asset called savings? management—many more were mentioned yesterday when I was speaking at the efficient Tavish Scott: Mr Mather, with his business government seminar in Inverness. I suspect that background, will understand that we have to invest there will be many ideas for measures that to pull some of the projects together and progress individual authorities can take and for collective, them so that they can achieve savings, which is Scotland-wide or regional measures—which will why we have set up an efficient government fund. be of interest to Elaine Murray, given her That is a good business practice about which constituency—that will not only lead to savings business people tell me all the time.

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Jim Mather: Absolutely. However, a business Budget (Scotland) (No 2) Bill: has to confront a bank and has to prove that the project is cash positive; we have to approach Stage 2 taxpayers and tell them that the project is cash positive. What is the net impact? 10:49 Tavish Scott: We will not know that until the efficient government fund—which I am sure the The Convener: Item 3 on the agenda is committee will properly scrutinise—is allocated to consideration of the Budget (Scotland) (No 2) Bill the authorities that have applied to it and until at stage 2. Members have a copy of the bill and a those authorities’ plans over the period of the note from the clerk. I draw members’ attention to efficient government programme can be two points in the clerk’s note. First, only a member demonstrated in the terms that Mr Mather of the Scottish Executive can lodge amendments describes. to the bill. Secondly, as paragraph 6 of the note states, Jim Mather: Will we, at some point, see a “it is not possible to leave out a section or schedule of the statement that sets out the savings, the cost and Bill by disagreeing to it”, the net savings? because to do so an amendment would have to be Tavish Scott: Absolutely. lodged. Jim Mather: Will the net savings be a lesser Before we start the formal proceedings, I will number? allow the deputy minister to make some Tavish Scott: Mr Mather is familiar with the explanatory remarks about the bill and then give overall numbers, which are what we will seek to members an opportunity to ask questions. deliver. Tavish Scott: I have some detailed points that draw out the more important elements of the changes from the draft budget that are in the bill. The points are fairly technical, for which I apologise to colleagues. Overall, the figures are largely unchanged from those that were in the draft budget, although, as members know—given that we have been through the process several times—they are presented in a rather different form. The usual small changes arise from estimating changes, from the non-departmental public body resource to cash adjustments and from programmes that have moved between portfolios. We are happy to answer any questions on those. I turn to the significant changes. Again, I apologise for the degree of detail on them. In schedule 1, we have introduced a new item 12, which covers Scottish teachers’ and national health service pensions schemes. Those are treated separately in the supporting documents, starting on page 75. The change reflects discussions with Audit Scotland on the accounting for the schemes, which will no longer be covered in the Executive’s consolidated accounts. As members will know, the accounts are prepared against the figures that are in the bill and it was therefore felt helpful to split the old item 10 in schedule 1 between the part of the Finance and Central Services Department budget that remains covered by the accounts and the pensions schemes, which will not be covered by the accounts. Secondly, the provision that portfolios have put in the central unallocated provision for 2005-06 is included in the draft budget but excluded from the

2287 1 FEBRUARY 2005 2288 numbers in the bill. The provision is set out in that from our main budget database, which we way in table 1.3, on page 4 of the supporting discovered before the supporting document was document. I draw members’ attention to the finalised, but after the bill was finished. When the negative figure for the Environment and Rural bill was laid, the figure in the supporting document Affairs Department portfolio, which represents a was more accurate. draw-down in the next financial year of resources There are three main reasons why we do not that have been put into the CUP and which will be propose to correct the mistake. First, as we cannot carried forward from this financial year. use extra cash authorisation without also seeking Thirdly, I would like to explain a convention that additional resource allocations, the unneeded is used in the bill that caused some confusion cash cannot be used. Secondly, we know that we during the stage 1 debate. As members know, for will introduce at least two revisions to the bill budget purposes, the smallest unit of resource that during the year. With the draw-down of extra we use is £1,000. We do not recognise any resources from end-year flexibility and the CUP, numbers below £1,000—in accounting terms, I we can be 100 per cent certain that, by next year’s hasten to add—and all figures must be in spring revision, we will need a higher cash complete thousands. However, the bill often authorisation than is currently in the bill. Therefore, includes receipts limits of £100. That is an there seems to be little point in amending the bill accepted convention to signal that the exact now. Finally, since the production of the amount of receipts cannot be forecast accurately supporting document, we have explored the and that we could not provide a taut and realistic— software error further to ensure that it has had no or robust, as Mr Morgan might put it—figure for the impact on other figures. We found one other error, bill. We use the £100 figure to signal clearly that which led to our understating our cash there will be receipts, but that we are as yet requirement in the current and the coming uncertain as to their extent. When accurate financial years. I will explain that further when we forecasts become available, we will insert them take correcting action for the current year in the during the year through the regular budget spring budget revision. However, the error means revisions, to which we all look forward so much. that the overall cash authorisation that is sought in the bill is closer to the correct figure than the figure Similarly, there has been confusion over the in the supporting document is. income-to-be-surrendered lines that are set out in the supporting document at the bottom of each I apologise for going into detail, but I hope that I part of schedule 3. The committee will know that have covered the three or four main points that we are allowed to retain almost all receipts up to arise from this year’s bill. the limits that are set in the bill, except those that The Convener: The same problem applies to are specified in the designated