Finance and Public Administration Committee [Draft]

Meeting date: Tuesday, April 1, 2025

Official Report 795KB pdf

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Scottish Budget Process in Practice

Good morning, everyone. The first item on our agenda is an evidence session with the Scottish Fiscal Commission on the Scottish budget process in practice. It is the first evidence session as part of our inquiry into the process.

I welcome to the meeting, from the Scottish Fiscal Commission: Professor Graeme Roy, chair; Professor Francis Breedon, commissioner; John Ireland, chief executive; and Claire Murdoch, head of fiscal sustainability and public funding. Before we move to committee members’ questions, I apologise for keeping our guests waiting. Our previous session, which was a briefing on the spring statement, overran by a few minutes.

The Scottish Fiscal Commission has said:

“Since the start of this parliamentary session in May 2021 there have been some welcome improvements in the information published by the Scottish Government as part of the Budget which improves its transparency.”

For the record, will you touch upon some of those improvements?

Thank you for the opportunity to come along and speak to you about the issues. To kick off, I have some general comments, and colleagues will then come in.

As we said in our letter, the information and transparency that are provided by the Government have improved over the parliamentary session. For example, we highlighted the classification of the functions of Government analysis, which is really useful. Through our statement of data needs, we have been able to ask for more information from the Government in order to inform the overall budget process. More information has been provided on the medium-term financial strategy, discussions on funding and so on—all those things are helpful to us, and progress has been made in all those areas.

We have highlighted some areas in which more information and transparency could be provided, such as the provision of open data and accessible information that people can use to track, and in relation to elements of the climate change work and public sector pay issues, which we have raised in the past.

We also highlighted an improvement in the budget documents, which has been to compare plans with the in-year position, although some challenges arose in the previous budget around the timeliness of that data. On that part, notable improvements have been made, but more information could be provided in some areas.

Can you give us a bit more detail on which areas you are looking for more information in?

I can kick off, but it would be good if colleagues came in on that as well. The climate change work is a good example. In our fiscal sustainability work, we said that we needed to track the Government’s budget plans alongside its climate change plans. We expect the Government to be much more expansive and provide much more information in the budget documents about the spending commitments that are being made to deliver on the transition to net zero.

If you recall the budget before last, we did not get all the information on public sector pay, which was a challenge. This time, we got information on the headline pay award, but some of the other information, such as average pay bills and employment levels, were not provided. More information could be provided in several different areas.

In your submission, you said that your August 2024 statement of data needs

“set out seven recommendations for the Scottish Government to improve the information published as part of the Budget, MTFS, Budget Revisions and provisional and final outturn.”

Where are we with those recommendations?

Since we published the statement last August, there have not been many changes. It is probably unrealistic and a bit challenging for the Government to fundamentally change how it presents some information in such a short time.

Alongside the budget, the Government published the COFOG data in December, which allowed the SFC and others to analyse how spending was changing. The trajectory is probably good, but we have not necessarily seen that much progress being made towards the recommendations yet. In general, when we make such recommendations, it takes a few years for the Government or other stakeholders to implement them.

If it takes a few years, do you not push for it not to take a few years? Have you requested that the Government achieve the recommendations by any specific deadlines?

The Government often takes a mañana approach to documents. If something does not have to be done this week, it will be done next week or, more likely, the week after.

I can see the argument around that. To be fair, most of our stakeholders provide most of the information that we set out in our data needs statement relatively timeously. Two to three years ago, we highlighted significant gaps in social security information, for example. It took Social Security Scotland a while to get up to speed to be able to respond to that, but the progress that has been made since then has been quite significant. Rather than setting a deadline, we say what we need; if we do not see much progress, we come back and are a bit more forceful about it.

However, as Claire Murdoch said, when we made the recommendations in August, we were pretty much running up to the budget process kicking in, so we were not surprised that it might not happen. If we get to this summer and do not see improvements, we might start to come back and say that progress has not been as quick as we would like.

It is fair to say that, so far, our approach has not been to play hardball and set deadlines. Perhaps we are being naive, but, from what we have observed, it looks as if everybody makes the best effort to respond to our data needs.

So far, we have not felt that we are being fobbed off. In that sense, the approach has been successful. However, you are right that we should keep an eye on whether people are not making the best effort.

In our recommendations, we note that we are publishing information—on funding, in particular—and doing so in the way that we think the information should be presented. Actually, it should be the Government that clearly presents the information, rather than us, but we have taken on the role in the absence of it doing so. Rather than nobody providing the information, the Government should fill that role, whereas we are filling that gap at the moment.

You say that the addition of the medium-term financial strategy to the budget process

“has been a positive development, setting out five-year forecasts”,

and you go on to say that

“this should encourage budget planning over multiple years rather than focusing on balancing the budget one year ahead.”

Can you talk to us about that, too?

09:45  

One point that we make consistently is on the importance of thinking about not only the next financial year but the medium term. That is where there is perhaps more of a gap in the overall narrative of the debate.

We do a lot of work on fiscal sustainability, which we might come on to later. That includes more discussion about the very long term and also about the next year. However, many of the factors that really matter for the Government’s budget planning relate to the next four to five years. Its commitments, their potential spending implications and how they link to funding are critical aspects of that medium-term horizon. Therefore, any work on starting to scope that out, and talking about the scenarios and the risks, is really important.

In that context, having a medium-term financial strategy that sets out the Government’s expectations and overall view is positive. The proof of the pudding will come down to how action orientated that medium-term outlook is, though. Is it just a projection that is an estimate of what might happen, or can we say that the Government is actually changing its behaviours and making decisions based on that? That is where the power and the judgment on a medium-term financial strategy really kick in. It is good to have such a strategy, but the question is whether it is actually changing decisions.

That is an important point. Your submission also says:

“We currently do not have a role forecasting spending, other than social security payments”.

You are obviously keen to have that additional role.

In principle. We will come on to the Organisation for Economic Co-operation and Development’s recommendations. Increasingly, we are starting to talk about how the picture will look over the next two, three, four or five years if commitments are made for the next financial year. That is quite important, particularly with social security being such a growing part of the budget. We are having to make medium-term decisions about other funding areas, because the social security budget is increasing and is demand led, which means that we have to make some decisions elsewhere. For us, that is a natural place to explore moving to, but it is really for the Government to set out its intentions.

