 I welcome everyone to this, the 29th meeting of the Public Audit Committee in 2022. The first item on our agenda is to agree to take agenda items 3 and 4 in private. Are we all agreed? We are agreed. Thank you very much. The principal item on our agenda this morning is to consider a recent Audit Scotland report into Scotland's public finances, challenges and risks. I welcome our witnesses this morning Fiona Diggle, who is a manager at Audit Scotland, Richard Robinson, who is a senior manager at Audit Scotland and the Auditor General. You are very welcome. I would also like to welcome Liz Smith, who joins the committee this morning for this part of our agenda. We will all have a series of questions to put on the briefing. First of all, Audit General, I would like to invite you to make a short opening statement. Many thanks, convener. Good morning, committee. We have previously reported on the financial sustainability challenges facing the Scottish public sector. Those challenges have been worsened first by the Covid-19 pandemic and now by the cost of living crisis. We are seeing record inflation, high energy costs, falls to real earnings and higher operating costs for public bodies. The Scottish Government faces a combination of an inflation-diminished budget, increased costs and unresolved demands for higher public sector pay deals. It needs to carefully manage its financial position to avoid overspending in its 2022-23 budget. Overspending this year could be clawed back from next year's budget exacerbating existing pressures on public spending. The challenges facing the Scottish Government are set to continue into next year, and there are difficult choices, therefore, when setting the 2023-2024 budget, as there is limited financial flexibility available to the Scottish Government. It will therefore have to take the UK Government decisions on tax and spending into account. A balance must be struck between short-term necessities and longer-term priorities, and the Scottish Government may need to revisit its priorities should the economic and fiscal position worsen. Given the financial challenges facing the Scottish Government, my report highlights the need for the pace and scale of public sector reform to increase. Past attempts at reform have seen a gap between ambition and actual delivery. It is vital that future reforms are delivered effectively and with public engagement to deliver financial sustainability, future sustainable services that improve people's outcomes. As ever, my colleagues and I look forward to answering the committee's questions this morning. Thank you very much indeed, Auditor General, for setting the scene. We have quite a number of questions into the areas that you have already identified as being quite critical to the assessment that you have made. The first thing that I just wanted to ask you is about the timing of the briefing. Obviously, the briefing came out prior to the 17th of November Chancellor of the Exchequer's autumn statement, so I guess my first question is why produce it prior to that statement and why not produce it rather than produce it after the statement had been delivered. I think that the committee will recognise that there has been a huge amount of volatility in the fiscal environment over the past few months with notable changes in the timing of UK Government public fiscal events. We plan our work many months in advance and look to capture as many of the relevant events as possible. When we set our publication date for the paper, there was a degree of coincidence that it coincided with the latest UK Government fiscal event. It will not be the last statement that we make on fiscal matters and we will capture that as part of our rolling programme, looking at the fiscal sustainability of the Scottish Government as part of our programme into next year. I turn to the autumn statement now and perhaps ask you if you have a view on what difference do you think the key points made by the Chancellor and the autumn statement make to any conclusions that you have made in the briefing that we are considering this morning? It is perhaps difficult to draw definitive conclusions yet. We have seen as part of the autumn statement—I will bring colleagues in a moment with some of the additional detail as they wish—that the challenges facing the Scottish Government will continue to exist alongside the impact of the autumn statement. The Scottish Government still has to resolve many of the pressures on public sector pay deals. It will still be facing significant challenges around energy costs. The cost of living through the inflation rates will have a significant bearing on what it means for the Government's purchasing power and its obligations. We touched on the paper, for example, about the Government's requirement to reference inflation rates alongside the uprating of social security benefits that will still have an impact on its budget for next year. In terms of a couple of specifics, the Chancellor made reference to £1.5 billion of Barnett consequentials in his autumn statement. We are looking for the detail of that, as I am sure the Government and some of the economic interests and advisers, too. It is difficult to be definitive yet convener about what that means for what that flows through to the Scottish Government's own budget. If I may, I will pause for a minute and just to check with colleagues if there is anything that they wish to add. The first point to make is that the contents of the budget do not change the challenges that are in the paper. The challenges remain. What it does do is give it a little bit more of a context about the environment into which the Scottish budget will be set on the 15th. A couple of things. The Auditor General touched on spending. What we have seen from the UK autumn statement is what the Scottish Parliament Information Centre recently described as a bit of a game of two halves when it comes to spending growth. There is £1.5 billion, which will come through Barnett consequentials expected over the next couple of years, before a tailoring goff effectively of