receipts order, or other figures that are given in section 3. The unless there are good policy reasons why we figures for the Scottish Parliamentary Corporate would not want to use receipts as a main source of Body, Audit Scotland and, I suspect, the Forestry funding. Those who are interested can find a good Commission seem to be at variance. The figures example of that on page 79 of the supporting are the same as those in the revised cash document. The Crown Office will retain £700,000 authorisation, but I am looking at the figures in in receipts from the categories that are set out in schedule 3 to the bill. schedules 1 and 2 to the bill, but it will also surrender £12 million of income from fines. I hope Richard Dennis: I will try to explain that. The that colleagues accept that that is because we do final column in table 1.5 in the supporting not want to give the impression that it is in any document gives the revised overall cash way in the Crown Office’s interest to impose more authorisations for various bodies—the last five fines. If no figure is set against the income-to-be- figures in that column are the ones that are taken surrendered line in the supporting document, that across into the bill. From a quick look, apart from means that there is no income to be surrendered, the figure for the Scottish Administration, the other not that the retained income and capital receipts four figures seem to be exactly the same in the applied that are set out in the supporting bill. The details in the schedule in the supporting document will be surrendered. document do not give cash numbers; they give only resource numbers. We take out the non-cash Finally, I am sure that members will have items for the figures at the front. spotted a small mistake in the bill. Table 1.5 on page 7 of the supporting document gives the The Convener: So there is a variation in the bill overall cash authorisation for the Scottish between section 3 and schedule 3. Administration as £23,221,697,000, but the overall Richard Dennis: Yes. Schedule 3 to the bill cash authorisation that is sought under section relates to resource control. The Parliament sets a 3(a) of the bill is different—it is £53 million more than is required. That is because of a fault in the control on the total amount of resources that the bodies can use, as well as on the cash that they software that is used to extract non-cash figures

2289 1 FEBRUARY 2005 2290 can use—one would expect those figures to be single question on groups of sections or schedules different. that fall consecutively and I propose to do that, unless members disagree. Jim Mather: Is the software being checked out? Is it a standard product or is it something that you Section 1 agreed to. guys have written? What steps will you take to Schedules 1 and 2 agreed to. ensure that the software has no other fundamental errors? Section 2 agreed to. Tavish Scott: I will leave Mr Dennis to answer Schedules 3 and 4 agreed to. that. Sections 3 to 5 agreed to. Richard Dennis: I see that the experts are Schedule 5 agreed to. listening. The product that we use is Oracle Financial Analyzer, which is well known and is Sections 6 to 10 agreed to. used for many similar purposes. Long title agreed to. Jim Mather: It might even be robust. The Convener: That was painless and it ends Richard Dennis: It might. A subprogramme is our stage 2 consideration of the Budget (Scotland) supposed to wander through our various accounts (No 2) Bill. I thank the minister and his officials for looking for all non-cash identifiers. It sources data attending. at a number of levels, which, curiously enough, we call parents, children and descendants. In this case, the subprogramme found a parent, but did not find the child, or the other way round. Jim Mather: Given that you use an Oracle system, which can produce read-only files, are there any plans to make the data available to parliamentarians and to the professionals you mentioned to allow us to browse them on a computer, rather than try to do the cross- referencing, which even you guys do not manage to do all the time? Richard Dennis: There are no plans to do that, because I suspect that there would be no interest in it, given that we publish the data six times a year. Jim Mather: We might surprise you. Richard Dennis: I am happy to think about the matter. Jim Mather: If the committee requested that information formally under the Freedom of Information (Scotland) Act 2002, would you be duty bound to provide it? Tavish Scott: I am not sure that we would be duty bound to provide it in anything other than the published form, but I am happy to consider the published form. I will not give a commitment today, but we will consider that matter. The Convener: In the absence of any further questions, we now turn to the formal proceedings for stage 2 of the bill. Although no amendments have been lodged, we are obliged under standing orders to agree to each section and schedule of the bill and to the long title. We will consider the sections in order, but we will consider the schedules immediately after the section that introduces them and we will consider the long title last. Fortunately, standing orders allow us to put a

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Cross-cutting Expenditure spending on economic development has fallen as a share of the Executive’s budget simply because Review on Economic that type of expenditure has risen much more Development slowly than the budget as a whole. That conclusion was quite clear for what we termed primary expenditure on economic development. 11:01 For support expenditure, the difference was a lot less dramatic, but support spending still rose a bit The Convener: The fourth agenda item is to less rapidly than other elements of public spending consider the main issues that have emerged from in Scotland. the written and oral evidence that we have received for our cross-cutting review on economic That raised the question why, if economic development. I welcome back to the committee growth is the number 1 priority, slower growth in Peter Wood, who is our adviser on the review. the items of expenditure that might be regarded as being most supportive of economic development Members have a copy of Peter Wood’s paper, could be observed. Various witnesses responded FI/S2/05/4/3, which summarises the issues that he to that question. The Scottish Executive feels have arisen from our evidence sessions. challenged our conclusion by arguing that all kinds Peter Wood will speak briefly to the paper before I of public spending made some contribution to open up the discussion to members, who may economic development and that there are other then make comments or ask questions. ways of cutting the cake. However, no specific Peter Wood (Adviser): Good morning, conclusions or recommendations emerged from everyone. As the convener said, the purpose of those comments. My present position is that, the brief paper that has been circulated is to notwithstanding some issues of definition and summarise