I hear a sense of frustration, though, that, although you are examining that aspect, you are not able to deliver the same handle on its impact on the rest of the Scottish budget. I sympathise with you on that. You say:

“The Scottish Government has also set out scenarios for spending and funding to assess the risks faced by the Scottish Budget in future years. The Scottish Fiscal Commission does not currently have any role in assessing these scenarios and risks.”

Again, would you be keen to have such a role?

Yes. One of the factors that we will consider when we examine that is what we mean by “assess”. That will not involve arriving at a yes or no answer, or a conclusion that it is not achievable or is wrong; it will involve being much more discursive about the scale of potential risks as an area that we can move into and be much more expansive about.

As we have discussed previously, when we consider the big drivers of the budget, the factors that move around are social security, pay and health, and everything else is separate. We are beginning to scope out how those big elements are moving around and what some of the commitments on those might be. That is a step forward in our work, but it is also a relatively important one for us to start to develop.

You have talked about an idea that I find quite interesting. The medium-term financial strategy will come out before the summer, but you suggest that it could be updated in December, in the run-up to the election.

That would involve a slight challenge on timing. We will have an election next year, at the point when a medium-term financial strategy would normally be published.

To inform a debate about the election, if we have a medium-term financial strategy in the next few months and a United Kingdom Government spending review over the summer, I think that it would be helpful for the budget to set out at a high level the overall trends for public spending and funding beyond the next financial year.

The need for something of that nature is laced throughout your report. For example, on multiyear funding, you said that you

“encourage the Scottish Government to set out multi-year spending plans even when these cross into a new parliament to support planning across the public sector. ”

You also said:

“A regular cycle of UK spending reviews should mean that Block Grant funding is more certain and that the Scottish Government will therefore be in a better position to provide multi-year spending allocations.”

Of course, we have been in a period of volatility for years. How effective would that be in the circumstances?

I will say three things. We have always been very strong in our view that we need multiyear assessments of where the budget is heading. It is really difficult for agencies, relatively small organisations and the general public to see what will happen next year if the budget is purely for one year. Multiyear spending and multiyear funding are really important. The UK Government’s movement to a multiyear spending review and to taking a longer-term view will be helpful, because it will start to anchor the block grant in a much more significant way than in the past. Again, it will come down to how much the block grant holds, but, in principle, having relatively stable funding outlooks across the UK would have benefits in Scotland.

In looking at multiyear funding, you could do a rigorous analysis over a long period of time that would involve a comprehensive spending review with line-by-line analysis of where public spending is heading in Scotland. Typically, that is a big exercise, and we have not done one for a long time in Scotland, but I think that there is real value in that and in looking at absolutely everything, including how things are set up and structured. That would not prevent us from doing a review of what is being done at the moment and what it means not just for the next year but for the next two to three years. Ideally, we would do a comprehensive spending review now and again—it is something that should be done not every single year but at key points in time—and we would build on it with regular adjustments. Ideally, that is how budgets should be managed.

Part 5 of our questionnaire asked:

“How effective is current public engagement in the budget process”?

In your submission, you replied:

“The Scottish Fiscal Commission welcomes public engagement in the budget process and is aware of the importance of providing clear material to support this engagement.”

That does not address how effective it is. I do not think that this is the SFC’s fault, by any manner of means, but one of the issues that was touched on in the OECD report was how we can improve the effectiveness of engagement with the budget. Two weeks ago, we talked about fiscal literacy among stakeholders, MSPs and so on, and we will probably talk about it again today.

I wonder whether you could respond to that question, because it is almost as though you have done a wee body swerve. [Laughter.] That is not like you, as you are usually very direct in your responses. That is how I sniffed it out.

It might help if I explain that, when we think about the effectiveness of engagement, we tend to think about three groups of stakeholders that we want to engage with.

We spend a lot of our time with a group of stakeholders whom we want to support to understand the detail of the fiscal framework and the budget, who include the committee and other key stakeholders who have a strong interest in the effectiveness of the budget process. We know that that is quite a small audience, but it is really important for us to ensure that that group understands those things. I think that we do that quite well, and the level of knowledge and understanding among the people who should know about the budget is quite high.

The second group is a broader group that includes people who might not need to know all the specific details of the budget but who need to understand the implications of what is happening with trends in social security, tax, the economy or the overall funding element. That group includes parliamentarians and a broader set of stakeholders. That is where effective engagement is a bit more challenging to do. I would not say that the engagement with that group is ineffective, but that is an area that requires more investment and time, in order for us to be able to go out and talk about the core big budget pressures. Perhaps we can come on to some of the work that we do on that—

We will probably discuss that further in the session on the OECD report, although it is tempting to stray.

I have to say—you touch on this in your submission—that your reports are written in a clear style. I know from your annual report that you provide training on writing clearly. Your reports are not written in any kind of gobbledygook; everything is explained. I know that you have used a few acronyms this morning, but those are always clearly explained in your reports. A layperson who is interested could read them and know exactly what the Scottish Fiscal Commission is all about. You should be commended for that.

I will move on. In your submission, you state:

“The written agreement between the Scottish Government and the Finance and Public Administration Committee sets out how the Scottish Budget document will normally be published no more than three working weeks after the publication of the UK Autumn Budget. However this gap provides very little time for the development of forecasts and the Scottish Government to consider policy decisions.”

What is the optimum period for that gap?

I will say a couple of things about that. Typically, when there is a UK fiscal event, the period between that and the Scottish event is condensed, because of the time that this Parliament needs to scrutinise the budget.

Indeed.

Anything that brought the UK fiscal event further forward but that still gave this Parliament sufficient time to scrutinise the budget and that extended the middle period for forecasting would be beneficial. The three-week period is the minimum. Anything longer than that would be beneficial.

I do not know whether we have explicitly given a number.

I think that we have said that a gap of about five weeks—

We have said five weeks. That is John Ireland being very generous, convener.

We have said that five weeks is ideal. I think—

If five weeks is ideal, why not say that and put that on the record? The likelihood of getting five weeks—

Is minimal.

—is not great. We understand that the Office for Budget Responsibility, for example, had less than a week to look at the spring statement that was announced last week.

It can often be very difficult for the SFC, the OBR and so on. It is good to put on the record what you think would be ideal, because that is something that we would want to aim for.

Sorry about speaking over you.