the increases thereafter. What that means is that there are more Barnett consequentials coming through. As the Scottish Government has already mentioned in the paper, there is also the inflationary effect of the buying power of that money to bear in mind. The second brief point to make is just around income and funding. As you know, there are devolved taxis now. They are the largest rich of Scottish income tax. There have been some changes of later at the UK level, which the Scottish Government will have to decide how to respond to because that will affect the overall size of the budget envelope. I mean, can we look at the Barnett consequentials element of this? I think that you make the point in the briefing that if there is additional help that the Scottish Government or the Scottish Parliament wishes to allocate to alleviate the cost of living crisis, it will need to find it from its own resource rather than necessarily or even at all relying on Barnett consequentials. Can you perhaps elaborate that a little bit more? I'll be happy to start on that. Richard might wish to say a bit more about the nature of the flow of Barnett consequentials and if the committee would find that helpful how that operates. Are you essentially right, convener, on your description that the decisions that the Scottish Parliament has made, and that they choose to make additional spending, as they have done so in a briefing paper, refer to some operations that the Scottish Government has chosen to do such as cost of living support, some additional energy efficiency matters, references to bridging payments for young people in receipt of free school meal arrangements, are some of the decisions that the Scottish Government can take themselves. But you're right, that has a bearing and has to be funded from their own budget. For spending matters that the UK Government take, if that's on devolved matters, there is a flow of funds, but what that might not mean is that it's clear. As we touched on in our earlier answer, we're still waiting for the detail of the £1.5 billion and what that will specifically mean for both next year's budget and the year after. However, I'll stop actually and Richard can come in with some more detail just to elaborate as he wishes. Just briefly, I think that Barnett consequentials and the block grant remains a key part of the Scottish Government budget. One of the points is here, I suppose, and maybe a good way is to contrast it to Covid-19 and the Covid-19 finances that we brought reports to you. Many of the areas of spending in reaction to the crisis were in devolved areas, which meant that there were in the air flows of Barnett consequentials through four areas, such as health and being a predominant one, elements of education, etc. As we point out in the report, the response is so far to date for the cost crisis that the UK Government has been in reserved areas, which means that there's no necessary flow to the Scottish budget, even though it applies to people in Scotland such as the energy support and relief. One of the issues around that, the extent to which the Scottish Government must manage its in-year position from the resources that it has available from its existing funding. We saw within the Covid-19 that there were elements where fresh funding effectively was coming through and that was able to be deployed to new events. Within the cost crisis to date, what the Scottish Government must do is manage its in-year position very closely, given that there may not be the same type of flow of in-year Barnett consequentials that we've had in recent years. If I go back and look at the report that you published on Covid-19 spending, I can't remember the figures off the top of my head, but a very high proportion of additional spending that was available to the Scottish Government was a result of Barnett consequentials, wasn't it? If you and I may have the numbers to hand, if we don't, we'll certainly come back in writing, but the relative scale of Covid funding that came to Scotland, the vast majority, was as a result of Barnett consequentials. The Scottish Government reprofiled some of its own spending, where it knew that, as a result of changes in the public spending pattern's demand, that there wasn't going to be the same demand. We've talked previously with the committee examples such as bus travel was one of the and support for operators was one of the under-subscribed funds that was reprofiled, but in totality it was a very small percentage of the overall funding, most of which came from Barnett consequentials. Okay, thank you. I'm going to move things on now and invite Colin Beattie to ask some questions. The question of public sector wages is obviously a big issue at the moment, there's many demands out there and some have been met and settled, others we have no idea what the end result is going to be, but what is clear is that inflation has wiped something like £1.9 billion in purchasing power off the Scottish Government's budget. Even if all the Barnett consequentials come through and are available to the Scottish Government, it's barely going to offset that. So it seems to me logical that somewhere money is going to have to be found to meet these wage demands, either in part or full, and there's only two ways to do that. Either we cut the budget net in different places or taxes go up. That seems to be fairly starkly the two options that are available, because, as you say, the Scottish Government's got the balances budget, it doesn't have any leeway in that. As I also said, the tax base is shrinking because, obviously, people will have less disposable income because of the increased energy costs and the cost of living crisis. Therefore, there will be less that spent because people won't be out doing the purchases and so on that they would in normal times. For the UK, of course, the corporate taxes will go down as well, so there will be pressure on them too. Within that, the wages are about £22 billion across the public sector. Funding for those deals will have to come out of the 2022-23 budget. What are the implications