the principal issues that have arisen debates of theory, the main conclusions of the from the committee’s work to date and to suggest paper remain robust. Over the period since lines along which the committee might set out its devolution, expenditure on activities that directly final report. I will not read the paper verbatim, but I promote economic development and on will highlight a few points from it. intervention in the economy has grown much more slowly than public spending as a whole has grown. The preamble to the paper suggests that five Given that fact, the question that we must ask is principal sets of issues emerged from our why. discussions. I will talk briefly to each of those in turn, but let me give an overview first. The context Three alternative explanations might be given. for the inquiry is the fact that the Executive’s The first is that, in practice, the Executive’s main stated number 1 priority is to promote or increase priority is not the promotion of economic the growth rate of the Scottish economy. The development but things such as improving health purpose of the inquiry was to see to what extent or increasing the quality of health care, improving that priority has been reflected in decisions about social housing or raising standards in schools. The the disposition of resources. second is that economic growth is indeed the Executive’s first priority, but the Executive does At the start of the inquiry, members will recall not take the view that it must spend substantially that I produced a paper that sought to measure more money on economic development than was changes in spending on economic development. already being spent. In other words, the Executive The paper used the two concepts of primary might view the level of direct economic spending and support spending. Primary spending development spend that it inherited—if I may put it is the money that is allocated to programmes that in that way—as being broadly right. The third clearly have as their first objective the promotion explanation develops that point further. It could be of economic growth and business development. argued that increasing expenditure on economic Support spending is those other elements of development by, say, increasing Scottish spending that are influential in, and important to, Enterprise’s budget is not an effective way of the development of the economy. Although the promoting economic development. committee’s main concern is with the Executive’s budget, the paper also considered spending by The evidence that we received from ministers other parties, including the spending of local produced no clear indication of which of those authorities and the remaining elements of United alternative explanations is valid. However, it could Kingdom-controlled expenditure that affect be argued that the evidence from the Minister for economic development in Scotland. Finance and Public Service Reform was that the Executive’s view is that a broad spectrum of public We discussed those matters at some length so, spending—in fact, practically all types of public rather than labour the point, I will summarise the spending—is in some sense supportive of principal conclusions. Over the life of devolved economic development. government in Scotland, direct or primary

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The second, more minor, topic to emerge that is between the priorities in FEDS and spending worth mentioning is the balance between patterns was a subject worthy of research economic development spending that benefits suggested that the Executive did not know the mainly rural areas and spending that benefits answers. The overall conclusion is that it has not mainly urban areas. In essence, the conclusion been demonstrated that a policy framework exists was that economic development activities that are that aligns strongly the pattern of public spending relevant mainly to rural areas absorb a higher with economic development priorities. We tried to proportion of spending than equates to the rural establish whether there was a consensus about share of Scotland’s population. In other words, what those priorities should be, but the views of economic development spending is higher per non-governmental and private bodies were varied. capita in rural areas than it is in urban areas. There was no doubt that organisations tended to see the main priorities as lying in their own The Scottish Executive’s chief economist raised bailiwick, whatever that might be. It is also fair to some objections to that analysis. Dr Goudie say that there is no evident consensus outside suggested that not all the spending that I had Government about what the principal priorities classified as rural spending was solely of benefit to should be for spending to support economic rural areas, although we were given no specific development, and I understand the difficulties in instances of that. There was some debate about that. the significance of spending on the common agricultural policy and a suggestion that other We come to the specific argument about forms of spending that might be more beneficial to whether individual, general expenditure decisions urban areas than to rural areas had not been have been aligned with economic development properly accounted for. However, those points do considerations. It is stated in FEDS that not add up to a major critique. Over the life of the expenditure proposals are evaluated on their Parliament, spending on rural economic social, environmental and economic impact. development has risen by, I estimate, 88 per cent Therefore, the framework for making spending in real terms. By contrast, the budget of Scottish decisions supports what is in FEDS. However, Enterprise, which is mainly concerned with urban what is really being described is standard good Scotland, has fallen in real terms, as has practice and appraisal, in line with the guidance expenditure on regional selective assistance. I do produced by HM Treasury for example. In itself, not dispute that there might be sound reasons for that does not establish that economic that spending pattern, but those reasons were not development has a special priority in decision revealed in the evidence that we received. For the making and it does not answer the question about moment, that is as much as I will say about how the broad strategic decisions are being made spending patterns. about how much we spend in the major areas of public sector activity. I turn to whether decisions on spending are driven by economic development priorities. The The written and oral evidence gave relatively committee received evidence on that from a few insights into the process. FEDS states that number of witnesses, including representatives of health care is important to economic development, Scottish Enterprise and Highlands and Islands but there is no way of establishing to what extent Enterprise, Government civil servants and others. the large increase in spending on health has been There is general agreement that the key