Three weeks is definitely too short a period. As it gets towards four weeks, the process becomes more manageable for us. There are pressures on the Government as well, because it has to turn around decisions very quickly, although it can plan and do a lot of the work beforehand.

I think that four weeks is—

A gap of four to five weeks is optimal. Only once has the gap between the Scottish and UK budgets been three weeks—that was in December 2017. That was very tough, and, at that time, we did not do as many forecasts, we did not have as broad a remit and the Government was not making as many decisions. We have always had a minimum of close to four weeks since—

It is worth saying that we recognise that the closer the two things are together, the better. That means that the numbers align much better. We are not asking to be given months to think about it. We realise that urgency is needed.

That is why I was asking for the optimum, rather than—

Exactly.

The only caveat that I would add is that, although the number of weeks is important, it is the effectiveness of the engagement in that period that is really important, as well as meeting the deadlines and providing clear information. The developments that we have made in the past few years on setting out to you the timeline help with transparency and help us to ensure that we get the information.

The number of weeks is important, but, ultimately, what happens in those weeks is the most important aspect.

Yes, and you could be more explicit about that. Last time, we had just under five weeks, but, as you will know, we had the issue of a policy that was announced very late in the process.

Exactly. It is important to emphasise and get on the record the fact that the issue is not just about the time; it is about what happens in that time period. We make that point, too, when we speak to the Government.

You also said:

“any spending which is known at the budget-setting stage to have to be transferred later on should be shown in the portfolio which will incur the spending from the outset.”

I have been saying that since Craig Hoy was in short trousers, and that was not yesterday. That is a really important point. Do you want to expand on that a wee bit?

10:00  

You have covered the issue. The improvement that has been made so that the budget comparisons are based on the latest in-year information is helpful. There was an issue this year to do with the revisions not being factored through, but that was, we hope, largely a one-off. The improvement should help, and the process should be much more transparent in future. However, that still leaves us with money being allocated into portfolios that the Government knows that it will move. From a scrutiny point of view, the Government should just show that, as that would make things much more transparent.

Exactly. In the autumn revisions, in particular, we have a groundhog day scenario with some of those transfers. I have said that to ministers, as you probably know. Thank you for emphasising that.

You said that the evaluation of the forecast in 2024, which was accompanied by a fiscal update, was

“judged to be a useful snapshot as the Scottish Parliament began its annual process of Budget scrutiny so we plan to publish the Fiscal Update again in August 2025.”

Can you touch on how useful that was?

I might say more about governance later, but we are trying to spread out our publications over the year. That is partly about internally managing our resource, but it is also partly about making sure that we can communicate most effectively and highlight the key elements at key points in time.

We got good feedback on the update that we produced in August last year, in which we took stock of where we were in that financial year and highlighted pressures on public sector pay and the like. Our plan is to make that a regular publication. We will have our budget document at the end of the year, our long-term fiscal sustainability document in the spring, the MTFS document in late spring and an update just before Parliament returns after summer recess. That will set out a bit about our forecast evaluation and a bit about our understanding of where we are in the current financial year, and it will also highlight key issues. I hope that that document will help to set up the committee to think about some of the issues that it needs to explore in the run-up to the budget.

I know that I speak for the committee when I say that it was very useful when you came to our business planning day in Dundee in late August last year. We went through the update, which was helpful and provided a springboard for what happened in the following weeks and months.

I will open up the session to colleagues around the table. The first member to ask questions will be the previously mentioned Craig Hoy.

Thank you, convener. Good minds think alike. I had eight questions, and you have asked seven of them, which have been comprehensively answered, so this is probably going to be one of my briefest contributions.

I want to go back to the cycle of parliamentary elections and the medium-term financial strategy. Is another risk for Scotland the fact that we seem to have a never-ending cycle of elections? Last year, we had a general election after which the assumptions of the previous Government were, in effect, disregarded and the supposed black hole emerged. We have seen various fiscal events since then.

You say that you want to have greater financial transparency and more stable ground, but to what extent are the parts of the UK that have devolved Administrations further undermined in projecting forwards as a result of that cycle? At the end of the day, particularly in the run-up to general elections, politics is short-termist in nature. Often, the political and economic narratives are absolutely one.

Do we need to be alert to that in Scotland? We had an election last year, we have an election next year and we will have local government elections the year after, and we could have a general election the following year. Does that not make your job, and the job of the Parliament, more difficult in trying to get security and forward-looking provision?

I guess that you are asking me, as an economist, to comment on whether democracy is a good thing. There are a couple of points. Because of the nature of the framework, you are right that elections, not just for the Scottish Parliament, have an impact on the budget process and, therefore, on the funding. Because so much of the funding still comes through the UK Government, a general election at UK level has an implication for the funding and, therefore, the Scottish budget. A Scottish election can also result in changes to decisions on taxation, which would then have an impact on funding and spending.

We have to live with that, because of the nature of the devolved settlement and the fact that the setting of the budget depends on both Governments, but that is not an argument against doing a lot more to set out medium and long-term trajectories for spending and funding. As I said, a lot of the big-ticket items in the public finances are relatively stable, so framing decisions over not just one year but multiple years should move the conversation and debate on to look not only at what is being promised for next year but at what is being promised over a period of time.

That is a long way of saying that you are right to say that there will always be challenges and that having multiple elections will have an impact on the budget. However, we should—as a result of moving into a more stable political environment over time and having multiple spending review periods—be able to make significant progress, relative to where we have been.

If you look at the timetable, you will see that there is no way to dodge those events, because there are too many of them, so our recommendation is to plough through, despite what is going on in the background. There is no way to plan a timetable precisely enough to give the lead time to avoid being caught in an election period, because those periods are almost permanent.

We could call that permanent chaos, but it helps us to identify something that the convener alluded to. Broadening and deepening your spending analysis beyond social security and giving you a greater remit to plan for scenarios might be more important in an environment such as that in Scotland, where we have those political cycles, because bodies such as the SFC provide solid, politically neutral analysis that allows Governments of all political persuasions to make informed choices.

As you would expect, I agree. The more we can do to set out the overall narrative about the constraints on spending and taxation choices, the better.

We also highlight risks. In the past few years, we have made the point that social security decisions are taken not only by the Scottish Government but in the rest of the UK. That has an impact on the block grant adjustment that we did not really see for the first few years, because it was all about what the Scottish Government was doing. We are now seeing decisions being taken at a UK level that have implications for, and an impact on, the budget. Similarly, decisions about taxation that the UK Government took in the past had an impact on funding. The more we set that out, the more we hope that people will understand the different elements.