of that, including for budgets in future years? Your briefing here is basically a red flag to remind everybody of the pressures that are coming through and to make sure that they are met. What do you think the implications are in the future years? You described the context, as we set out in the paper, absolutely, Mr Beattie, that unresolved public sector paydeals, and, just to add on alongside that, the significant growth in energy costs are both unresolved. We know that the energy costs have anticipated to rise further into early 2023 and that there are, as yet, industrial disputes discussions around public sector pay. If those are resolved this financial year, they will have to be met from public funds that are within the 2022-23 budget. In the expectation, as is typically the case, pay awards are consolidated, so there is not a one-off pay award to see public workers through the current year. They are then added to the baseline that is applied into the next financial year, so that will all have to be factored into the Scottish Government's 23-24 budget setting arrangements for next year. To agree again, the context that you described about the choices that the Government will have to make next year, public expenditure pressures, demands will be met through taxation arrangements or through finding efficiencies in existing public spending. As we set out in the paper, there are flexibilities. Any Government can make different choices into the medium and longer term. It is much harder to do that in the short term, so finding the levers that the Government will want to will be much harder. That is effectively what we look to set out in the paper, both that there are in-year financial pressures. As we look to be quite clear that, perhaps for the first time since devolution, the Scottish Government faces a real risk of overspending against its budget and that some of the spending choices available as the Parliament will consider the budget in the next couple of weeks and months beyond, there is going to be a very difficult fiscal environment in 23-24. I think that everybody would agree about the difficult fiscal environment. At this point, there is no reason to believe and tell me if you think otherwise that the Scottish Government is not going to have a balanced budget. The budget has been balanced every year since 1999, so there is no reason to think that they won't take steps. However unpleasant, they have no choice. They have to balance that budget. It is not a choice, it is not an option for them and there is no reason to think that they won't do that. The purpose of our paper was to highlight that this is a very real risk rather than to say that there is no expectation. There is a risk that that would be the case this year. That is not to say that the Government is not taking action. Again, as the paper touched on, I will bring Fiona in a moment just to say some of the steps that the Government is taking this year. Totality has identified £1.2 billion of spending through the emergency budget review just to see what levers are available to the Scottish Government in year. However, what that does not do is address, as you started with, that there are still very significant unresolved costs facing the Scottish Government in terms of public sector pay. Yes, of course, the energy costs, given the volatility that is happening in the wider world. I am going to pause Mr Beattie and bring Fiona in just to say a bit more for the committee's interests and some of the levers that the Government has used already. Yes, that is right. The Scottish Government has been developing its strategy for financial sustainability over the past year. The work is aiming to better understand the fiscal risks across the whole of the Scottish Government and to improve the data that is available to them. For that to work, it will be important that it is transparently showing to improve the scrutiny of the financial position and highlight those risks as early as possible. Exhibit 1 in your briefing states that councils currently spend around £86 million on food each year, mainly for school meals and in care settings. It is estimated that food costs are going to increase by 5 per cent over the next two years. Where did that figure come from? Given what we are seeing in the press, it seems a bit unlikely that it is only going to be 5 per cent. Fiona, do you have the detail on that? Absolutely. Those figures came from response to the Finance and Public Administration committee's consultation over the summer from COSLA and SOLIS and SIPFA. However, as you say, those figures are a very fast-moving environment and those figures may have changed since then. Already we understand that there is a joint letter from COSLA, SOLIS, SIPFA and the Finance and Public Administration committee, saying that money no longer reflects the actual cost of delivery. We have heard about the challenges that children living in poverty already have. We know that there is a huge percentage that go to bed hungry every night and 25 per cent are thereabouts. School meals, as such, are vitally important for those who fall into that category. What priorities are being given to ensuring that the level of funding stays sufficient in this area, given what we have said about 5 per cent over the next two years, which sounds a bit light, but also about the fact that already they are saying that the money does not really cover it? I am happy to start again and bring colleagues in again, as they wish. I think that the point about 5 per cent is that it is probably illustrative of the real volatility of change in costs. Even going back to when the Scottish Government set its budget for this financial year, you had an inflation assumption of around 3.5 per cent. I think that is the figure that we refer to in the paper. With CPI and double digits, CPI is higher. The differential rates of inflation exist. The point that you make is absolutely right, Mr Beattie, that for some families, as well as public bodies, is that we are not all experiencing the same inflation rates. If you are on a low income