in the areas that are most closely related to documents in respect of priorities are the economic activity, such as occupational health or “Framework for Economic Development in the well-being of people in the working age Scotland” and “A Smart, Successful Scotland”. groups, as opposed to care for the elderly or FEDS argues that the six areas that are most children. We cannot really tell whether or how important to economic growth are planning and public health care spending has been aligned with the housing market, transport, schools, lifelong or driven by economic development priorities. learning, the electronic infrastructure and health Transport is of special interest, because a care, and discusses generally how those might number of witnesses identified it as being of great affect economic growth—for example, if people importance to economic development and it are healthier, they are less likely to be off work. features as such in FEDS. We have seen high However, we cannot derive from FEDS a clear growth in spending on transport since 1997, but message about where spending should be the great bulk of that has been on aspects of concentrated or where it should be increased in public transport, including funding for either relative or absolute terms; the discussion is concessionary fares. Expenditure on roads, which general. most of the private sector witnesses identified as The evidence from the Scottish Executive being important to economic development, has witnesses did not indicate that FEDS or SSS were shown practically no growth since 1997. It might playing a major role in spending decisions. The be argued—and no doubt will be—that public evidence from Dr Goudie that the relationship transport has more to contribute to economic

2295 1 FEBRUARY 2005 2296 growth than does building new roads, but that view That said, the point that you made about would certainly be contested. transport spending is entirely relevant. Would you make the same point about higher education 11:15 spending, because it seems to me that a great deal of such spending has been geared towards The Minister for Transport stated in his evidence access issues, which I suppose feeds into skills, that although appraisals of road projects tended to rather than towards the Turner approach of high- show higher economic gains than did appraisals of level research specialisation and other types of transport investment, policy had commercialisation by university spin-out shifted away from road construction towards public companies? Is there a similar argument? transport priorities. That suggests either that decision makers believe that the appraisal Peter Wood: There certainly could be, although procedures that show high levels of economic the issue is complex. It is true that at both UK and return from roads investment are deficient, or that Scotland levels, the expansion of higher education other priorities, such as environmental priorities, has been justified on the ground that graduates are being given greater weight in the decision- earn more and are more productive, so the more making process. What the committee has heard graduates we have, the higher the added value, as has not demonstrated that economic growth as a it were, in our economy. That argument must be priority is having a strong impact on decisions kept under review. The questions that you raise about resource allocation at what we might term are relevant. the strategic level. Has anyone asked whether the best way of We have seen slow growth in direct spending on using the higher education budget to promote economic development. It is unclear whether that economic development is to widen access? I am means that economic development is not the not saying that doing that is necessarily contrary to practical priority that it has been suggested it is, or economic development priorities, because one whether the Executive’s view is that that form of way of expanding the economy is to raise the spending is not effective in promoting economic productive capacity of people who have been development. We have had no real explanation of hitherto excluded from the higher levels of the why there appears to be more spending per capita workforce. However, is doing that more or less in rural areas than there is in urban areas. Overall, effective than building up centres of research there is a lack of evidence that the pattern of excellence? I take no view on which course of spending on and investment in public services has action is better, but I can say that the choices are been influenced strongly by economic not really set out in FEDS and SSS. It is as if development priorities. There is certainly no everything that might be beneficial or worthwhile is transparent framework for spending decisions that recorded—quite reasonably—but no sense of would enable us to say that spending has been relative priorities or relative importance is given. increased in one area because that matches up with an identified area of priority elsewhere, or to You draw a pertinent parallel between the situation in higher education and the situation in show the connection between priorities and transport. The rationale behind the decisions that spending decisions. Specifically, I suggest that spending on transport has been driven more have been made was not made explicit in the documents that we received or the evidence that strongly by factors other than economic we heard. development considerations. Those are the issues for the committee to The Convener: I have two other questions. On the volume of spending, which is the main burden consider and around which I suggest its report of the first part of your report, you paint an might be framed. interesting picture of priorities. If we look slightly The Convener: Thank you, Peter. That was an beneath that, at the direction of spending rather interesting and, in many ways, challenging set of than the volume of spending, and consider findings. The views that you have set out have the spending on the enterprise agencies, and great virtue of clarity. specifically spending on Scottish Enterprise, it seems that the approach that has been inherited is I begin by making a slightly cautionary remark: essentially a business support-oriented approach, economic growth might be the Government’s first which sees the fundamental role of Government in priority, but it cannot be the only priority, and there promoting economic growth as being to support must always be a balance between the priorities of the growth of business. What concerned me about any Government at any point. In testing the that was that the alternative approach, which relationship between the economic growth priority existed before 1992, and which saw Government and spending, mapping out consistency, as you as having more of a co-ordinating role in areas have done, is an interesting intellectual exercise, such as land reclamation and development in but Governments must always make judgments on particular localities, does not seem to be being balance.