In your role as a trusted adviser to Governments of all political persuasions, you said last summer that you wanted there to be greater transparency on Scottish Government pay awards. Do you get the impression that that advice has now been heeded?

There has been some improvement in the information that we receive on public sector pay. We did not get any information about public sector pay in the budget before last, so we made an assumption about that. This year, we got a headline from the Government that the public sector pay award would be 9 per cent over three years and 3 per cent this year, although information on matters such as overall pay progression and public sector employment was missing. Given that that is such an important part of the budget, the more the Government says, the better our forecasts can be. That would also give the committee better information on which to scrutinise the pressures on public spending, because although that spending might be going up, there will be an impact on service delivery if a lot of that is taken up by wages.

Lastly, the convener referred to the need to ensure that funding is properly allocated to the portfolio from which it will be spent. You have said that the fact that that does not happen probably affects your forecasting. It definitely impedes our scrutiny function. Why do you think that the Government is still reluctant to go as far as it could in relation to that relatively simple switch in methodology?

I cannot really comment on whether the Government is deliberately attempting not to do that. Part of the reason might simply be that that is the way that it has always been done.

We had that conversation about budget documents always being set alongside draft budget documents from the previous year, because that was what was always done—that was simply the process. Now, the Government has changed its approach so that it provides not only the draft budget but the latest position within year. The Government is making progress, but, with many such issues, once we start to highlight them and say that it would be much better if a change was made, more often than not, the Government gets around to changing the process. That comes back to the point about our asks around the data needs.

I cannot really comment on why the switch has not been made, but I hope that it will be made, because it is an obvious thing to do.

You think that progress is being made and that there is greater awareness in the Government that the process is not helpful.

Yes, and I hope that we have a role to play in that. With us and the committee highlighting it, it becomes difficult for the Government to ignore the question, “Why are you not doing it?” If the Government simply says, “We haven’t done it yet, but if it’s helpful, we’ll do it now,” that is great, but if we ask why the Government is not doing it, that gives us a better chance of success.

It is worth emphasising that sessions such as this one are very important to us, because we make points about the data needs and you reinforce them—or not, if you do not agree with them—which makes it clearer that we all have an agreed direction of travel. Such sessions are helpful in allowing us to see where the gaps are and to shine a light on them.

Super—thank you.

You still got more or less eight questions, Craig, so you did not do too badly.

I will build on a few points that have already been made. Forgive me for being sceptical—and I think that I have said this before—but is there really a lot of point and can we have any faith in medium-term financial forecasts when things seem to be changing? Craig Hoy emphasised the elections, but it is not just about the elections, is it? In October, we had what was meant to be a major budget, a new Government and plans for the future, and then last week a fair chunk of it got changed.

Graeme, I think that you used the words “relatively stable”. Can we ever expect that to be the case or are we just going to put more and more resources into both your organisation’s forecasting and the Government’s making plans for the medium term only for the UK Government to change something major?

You are right that we live in quite different times from when I was studying economics, when it was about abolishing boom and bust, and everything was nice and stable. We could look ahead, spending was growing and everything was fantastic. We are now in a different place, so you are right that there is more uncertainty, but I would separate out several different things in all of that.

In some core elements of the budget, it is relatively straightforward to set aside broad trajectories or multiyear spending commitments, and it is important to prioritise areas where we might want to do that. For example, it is helpful to give relatively small organisations indicative funding and clarity over that. That is a small share of the overall budget and it does not cost too much to do that.

The second thing, however, which is where the medium-term elements kick in, is that, rather than our saying, “This is the exact amount in pounds, shillings and pence that you should expect to get,” the overall trend that is pushing through could be really important in shaping decision making in an area over the next four to five years. Social security is a good example of that. We can work to project not just the commitments that the Government will need to make next year, but whether we think that those commitments will increase over the next few years. The two-child limit is a good example, because we can model and say what is coming as additional expenditure next year and whether that will increase or decrease over the forecast horizon.

The Government can set out its overall trajectory for where it is heading as an organisation with its pay policy—for example, whether it is planning to commit to pay rises that are above the rate of inflation, which locks in some commitments over the medium term. For example, is it committing to expanding, maintaining or shrinking the workforce? The Government could set those commitments and broad trajectories.

We can highlight where some of the broad trends in public expenditure are going, and you are right that those trends change with elements of UK policy. For example, if the UK Government is going to spend more money on security and defence, and if it is not going to borrow or increase taxation to do that, we can highlight that the money will have to be found from spending elsewhere, which presents a risk to the Scottish Government’s budget in the next four to five years.

I share some of your scepticism about whether an exact budget could be set five years out, but we can do a lot more if we are able to be much more expansive about the broad trajectory and the factors that are driving spending and commitments.

10:15  

On the broad trajectory, if I understood our briefing correctly, one of the points that was raised last week was that the increase in UK resource spending will reduce from 1.3 per cent to 1.2 per cent. That does not sound like very much, but those could be quite big numbers for Scotland and the UK.

Yes.

Even those trends can be changed at a moment’s notice, can they not?

They can, but it goes back to the point about what the planning is in all of this. The Government has set out its spending for the next couple of years, and the growth in spending drops significantly over the end of the forecast horizon. That is our central position.

In the context of the Scottish budget, it should be clear that the UK Government’s central expectation is that spending will have moved to relatively low growth towards the end of the forecast horizon. That is an important planning assumption for the Government, and it should modify thoughts about the spending commitments that the Government is making.

If the central plan is to cut back spending, or at least to reduce spending growth, you are right in saying the UK Government could change that completely, but it is about planning for the potential variation. If you expect that to be changed, you have essentially banked money that you do not already have.

One of the important things that we are trying to do in the background is say that there are these trade-offs whereby, if you spend more on X, that has implications for Y, and that is often a multiyear question—it is not just saying that the trade-offs will suddenly appear in next year’s budget.

Social security is a great example. Social security will continue for years, and it is useful to be able to say that it will have implications for other parts of the budget. We have to have some numbers; we cannot just say there is a trade-off. It is a way of presenting the fact that budgeting is about trade-offs, not necessarily getting the forecast exactly right—which, as you rightly say, is not possible in practice.

