Hansard

There will be a bit of a change of tone during my speech on behalf of the Finance and Constitution Committee, but I am sure that normality will resume once I sit down.

One of the strengths of the Parliament’s committee system is that it allows us, when we work collegiately, to tackle some of the more complex challenges that we face as parliamentarians. I sincerely believe that the committee’s report on the draft budget is a good example of that approach. I am delighted that my colleagues on the committee have once again put our political differences to one side and produced a unanimous report, which is a bit of a contrast to today’s debate.

That approach is significant, because it allows us to work together in grappling with some of the challenging and complex issues that arise from the operation of the fiscal framework. As colleagues are aware, the operation of the fiscal framework is now an important element in determining how much money is available to the Scottish Government. Colleagues will be equally aware that the framework is a challenge to comprehend. In our report, we have therefore sought to provide some clarity and greater transparency on how the framework works. With some foreboding, I will try to do the same now, if colleagues will bear with me.

As a starting point, I point out that the budget is now subject to greater volatility and uncertainty as a result of the increased dependence on the performance of the Scottish economy. That is because of the obvious strong correlation between economic growth and growth in income tax revenues. Under the fiscal framework, the size of the Scottish budget will be dependent on the relative growth rate of tax revenues in Scotland compared to the growth rate in the rest of the United Kingdom. The block grant is now adjusted to reflect the annual growth in revenues per capita in the rest of the UK for the taxes that have been devolved to Scotland. If those tax revenues in the UK continue to grow, the reduction in our block grant will also grow. That means that we need at least a similar level of growth in revenues per capita from the Scottish taxes in order to protect the Scottish Government’s budget.

That is complex enough, but it is further complicated by the budget’s dependence on two sets of independent forecasts: first, the forecasts that are carried out by the Scottish Fiscal Commission for the devolved taxes; and, secondly, the forecasts carried out by the Office for Budget Responsibility for the equivalent taxes in the rest of the UK. The SFC forecasts determine how much tax revenues are available to the Scottish Government in deciding its spending proposals in its draft budget, and the OBR forecasts inform the size of the adjustments to the block grant.

Critically, as we highlight in our report, that means that the budget is subject to a degree of risk arising from forecast error. To some extent, the risk is lessened if there is a similar level of forecast error by both the SFC and the OBR, so if both forecasting bodies turn out to have been overly optimistic or unduly pessimistic, the net impact on the budget will be minimal. A bigger risk occurs if there is significant variation in any forecast error between the two bodies. For example, if the OBR turns out to be pessimistic about tax revenues in the UK while the SFC turns out to have been more optimistic about the Scottish taxes than reality, the risk to the public sector increases. Of course, if the opposite were to transpire, the public finances of Scotland could be boosted by an unexpected bonus. As you can see, Presiding Officer, it is all pretty simple.

It is important to recognise that that is not intended to be a criticism of either the Scottish Fiscal Commission or the Office for Budget Responsibility. Rather, I simply highlight the critical point that the budget is now significantly dependent on forecasts and that it is inevitable that, to some extent, those forecasts will be incorrect in the future, because forecasts often are. Recognising that, the fiscal framework therefore provides the Scottish Government with the power to borrow up to £300 million annually to address forecast error, within an overall statutory limit of £1.75 billion.

One key issue that the committee is keen to understand more clearly is the relationship between economic growth and tax revenue growth. Robert Chote, the chairman of the OBR, told us that weaker gross domestic product growth means weaker growth in all major tax bases. However, despite relatively pessimistic GDP growth forecasts, the SFC is forecasting that income tax revenues per capita will grow at the same rate in Scotland as in the rest of the United Kingdom. Some of that may be explained by higher employment and wage growth, but the committee has asked the SFC to explain in more detail how it arrived at its conclusion.

We are now entering a new period of devolution, in which our Parliament is responsible for raising much of the revenue that funds our public services. That requires us all to rise to the challenge of using the new powers wisely and of managing the inevitable risks with a pragmatic and reasonable approach. Our report on the draft budget is intended to support that process.

Moving forward, the helpful recommendations of the budget process review group, which we fully support, will further enhance effective budget scrutiny in future years. We welcome the commitment from the cabinet secretary to fully implement the recommendations. The changes to the draft budget that have been implemented to date have already improved the transparency of the process, but there is still much work to do in delivering a more effective budget process in response to the increased complexity of fiscal devolution. That will require the support of colleagues across the chamber, and that is why the committee has asked the Scottish Parliamentary Corporate Body to look at what additional support can be provided to members.

There is also clearly a need for the Parliament and the Government to take a longer-term view of the public finances, and the introduction of the Government’s medium-term financial strategy this spring should start to provide that. The Scottish Government will also set out its broad financial plans for the next five years following the UK Government’s spring financial settlement. That should assist the Parliament in adopting a longer-term outlook, including addressing fiscal constraints and the impact of increased demand. In due course, the committee will provide revised guidelines to subject committees on how the new budget process will work, prior to the publication of the medium-term financial strategy.

I appreciate that none of that is easy and that understanding the complexities will require a significant degree of effort from us all. As highlighted by the review group, cultural change will be required, as well as procedural change. It is a challenge, but I am confident that we can rise to it to ensure effective scrutiny of an increasingly complex budget process.