2297 1 FEBRUARY 2005 2298 pursued. As we heard, that approach has been Borders rail link or any other project; no economic followed down south by English partnerships and growth driver was saying that we should do one other agencies. The question is not simply about thing rather than another, nor was there any volume of spend, but about whether spend is evidence of an exercise similar to the one that the being directed correctly, and whether a form of Deputy Prime Minister has mounted in the south- planning-geared, strategic spend is not taking east of England to link affordable housing to place or is not being properly co-ordinated in serving specific employment needs. Is that a fair Scotland. point to make about the report—that we need to have a better link between economic benefit and Peter Wood: I agree that there are some issues project choice than we appear to have at present? that we should certainly develop in the report. I will respond to those points. What we have observed Peter Wood: I apologise for not making that is very slow growth—not real growth—in the point more clearly. At one stage, I was trying to expenditure of Scottish Enterprise. It is quite right make it, but I obviously did not underline it to say that Scottish Enterprise’s main activities sufficiently. There is a gap. One can think of over the period have been in direct business various levels at which decisions must be made support and business intervention, which is, about public spending. At the highest level, there indeed, a contrast with the balance of activity pre- is the question of how the budget is cut up among 1992, when there was much more emphasis on health, education, transport and other things. That physical land reclamation. I might be reading more is a complex process, and changing that balance into FEDS than is there, but I am struck by the is very slow. At the level of individual projects, we extent to which emphasis is put on the creation of are deciding whether to build a bypass round a framework or context for economic growth—the Aberdeen, improve a bit of road up beyond physical, social and economic infrastructure, Crianlarich or whatever. Appraisal procedures are including education, training and so on—rather used to assess individual projects, and those can than direct intervention. be examined and one can say whether they are rigorous. What might really be happening is that the priority is shifting away from the interventionist In between those two levels, there is a activities associated with Scottish Enterprise mesolevel, at which we determine the big priorities towards gearing spending to create an in, for example, the education or transport budget. environment—or indeed a framework, as FEDS Are certain key projects of strategic significance? has it—for economic development. The activity is Where does upgrading the M74 come relative to implicit rather than explicit. That is my observation the Borders railway line, or how does expanding and it would be helpful to know whether that is one aspect of higher education match up against indeed the priority. another economic development priority? That level is missing in the framework documents. If we I refer again to the evidence of Dr Goudie, who examine FEDS, we find sensible statements about said at one point—I am paraphrasing—that there the connections between aspects of public are questions to be asked about the balance of spending—of course, it is true that an efficient spending on skills, direct support for economic housing market is important for labour mobility and development and infrastructure. That leaves the that a healthy population is important, as that question of what the right balance is, and one makes for a more productive population—but what might say that it is for the Executive to suggest is missing is something below that, namely a level what the right balance is. The shift and Scottish at which we ask, “Within the overriding, broad Enterprise’s loss of spending share might reflect a conclusions, in which areas can the greatest policy change that, to some degree, downgrades difference be made? What is most important in the the activities that Scottish Enterprise engages in medium and longer term?” nowadays, which are essentially business support activities rather than measures to change the I concur with the convener’s view and that is physical or economic infrastructure. what I was trying to say. I think that there is an absence in the framework of clearly articulated The Convener: My final question is about priorities at the level between the global budget strategic choice at the level of projects, or at least and individual projects. at the level of area intervention. I do not think that this has quite emerged in your summary, but I Dr Murray: What you have said is quite a useful certainly took from the evidence that the general suggestion. I found the inquiry a bit disappointing, assumption is that higher education or more in a sense; not only did the Executive seem not to transport spending is a good thing for economic be able to demonstrate how it supported its top growth, but that does not drive choices between priority of economic growth, but nobody else different policy goods or project goods. For seemed to have much idea of how they would do example, when you bundled together the transport things differently and they could not make any priorities, the M74 came out the same as the alternative suggestions. That was quite frustrating.

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The type of suggestion that could lead to a committee should take a position on whether the positive improvement would be helpful, because I balance is right or wrong; I simply suggest that the feel that our conclusions are a little bit downbeat item is one for which an explanation is lacking. and that they do not point to things being done Although I can imagine what some of the differently or invite the Executive to do something explanations might be, they have not been differently. articulated. Suggestions were made about road transport, To return to Dr Murray’s first point, the purpose but one of the big issues at the moment seems to of the document as it stands is to promote be planning constraint due to lack of water and discussion. I am looking for a sense of where the sewerage infrastructure. I was slightly surprised committee is going. The committee might want to that that issue did not emerge in our inquiry, and put forward a stronger view on the need for the we do not seem to have highlighted it. Executive to articulate and set out its priorities in the areas of spend. I can see how the report could I have taken issue with people before about the be written to do exactly that. The committee wants question of rural and urban spend. It would be to produce positive recommendations and this is easy to overdevelop that issue, because we are one of the areas