That leads me to another issue. You said that you have a lot more information about pay increases and that kind of thing, but, to be slightly sceptical, surely the important thing is the total work payroll for the whole of the public sector. It does not seem to matter too much whether we have slightly fewer workers and they get a bigger pay increase or slightly more workers and they get a lower pay increase. Does it matter?

It matters, but you are entirely right that it is only one part of the overall element. We ask for much more information about the total pay bill within the public sector. It is not just about pay awards; it is about things like progression, grades and the totality of the workforce. That is what is most important, and it is then about what that means across different aspects of the portfolio.

You are entirely right that having the pay award is better than having no pay award, but it might still not highlight the totality of what you need.

There is another factor in the trade-offs issue. For the purposes of our forecast for the Scottish economy, as you say, knowing the total pay bill is probably quite enough to enable us to make a very narrow estimate. It is not necessarily useful for us, but it is useful in highlighting that, if you make an assumption about progression, it has an implication for employment. Are you happy with that implication for employment? If you have just a lumpy number, it does not highlight the trade-offs between progression and employment or pay awards and employment. I think that it is useful to highlight that. However, you are probably right about the fact that we could do an okay forecast without that breakdown. It is not hugely important in that part of our job.

That is helpful.

Being clear about the pay award is useful—and was also useful last year—for tracking what is happening in-year. If it is transparent that pay negotiations have resulted in awards that are higher than what was in the budget, you can see—to go back to Francis Breedon’s point—that there will have to be trade-offs. You budgeted for one pay award and, if the pay negotiations come in higher, that potentially has implications for the budget, so just having a pay award is still really important in terms of the transparency of the budget.

There is another area in which you are looking for more detail. Under

“Approach to spending reviews”,

you wrote:

“We would also encourage the Scottish Government to ensure spending reviews provide more detailed allocations than just at portfolio level to allow the NHS boards, local authorities and public bodies to develop medium-term spending plans.”

How much detail are you looking for? Is it how much each health board will get? Is that the level of detail that you want?

I would not say explicitly that it is the exact detail that is needed. We are arguing against having broad totalities of spend that mean that it is then difficult for you to see under the bonnet. Whether it is level 4 or level 3 figures does not really matter too much; it just needs to be relatively detailed so that you can see, for example, the Government’s overall ambitions around spending on the NHS in key areas. There is a balance to be struck between providing really specific detail, which—to get to your point—is really quite difficult to see over a five-year period and providing very high-level figures. “This is what we’re going to spend on health” would not cut it—it is somewhere in the middle.

The fear is that the spending review is at too high a level.

Yes. We would want to guard against that.

Again, there is good practice. It is not as though we have never done a spending review. We have done comprehensive spending reviews in which we have gone through in detail the plans and expectations for economic development and NHS boards. It is not something that we cannot do; we have done it before.

The resource spending review in 2022 gave high-level portfolio allocations with no underpinning detail. Then, as inflation changed, there was no update. Based on what the Government had published, you could not track how its priorities were changing and how it was going to manage the budget as it came under greater pressure. If there had been a more detailed position, you could have tracked where it was changing its priorities. If the Government has more money than it thought it had, it should be able to say how it will allocate that—and, if it has less, where it will have to cut.

So, if 2022 is the standard that we are starting from, we want a fair bit more detail than that.

Yes.

The final area, which has been touched on, is about the transparency and public understanding side of things. I watched some of your videos. Your introductory one says that, if someone is watching the video, that shows that they already have a lot of interest. That implies that the general public are not piling on board. We may touch on the OECD as well, but my understanding is that you have met other independent fiscal institutions around Europe or wherever. Are other countries making more progress? Are they doing better when it comes to politicians’ and the public’s understanding of the budget?

John Ireland or Claire Murdoch may want to come in on the specifics. In general, as I said to the convener, there are three groups of stakeholders with whom we want to engage. The first group is the people who really get it—people who watch our videos and want to understand the intricacies.

The second group is the broader stakeholders, who need to understand the overall trends and trajectories. That may include the university sector understanding demographics and overall public spending pressures; the business community understanding the tax choices; and third sector organisations understanding social security. That group might not need to know the specific mechanics of the fiscal framework, but the broad budget element is important to it.

The third group is the public at large, for whom the issue is how we talk about the big-ticket elements, such as what is happening to income tax.

As I said, I think that we do quite well. The review talks about targeting the people who really need to understand the detail. When it comes to going out to the broader groups, it is partly a resource issue. Other IFIs have much more resource for communications and engagement, and they can potentially go round speaking to lots of people and engaging on all of that. That is the resource space.

From memory, I think that you mentioned the Netherlands.

Yes. They have significantly more resource than we have for that.

Is that working for them? Is the general public in the Netherlands better at understanding the budget?

It is worth highlighting one thing that is specific to the UK. We talk to the Northern Ireland and Wales IFIs, and we all slightly bemoan the same issue, which is that the fiscal framework itself is quite intimidating. It is quite hard to get people to engage when they are thinking, “Oh no—I’ve got to learn about those Barnett consequentials and block grant adjustments.” I think that what Graeme is saying is that there is only a subset of people who really need to know about that, and what people do need to engage with is the fact that fiscal policy imposes certain constraints. That is the distinction that we are trying to make.

We, Northern Ireland and Wales have noticed that we get people saying, “Oh, my God—you’re not going to explain to me what a Barnett consequential is, are you? I really haven’t got the bandwidth for that.” That is one of the reasons why we have slightly dodged the question. I think that we accept that there has not been as much engagement as we would like there to have been, ideally. Perhaps it is an excuse, but I would argue that the complicatedness is one of the reasons for that.

We might come back to that in the second evidence session. I will leave it just now.

The issue is that you can take a horse to water but you can’t make it drink. As the OECD has pointed out, there are also issues due to the shortage of financial journalists who would want to take on board a lot of what you have been saying. The situation in our islands is completely different; you have discussed the comparisons in detail.

What you do with the resources that you have is excellent—I am happy to put that on the record again.

In your answer to the first question this morning, Professor Roy, you set out where you felt there had been improvement in data availability. You then raised some issues about areas in which you thought we could still make improvements. Will you do the same in relation to how effective we are in scrutinising public expenditure? Will you tell us where you think that the data is improving and where you think that we need more data in order to decide how effective we are being in scrutinising public expenditure?