in which one would hope to see looking only at a devolved budget and the division that happen. of expenditure in urban and rural areas must be examined in a UK context. You might be getting a Again, as Dr Murray pointed out, the difficulty skewed picture of spend, because more of the lies in establishing consensus on the priorities on devolved issues are more relevant in rural areas. I which the committee needs to focus. If I were to will illustrate that with a small example. You made be critical of FEDS, I would say that there is an reference to the Scottish agricultural and biological absence of such choices—or of evidence that they research institutes, but they are the only part of are to be made—in the document. FEDS would be the scientific research community that is funded more useful if it articulated some of the choices through the Scottish Executive and not the UK that must be made about the direction in which we Government. A very different picture of scientific should be going and where the priorities should research might emerge if you were to look at the lie. research community as a whole and not only at The Convener: I take a slightly different view the part that is devolved to the Scottish from Elaine Murray. She is right to point out that Administration. I am not anxious to get involved in some of the evidence was disappointing, but it constitutional arguments but, that said, too many gave us the opportunity to highlight the need for a conclusions can be drawn from the division, which debate that has not yet taken place. For example, may not be accurate. we should have the chief executive of Scottish Enterprise knowing what the top transport 11:30 priorities are and being able to explain them Peter Wood: I am grateful for that point. On the clearly. issue of water and sewerage infrastructure, I can Ms Alexander: Like the convener, I think that a only agree; that point emerged in evidence taking. concise and balanced report has emerged from Infrastructure is a good example of a priority area incredibly diffuse and difficult evidence. I that has arisen in various discussions. However, congratulate our adviser on being so concise. one looks in vain for infrastructure being Although the report is not written in our usual style, articulated as a priority in the framework it is balanced because it does not try to impute document. I concur with the point. rationales where they were not articulated. Urban and rural spend should not be set up in I share the convener’s belief that our expectation antithesis. I did not intend to suggest that too for the report should be that it opens up a debate much is being spent on rural areas; I mentioned on the subject. The rationales that the Executive the issue because it is one in which the spending can be asked to articulate could be reflected on by changes have not as yet been quite explained. For the Enterprise and Culture Committee and other example, we are seeing a big increase in spending committees. In general terms, the report is helpful. on rural economic development at a time when As I said, although it does not impute rationales, it other types of spending have not risen. It would invites others to be clear about them. have been useful for that change to be acknowledged and for the reasons to be I have three minor suggestions to make, the first discussed. I leave aside the question whether the of which returns to the point that Elaine Murray spending is justified; I cited the example merely made about water and sewerage. We should say because it shows the difficulty in deriving clearly that the report is about spending on explanations of what can be observed, in terms of economic development and that it does not deal spending, from the priorities that have been set with the ways in which regulatory or legislative out in the documents. I do not suggest that the action affect the competitive climate. It is outwith

2301 1 FEBRUARY 2005 2302 the scope of the Finance Committee to talk about total public spending? I suppose that my question issues such as planning and water—although, hints at the extent to which this is a problem of God knows, I feel strongly about them. We need a Government per se or a problem of FEDS. disclaimer at the beginning of the report to the Peter Wood: It would be wrong for FEDS to be effect that the report’s focus is on spending on castigated, as sometimes happens, for being economic development and not the way in which worse than other documents. Certainly, Treasury the regulatory environment might impinge on it. documents start with the priorities that are set out Under paragraph 2.11, the point is made that in the Chancellor of the Exchequer’s budget aspects of the classification of main spend and statement. The issue is one of Government and development spend have been disputed. It is not FEDS; the criticism was not specifically aimed stated that, although revised figures will be at FEDS. included in the committee’s report, they will not I would like to reflect on the matter a little fundamentally change the conclusions. That point more— is absolutely fundamental. The final report should include a rerun of the tables, even if we have to Ms Alexander: Sure, that is what I would like add footnotes with a caveat that says, “The figures you to do. are disputed, but, because the order of magnitude Peter Wood: Reference was made to some of is 1 per cent, they do not change the bigger figures.” The data annexes are vital. the priorities that were articulated by the Office of the Deputy Prime Minister in England. Perhaps My final suggestion also concerns the key some points should be drawn from that. I reserve nature of the data annexes. I return to one of the my position for the moment. points that Elaine Murray made. The bottom line is Ms Alexander: I agree with that. Indeed, as you that the SABRIs account for £4 million or £5 write your conclusions, you might reflect on million—how many million is it, Elaine? whether the overall problem is one of Government Dr Murray: It is £100 million. and whether the problem might be more acute in Scotland because our Administration is newer Ms Alexander: Okay, the total figure is £100 than that at Westminster. million, but that is still less than we spend on fishing and forestry combined, to choose one Mr Brocklebank: I am particularly interested in example. We should deal with that by putting the the section of the paper that deals with the data tables in the report. balance between urban and rural spending. It would be helpful if we were clearer about the I have one further query that relates to areas that we refer to as rural as distinct to those paragraph 3.3, in which you say: that we refer to as urban. “CAP spending should be excluded from the analysis on the grounds that the parliament has no effective control There is an argument that the only real urban over this spending.” areas in Scotland are the four major cities. My quick calculation is that the total population of You might want to add a footnote about the those cities is about 1.65 million. Even the urban increasingly discretionary aspects of CAP, cities have huge rural hinterlands—for example, because that would clarify the extent to which there are rural areas right round the outskirts of control can be exerted. Glasgow. The adviser’s paper states: Similarly, in paragraph 3.4, a contrast is made “Rural areas account for 47% of the expenditure - rural between 88 per cent and 10 per cent. Is CAP in or Scotland accounts for 27% of the Scottish population”. out of the 88 per cent figure? Are those Scottish Executive definitions? Peter Wood: It is out. Peter Wood: They are indeed. There is a whole Ms Alexander: Perhaps it would be helpful to literature devoted to the subject of defining rural include a footnote to that effect. areas. The Scottish Executive uses a definition In paragraph 5.2, a point is being made about that is based on settlement size. We are talking FEDS, but the final sentence of that paragraph about the population living in and around does not quite tell us about the relative priorities or settlements below a certain threshold. There are the higher-level strategic decisions—the big-ticket different thresholds. However, basically, the items. definition is based on settlement size Finally, I have a point of clarification. I am not Mr Brocklebank: Would that include our old suggesting that the answer to my question should county towns? go into the report, but are other branches of Peter Wood: Let me explain exactly how the Government more clear about how the trade-offs definition works. The trouble is that the definition is are made? Does the Treasury do that in terms of slightly coarse, because it is based on individual

2303 1 FEBRUARY 2005 2304 local authorities. A local authority is classified as I do not like to speculate, but my guess is that urban or rural—which is a kind of all-or-nothing the increase in spending on what is classified as classification, as you might well imagine— rural development is, in fact, a response to the whereas, in reality, even the Highland Council problems that affect the agriculture and fishing area, for example, includes Inverness, which is a areas in particular in rural areas. Indeed, we are city, naturally. You are right to draw attention to talking about the loss of some support that has the statistical problems that rest with the definition historically come through direct support to those of rural. However, the definition is based in activities. Therefore, the expansionary expenditure essence on the proportion of the population of in rural development may be entirely appropriate. each local authority area that lives in smaller My point is that one will search in vain in FEDS, settlements. If that proportion rises above a certain for example, for an explanation of why that is level, the area is defined as rural. being done. I am making an argument for having more explicit and transparent priorities to which we Mr Brocklebank: So Fife, for example, which is can connect spending decisions. where I come from— Jim Mather: Given that, do you believe that Peter Wood: It is urban. there is an ideal blend of priorities and followed-up Mr Brocklebank: It is urban, yet look at it: spending, or do we have a rather incomplete everything east of Leven is rural. The place splits proposition? Do we need to do something to totally in half. The west part of Fife is urban— change the conditions that generate growth, rather Dunfermline, Kirkcaldy, Buckhaven and so on— than just depending on a magic formula of support but beyond Leven and into north-east Fife, it is programmes and services? Pretty much every totally rural. Therefore, it seems to me that some other country in western Europe is doing that. of the Executive’s distinctions are not particularly helpful. We would think that the old county towns, 11:45 such as Inverness, Perth, Stirling and Ayr, would Peter Wood: Again, I will remain uncomfortably be regarded as rural. If they were, that would bring sitting on the fence. I do not want to take a up the figures. position on what the right balance would be between, on the one hand, supporting the Peter Wood: The Highland Council area is infrastructure of development and, on the other, certainly classified as rural. Mr Brocklebank makes a fair point. It would be useful to provide an intervening directly. explanation in the report. The more we consider what is happening with spending, the more we see that decisions are Jim Mather: I appreciate what you have done, Mr Wood. Your paper is objective and genuinely being made that might imply what the priorities are. However, things are not transparent. To some worth while, and is a significant contribution to extent, the evidence from the Scottish Executive taking forward the debate. I consider it exceedingly helpful. witnesses left the question open. It was as if they were saying, “We don’t quite know what the right I want to return to the rural versus urban issue. balance is on questions such as whether to spend An article on the front page of today’s Financial more on training, or more on roads.” It is important Times gave me a new word for my vocabulary: that we should try to arrive at a view on such delocalisation. That probably describes an matters. approach that is the opposite of relocation: the drift away from rural areas. Given the current debate, I Wendy Alexander is right to say that one can influence and support economic development in wonder about state aid for poorer areas and about ways other than by simply spending money. rich countries being under threat. I wonder whether we should take more strident steps here Nevertheless, the Executive’s primary mechanism is its control of the budgets. It can decide what to in Scotland to protect our position and start to spend its budgets on. Again, I come back to the make a special case. basic point: it is not clear what priorities are Peter Wood: It is hard for me to make that influencing the balance of spending decisions, or judgment. For me, that is a further example of the what beliefs are held about the relative efficacies kind of issue that needs to be addressed and for of different types of expenditure. which we need a framework. I emphasise that I Jim Mather: In 20 years’ time, should people am not suggesting that the Finance Committee look back at this report, will they see that we were take a position on what the right balance is between urban and rural spending. However, it on the cusp of recognising that the artificiality of Scottish economic management and the would be good if we could trace back what we incompleteness of its mechanisms were coming observe to priorities that have been articulated, so that we could say, “This is a particular problem to home to roost? which we are giving greater priority.”