The COFOG analysis has certainly helped, because it is immune to changes in portfolios and, through it, we can look at expenditure over time. It definitely helps. The overall provision of narrative around what the Government is doing on expenditure is improving and has already improved, which is really positive.

We do not stray into saying whether we think that spending is good or bad. We do not go into saying whether money is spent effectively in a particular area. However, we highlight challenges in things such as public sector pay. Given that it is such an important part of the budget, there is very little information in the budget about where public sector pay is flowing around the system. Climate change is another example. If the Government’s top priority is hitting net zero, it should not be so difficult to see in the budget document where the effort is going into that. That starts to stray into your point about effectiveness.

That is one of the reasons why I am asking the question. You held a Scottish Parliament information centre breakfast seminar on this exact issue, considering the challenge of climate change against other issues. It is essential that the information that we need in order to scrutinise is as available as possible. Where there are different policy choices, politicians have to make decisions about whether those are good or bad, and just getting to the information about effectiveness is absolutely critical, including to this committee. Are there other areas in which we need to boost the data?

Do you mean on climate change or in general?

Both, actually. You said at that breakfast seminar that there is a bit of a trade-off whereby we have to measure up what the Scottish Government should prioritise. That was one of the best events that you have run in the Parliament, because it gave us a wider perspective on what the challenges are, and the reason why it was good is that we got additional data. The charge on this Parliament is to measure how effectively we are spending public money. I just wonder whether there are extra bits of information that we could have.

10:30  

I will make some broad comments, and Claire Murdoch and John Ireland may want to come in on some of the specifics.

There has been a lot of discussion about wellbeing budgets and budgeting for outcomes. For the past 10 or 15 years, we have tried to do that, but it is tricky, because the lines cross over and it is not easy to add up absolutely everything to say that it gets there. The climate change work was interesting. If you focus on a specific policy area, such as how to hit net zero by 2045, through our modelling we can say what amount of money you need to spend on infrastructure and all the different areas to hit that, but is that information in the budget documents? It is not. Similarly, is there a laser focus on the budget elements that go into the climate change plan?

You could extend that to tackling child poverty. If that is your top priority and what you are really focused on, what in the budget will tackle child poverty and over what time horizon? You can quickly measure things such as the Scottish child payment, but what is happening to housing, education and all the other elements in local government?

Those are policy choices—they are not for you but for politicians. We cannot make effective, evidence-based decisions about public spending priorities until we know what the good-quality data is and what the effects of decisions are. That is basically what we are after. It has been a past concern of the Auditor General, as well as yourself, that we need to do more on that basis.

We have discussed twice before the possibility of having a finance bill, which I think could help us, but you are not going to answer that question. However, do you feel that a fiscal framework between central Government and local government could help that process?

I do not think that we have a specific view on whether there should be a fiscal framework. Ultimately, it would be for Government and policy makers to decide that.

Would it help the pursuit of getting the right evidence? It would increase the scrutiny.

I would need to think about that. Anything that can improve transparency and the identification of flow-through is better. As I said on climate change, anything that shows what the Government thinks it is spending and doing in order to hit net zero is important. Similarly, on child poverty, what list of things that the Government is doing can help you to understand whether there should be more money in one area and less money in another area? What is the trade-off?

Local authorities often tell us that they have been on single-year budgets—it is a bit hand to mouth—so they are having to make very quick decisions and are not necessarily looking to the medium term. One of the reasons—this is a personal view—that I feel that a fiscal framework arrangement could help that process is that it could improve the transparency and the expectation of what evidence could be provided before decisions are made.

As we have said, anything that ensures multiyear funding in any area is a good thing. If it lets local government or NHS health boards plan things, it is better. However, we need to think about the specifics of a fiscal framework, because, in my mind, it has connotations of things such as agreements around local taxation versus central Government funding, which obviously strays into potentially thorny issues. We do not have a remit on local taxation, for example. That is a broad way of me saying that anything that helps to improve transparency and opens up some of the intricacies would be a good thing.

The Parliament is in need of processes that make it easier to understand where we have spent money well and where we have had issues. That is the crux of the matter.

I will come back to other matters later.

I will add something.

There are probably two ways of thinking about the issue. One is thinking about how public money is spent and evaluating the effectiveness of that money, which is like a policy evaluation. The other is thinking about what is in the budget and where the Government is actually spending the money.

Last August, we made some recommendations that may look a bit techy but that are fundamentally about trying to improve how we all understand what is going on in the budget and where the money is spent. We recommended that the Government publish level 3 data sets with unique identifiers so that, when they slightly change the name of the spending line, that data can be tracked over time. We also recommended that the Government publish that data when the budget is introduced or revised and when there are provisional or final outturns, which would mean that we could see how the Government was spending its money within a year and could make comparisons over time in order to work out whether the Government was consistently changing things. Does it always say that it will spend money in a certain area but then increase or decrease that over time? What is the trend? Are certain areas growing? It is hard to know all of that from what is provided at the moment.

Having that data would improve your ability, as well as our ability and that of other stakeholders, to analyse the budget, and that might, in turn, improve how people understand what is happening. If you end up having discussions about whether the budget is bigger or smaller than last year, there is an answer to that question, but it is not actually the question that we should be talking about. We should be talking about where the money is going and about what the priorities that underpin the budget are.

That is helpful. Thank you.

We have been told that the budget process for the coming year will include an additional strategic document called the fiscal sustainability delivery plan. We have touched on that a little already, but what is your understanding of the relationship between that delivery plan and the medium-term financial strategy?

We wait to see the exact specifics, because this will be the first fiscal sustainability delivery plan. We will see the detail of what it looks like when it comes out.

The best way of answering your question might be to talk about what we want to see. There must be something that appreciates the scale of some of the long-term fiscal issues that we have highlighted and, crucially, it must link that back to today. It should say what pressures are caused by health, demographics and climate change, which takes us back to the conversation about climate work. We have done some work on long-term trajectories and do not need to have another conversation about the ageing population or trying to hit net zero. Instead, knowing what we can see, we need to know specifically what the Government is going to do next.

As far as you are aware, does the document require any modelling from you?

I would not have thought so. Have we been asked to do anything additional?