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Peter Wood: Why do I feel the ground opening town or city to buy his tractor, where is the up beneath me? economic benefit? Is it urban or rural? The Convener: You could pretend that it was Alasdair Morgan: The benefit goes to the Magnus Magnusson and say, “Pass.” United States. Peter Wood: There are different forms of Mr Arbuckle: Not always. government in which different levels of decision What about a situation in which a farmer goes to are made at different scales. The question was Edinburgh to see his lawyer or accountant? Where interesting. One would argue that economic is the benefit there? Members are considering the development priorities should be aligned at the matter as though there were two boxes, but there different levels—that national budget policies are not. The two aspects are intertwined and it is should align with regional spending patterns, negative to regard them as separate boxes. which should align with the allocation of money at local level. There is a far bigger issue in the adviser’s paper about direct support to infrastructure and spending In a way, we have an experiment that has yet to that is supportive of economic development. Do be run in the Scottish Parliament, with regard to industries such as the tourism industry benefit what might happen if there were to be a from support? Other industries, such as misalignment between the views of this Parliament manufacturing industries, might benefit more from and the views of the Westminster Parliament. That direct investment in infrastructure. experiment awaits us. Peter Wood: Again, that is a big question. It is The Convener: Its time will come at some point. difficult to answer, but I will try to strike a balance between personal opinion and the body of opinion. Dr Murray: In case there was any misunderstanding, I want to make it clear that my There is general acceptance that some kinds of industry and business—tourism is a good criticism was not really of Peter Wood’s paper but example—have a collective interest, for example of our inquiry. The paper is a very good reflection of the inquiry. in promotion. It is beyond the resources of individual businesses to promote their wares We have mentioned water and sewerage internationally, but by acting together with the help infrastructure and planning constraints. Those of Government they can do so. We can therefore issues are to do with spending, not legislation. The argue that we need a national tourism promotion major local development issues that many local strategy. authorities face concern investing sufficiently in The manufacturing industry has a different type water and sewerage infrastructure, so that they of structure in that regard and on the whole we can build the houses and attract the businesses. I think that individual businesses are best able to disagree with the view that that is a legislative promote their products to potential customers. matter; I think that it is about spending priorities. There are parallels with agriculture, which has I want to pick up on Ted Brocklebank’s point. been mentioned. Agriculture is sometimes We need to define what is rural and what is urban. regarded as an area in which there is a form of I presume that Dumfries and Galloway is rural. market failure, because it is difficult for individual The analysis suggests that expenditure on farmers to promote their interests, which leads to agriculture, forestry and fisheries benefits the town arguments for marketing co-operatives and other of Dumfries but in no way benefits north-east Fife. such measures. The general point that the That is a silly conclusion and I am not sure that we appropriate type or extent of intervention varies can stretch that sort of analysis too far. according to the circumstances of individual industries is absolutely right. What is appropriate Peter Wood: That point is worth reflecting on. to support—for the sake of argument—the On the first point, a question clearly arises in Scottish crafts industry, is not necessarily what is relation to overall expenditure on water and appropriate to support mechanical engineering. sewerage. Again, I say that Wendy Alexander was Such discussions and issues lie rather beyond right to say that Government can do more to the remit of this committee. How and where we promote economic development than simply should intervene appropriately is perhaps a matter spend money. Elsewhere, such matters are rightly that belongs more in the realm of the Enterprise being considered. I know from current direct and Culture Committee. However, I concur with personal experience that the Executive is the view that different types of intervention are examining the extent to which the planning system appropriate for different industrial and market inhibits, or fosters, economic development. structures. Mr Arbuckle: I am concerned that we are Mr Arbuckle: What is your response to my drawing such a division between urban and rural. other point about the artificial division between If a farmer receives a subsidy and goes to the urban and rural?

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Peter Wood: I am sure that we will not reach an 11:56 agreement on the matter. As you rightly suggest, Meeting continued in private until 12:00. someone who lives in Lochinver will no doubt go to Inverness from time to time to do some shopping, which brings benefits to the area. However, I emphasise that we should not fudge the issue too much. There is a question about why, for example, there has been an increase in measures that are intended directly to promote economic development in rural areas at the same time as measures to do that in predominantly urban areas have been relatively cut back. I am not suggesting that that is right or wrong, but it would be interesting to know why that balance exists. I am not suggesting that the committee make a crude point about spending too much in rural areas; the issue simply exemplifies the question about how we match up what happens in spending with the priority framework. The Convener: We have had a good kick-about on the matter and useful comments have been made. As I said at the beginning of our discussion, our report is potentially important, because it will highlight a number of issues that I think the committee would agree need to be considered properly. The advantage of the Finance Committee undertaking the exercise is our ability to look across the range of expenditure and take a vantage point that subject committees, which have more restricted remits, cannot take. We will try to incorporate issues that have been raised today in our draft report, which we hope to produce around the beginning of March. It might take a bit of time to finalise the report, but that is a reasonable timescale to set. Although there was some unease about the urban/rural issue, particularly from members who represent rural areas, I do not think that we can avoid any of the issues that have been raised. We must deal with the issues that have been introduced. I am keen to try to push the Executive on the link between general, framework statement issues and the process by which decisions about investment or policy choices are made. We need to explore the rationale for such matters. Perhaps we should consider areas in relation to which discussion does not take place—or appears not to take place sufficiently—between ministers or between ministers and agencies across the boundaries of departmental responsibilities. Are members content to proceed in that way and to return to the matter at the beginning of March? Members indicated agreement. The Convener: I thank Peter Wood for his participation and for his paper. The committee agreed to take in private the final agenda item, which is consideration of our report on the Charities and Trustee Investment (Scotland) Bill.

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