We have not been asked. We are trying to work with the Government to understand exactly what will go into the document. When we see drafts of that document, we can think about what we will say in our report in May and, depending on how much time we have, we might also pick that up in our fiscal update in August. We are waiting to see what is in the document. In our letter to the committee, we have been clear about what we think should be in the framework, but we cannot go further than that at the moment. We have not been asked to do any additional work.

There is a general issue with fiscal sustainability, which is that a small touch on the tiller early on can get you on the right course, which is far better than waiting for problems to develop and suddenly having to do a huge course correction. We welcome the idea of long-term challenges being brought forward to today—if that is what happens—so that we can think about the implications for decisions today.

We have heard quite a lot so far about the modelling that is required for different decisions. It strikes me as slightly strange that there would be what you called a touch on the tiller without the Scottish Fiscal Commission indicating what it thought the impact of that touch would be.

As John Ireland said, we need to see what the document looks like, because it is outside what we would typically do with the annual budget document. It is for the Government to say which issues it thinks are causing long-term fiscal sustainability challenges and what actions it is going to take to meet them, and to provide the evidence base. If the Government asks us to provide any input, we can comment on that, subject—as John said—to the timing.

My understanding is that the document will be slightly different and that it will not be as specific as the Government saying that it has changed a certain policy or that it intends to do something that will pull a lever and give an exact projection.

It is meant to be published alongside the MTFS, and your deadline for Scottish income tax is this week. Is that correct? In your letter to the committee of 24 March, you say that the deadline for providing forecasts is

“Thursday 3 April with Scottish Income Tax at midday on Friday 4 April”.

You will have the information for the MTFS this week to allow you to produce some of those models, but you do not have any indication of the content of the fiscal sustainability delivery plan.

As I said, the document will be different from what is usually produced for budgets and so on. It is a bit like what happens with the climate change action plan, whereby the Government says, “These are the decisions that we’re going to take in order to hit net zero,” and our job is to say, “This is the scale of the investment that’s needed, this is the scale of the overall challenge, and this is what you need to do from a public finance point of view in order to achieve that.” It is then up to the Government to do the specifics and consider which individual policies it will take in order to achieve that. We do not really have a role in setting that out.

Okay. I am still not much clearer on the work that is going to be done, and, if I am honest, it does not sound like you are either, as an organisation. I do not mean that to be critical. It is just a new field that we do not really understand.

Yes. To be fair, it is really good that the Government is setting out the plan, because the committee has pushed very hard to get the Government to talk much more about fiscal sustainability. I am relatively relaxed about saying, “Let’s see what happens and what the document looks like.” If we are asked to support it, we will provide any information that is needed. The process will give us a chance to work on the matter and provide feedback and comment on whether it improves clarity and where things might need to change.

Mr Ireland said that you are expecting to see drafts of the plan.

We have asked to see drafts as the Government prepares them, and we are finalising the deadline for that with the Government just now.

Okay. Thank you.

My next question relates to what was said earlier about the cycles of elections and policy decisions, how we deal with medium and longer-term questions of fiscal sustainability and financial planning, and the various documents that are planned. The clear message that I have heard from your answers to the committee’s questions today is that we should publish and be damned, to an extent. Let us set out the figures and, if things have to change, they have to change. Is that a fair characterisation?

In general, the more that we can set out, the better, and it helps the conversation more generally if we say what we have confidence in, what we do not have confidence in and what might change. There is a difference between doing that and going through a full comprehensive spending review at a micro level. People sometimes say that we do not have enough time or certainty to do that, whereas a lot more can be done at a strategic level to talk about the trends and pressures that exist. The more that we publish and the more we have that conversation, the better.

We expect the UK comprehensive spending review to be published in June, but we have had an indication of what the budgets are going to be on a departmental basis through the OBR, so we understand those numbers. Should the Scottish Government not be undertaking its own comprehensive spending review now? Is there any reason for it not to be doing that?

The obvious time to do that—if we ignore the cycles of elections and things like that—would be once the UK Government has done its spending review and provided detailed spending lines across the UK, because that gives the Scottish Government clarity on likely funding and so on. If I was to start with a blank sheet of paper, that would be the ideal time to do a root-and-branch comprehensive spending review.

The departmental budgets will be as the OBR indicated in the spring statement. Is there any reason for the Scottish Government not to be working on the basis of those numbers?

The thing that I was going to say that builds on that is that planning on spending should be going on all the time within Government. The idea that it should do this once every X number of years and then forget about it and just set annual budgets is quite odd. We have got ourselves into a quite odd place in how we do public finances in the UK, but also in Scotland. Actually, there should be on-going thinking about commitments and we should be setting out all the time what will happen to individual portfolios and what they will look like over the next three to four years. There is a separate question about how much should be published on that, but you asked whether internal work should be going on, and I hope that it is going on all the time.

10:45  

The way that it has been characterised to me by senior civil servants is that two thirds of the year is spent fighting to keep the money that was put in the budget in the first place—particularly in the context of the annual emergency budgets over the past three years—and the other third of the time is spent answering freedom of information requests. The ability for senior civil servants to do anything strategic to deliver against a policy is incredibly limited, which speaks to the need to do something that sets a longer-term trajectory.

What we have had so far from the Cabinet Secretary for Finance and Local Government is that a comprehensive spending review will begin only after the UK spending review, and there is some doubt as to whether that should report before the election. That will put us back in the spin of cycles, in which people cannot deliver. We will probably be working towards the last year of the current UK spending review. Is there not an imperative to get on and get this done sooner rather than later, so that people can start delivering the policies rather than fighting internally about budgets?

A general comment is that spending reviews and looking at where we are heading should be going on all the time, and it should have happened many years ago. A comprehensive spending review, which is a root-and-branch review of all the individual lines, takes time and requires a lot of resource. It also requires ambition and the ability to not do what you were talking about, which is to say, “This is what we have spent always, and we just top it up.” It is about how we allocate the funding and about going back to the beginning and starting again with decisions on where to allocate the funding. That takes time. I do not know where the Government is with the planning on that or whether it has started to do it, but it will take time and it definitely needs to get done.

I have much more confidence that, once the comprehensive bit is done, that gives the baseline to monitor, update and flex on a regular basis. However, that does not mean doing it annually; it means doing it on a multiyear basis and saying, after the spending review, “This is what we thought we needed to do in order to tackle health inequalities.” Progressing over three to four years is a much better way of doing the whole budget process.

Finally, on 16 January, Shona Robison, the Cabinet Secretary for Finance and Local Government, wrote to the Scottish Affairs Committee in Westminster stating that the policy of the Scottish Government is “full fiscal autonomy”. Has there been any indication to you as to how the Scottish Government is pursuing what would be a major alteration to fiscal policy?

We have not had any correspondence on that.

Have you noted the correspondence to the Scottish Affairs Committee?

Yes, but we have had no instructions on that, so we have not looked at anything like full fiscal autonomy.

The Government expenditure and revenue Scotland figures for 2022-23 showed a fiscal transfer of £8.3 billion, rising to £12.3 billion for 2023-24, as a transfer within the current fiscal framework. Removing that money from the block grant would be a very significant policy alteration. Have you gone back to the Government and asked for clarity on its position on that?

That does not lie within our remit, because you are looking outside the fiscal framework. The GERS numbers include the totality of public spending and public revenue in Scotland, and that is not something that we look at. We look at the existing devolved fiscal framework and forecast for that. We would not look at that, and we have not been asked to look at it by the Government.

I have a couple of questions to finish off this evidence session. You talked about the fiscal sustainability documents and climate change plans. I would have thought that the Scottish Government would feed in the work that you have done when it is producing the fiscal sustainability document.

We also talked about the deadlines regarding the publication of the Scottish budget after the UK budget. I was quite interested in the deadlines in the letter of 24 March that Michael Marra referred. They seem to me to be very tight. For example, the deadline for the Scottish Government to provide the commission with information on policies is 4 pm on the following dates. Round 1 is Monday 31 March. The deadline for the Scottish Fiscal Commission to provide forecasts for that round, which is on Scottish income tax, is midday on Friday 4 April.

All the rounds—“round 1”, “round 2”, “round 3” and “final forecasts and policy costings”—have very short lead times. For rounds 1, 2 and 3, the deadline is three days; for the final forecasts, it is a couple of weeks. How are you able to produce comprehensive responses in that time?

We talked about four weeks being the optimum time to respond after a budget. I know that this is not on the same scale, but you are given those figures and then expected to turn them around in 72 hours or less, which seems very tight.

We have a brilliant team that helps us to do it.

I am well aware of that.

You are right—it is a really intense period. We will maybe come on to talk about governance, but one of the big risks that we highlight in our corporate documents is that timelines are very tight, and absences or information technology issues can impact our ability to respond.

It is not as though the SFC and the Government sit around, then a starting gun is fired and we are away, because a lot of the work builds up to that point. One of the reasons for having a round 1 forecast is that it largely involves us updating our thinking from the previous few months. We update our projections and we get new data on tax, earnings and the economy or the latest news from Donald Trump. We put all that stuff into our first set of projections, which gives us a basis to move on. We also have a discussion with the Government before round 1, so that we are all on the same page about where our economy is heading. Similarly, we know that the Government will think about any policy changes that it wants to make well in advance of that process.

You are right—once we start, the period is quite intense, but we have done a lot of work before that. We very much hope that only marginal changes are made in that period. The Government might clarify a final policy change, and we might receive updated information from the UK—for example, we might put in information from the OBR into our forecast. We then walk through how those things change the scenarios.

So, you feel that this is deliverable.

Yes. It comes back to the point about the length of time that we have. The very short periods of time—three weeks in total—make it very difficult. More weeks would give us more resilience and time to do the work, but the point of the deadlines is that, if they are met, we commit to being able to deliver the forecast and support the budget process. If the deadlines are not met, that is where it becomes difficult.

A good example of that was the two-child limit issue last year, which we were informed about 10 working days after the deadline. We were told on a Thursday and the budget was on the Tuesday, so it was simply impossible for us to be able to turn things around and give you a document—

That seems to be a habit of Governments. We heard that the OBR has been in the same situation due to the lateness of figures for the spring statement, so it is clearly an issue that has to be addressed.

That is really important. We have independent fiscal institutions, and there are timelines and processes. It is really important that everybody sticks to those timelines and processes. It is important that we do so as well, because we are held to account.

You are held to account on your forecast.

Yes, exactly.

If you do not get that information, you cannot really be held to account.

It is really important. We do not want it to become a regular occurrence that Governments anywhere, of any colour, do not follow timelines.

I am interested to hear that you are to provide the final forecasts and policy costings by 12 May but the MTFS is not going to be published until 29 May. Why is there such a long lag of 17 days? It is almost as if you are compressed into doing your work over a few days but the Government then has more than a couple of weeks to put it all together.

There are a couple of reasons for that. Importantly, the MTFS gives the Government the opportunity to think about the longer-term and medium-term issues that we have talked about this morning. To give the Government a base from which to work, we need to finalise the Government’s funding envelope and social security forecast, and we need to give it a fair amount of time to work through quite difficult issues around how it can allocate its money over the next five years. The MTFS has a deliberate period, in which we deliver our final forecasts much earlier than we would for a budget.

Even once the forecasts are delivered, work is being done. At that point, we hope to see early drafts of the medium-term financial strategy and the fiscal sustainability delivery plan, and we will think about what we will say about the plans, the funding position and the reasonableness of the Government’s borrowing requirements. An awful lot of other work has to be done once we deliver the forecasts, but it is a very deliberate design feature that we give the final forecasts to the Government early in the MTFS process, as it means that it has time to process and think through the tricky issues that are involved in medium-term planning.

The protocol between us and the Government makes it very clear that the timeline for the MTFS forecast and the timeline for the budget are different.

Does zero-based budgeting have a role to play in the comprehensive spending review?

That is an interesting question. It will be interesting to see the Government’s approach to the comprehensive spending review. We want to avoid an approach that is high level, in which the Government essentially says, “This is what we have at the moment and, given the allocations at the UK level, this is how we think we will allocate over the next wee while.” We need a much more root-and-branch approach.

I was a Government civil servant in 2007, when the big comprehensive spending review took place—it really got into the detail and pushed areas such as what outcomes were being achieved. It comes back to Liz Smith’s point about the effectiveness of spend. If we spend money in an area, what outcomes are we are achieving, what are the key performance indicators, and what outcomes do we want to achieve in the future? Taking that approach is the most effective way to do it. It will be interesting to see what the Government sets out as its spending review approach.

Thank you very much for answering our questions. We will have a wee five-minute break and then reconvene for the next round.

10:56 Meeting suspended.  

11:03 On resuming—