and most of your budget is spent on energy or food, you will be experiencing additional hardship. Therefore, matters all the more that public bodies are able to do all they can to support and prioritise the point that you make to help to mitigate that. We have touched on already this morning some of the steps that the Scottish Government has taken in terms of bridging payments for free school meals, alongside initiatives that are going on in parts of the country about using public buildings as a place of warmth for people. It is also important to highlight, as I touched on in the paper, last month the implementation of the extension of the Scottish child payment as one of the measures to help to mitigate some of the effects of the cost of living crisis. Ultimately, it will be about prioritisation, both for central Government bodies and for local authorities in Scotland, to decide what they can do. However, it probably speaks to the wider point that, although many of the costs are fixed and certainly for central Government bodies in Scotland, they do not have access to borrowing arrangements that Scottish local authorities may use, but setting aside the rights or wrongs of borrowing for revenue purposes, as that will ultimately come down to really steep prioritisation for both the Scottish Government and local authorities about what steps they can and choose to make to offset some of the real cost of living challenges. Clearly, you touched on the fact that both the Government and councils will be looking to provide some sort of safety net for those who are most vulnerable and most going to be impacted by what is happening around about us. Just to broaden out from the question of school meals, your briefing talks about the costs of supporting people through the crisis and that that has increased. You say that social security spending is a key channel in which the Scottish Government uses to provide support to individuals and that, in 2022-23, it accounted for around 10 per cent of the budget. There is new support being given by the Scottish Government, as you also touched on. Obviously, there are going to be more costs attributed to that. Are you able to give a little more information on that, how you see that developing? Obviously, the anxiety is that, having such a tight and fixed budget that must always be balanced, the inability to borrow and the fact that we are reliant on private sector taxes to support the whole public sector and the whole of this effort here, how does it come together? How is that support and the costs related to that being handled? Thanks, Mr Beattie. I will bring Fiona in a second just to talk the committee through some of our current understanding. It is something of a caveat to many of our response. I think that you heard a number of times already this morning that forecasts whether inflation or public spending are changing so quickly, given the volatility of the environment that we are in. We expect updated forecasts from the Scottish Fish School Commission to support the Scottish budget later this month. The most up to date numbers, though, are set out on social security spending at Paragraph 20 of the paper that sets out that. In the next two financial years, there will be an extra £369 million of public spending required to support additional social security costs. Alongside that, the Scottish Government through the Social Security Act is required to have reference to the current rates of inflation when setting social security rates for future. The scale of change that is already anticipated likely to be updated further from the Fiscal Commission's forecast, alongside inflation running at double digits. The 10 per cent that social security spending already consumes of the overall Scottish budget remains a possibility that that will require to increase. As you rightly said, it does not do away from the fact that the overall budget has to be balanced and, therefore, it disappoints again that the Scottish Government will have to make very clear prioritisation, whether it is spending or taxes, to set that balanced budget in future years. I will stop again if you want to, if there are any wishes there. When the paper published, as we mentioned, we did not know what would come in the autumn statement and what the UK Government's intentions were regarding upraising benefits. We now know that it intends to in line with inflation for working-age benefits, and that will, as we understand it, flow through to the block grant adjustments for those larger benefits that were devolved. For the newer benefits, such as Scottish Shell payment, that is entirely funded from the Scottish budget and no additional funding is provided through the block grant adjustments. We will have to be covered by funding from the Scottish budget. We will know more about the Scottish Government's intentions for upraising benefits when it publishes its paper on this, which I think should be later this month, and when the Scottish Fiscal Commission published its updated forecast alongside the budget in December. Okay, thank you very much. Early on in the paper, you quote the Scottish Government's assessment that it faces significant financial challenges. Sharon Dowie has a series of questions that address that. Page 9 of the briefing states that, without very close management of the budget, there is a real risk that the Scottish Government overspends against its 2022-23 budget. Paragraph 24 states that, early in 2022-23, the Scottish Government was forecasting a significant budget gap for the financial year, which was larger than could be managed through its usual budget processes. Paragraph 25 goes on. The Scottish Government has recognised that the financial situation it faces is by far the most challenging since devolution and the potential consequences and how that would take shape or unclear at this stage. Can you share your views on what the potential consequences could be and to what extent the Scottish Government might be preparing for this outcome? The very real consequences that, for the first time since devolution, the Scottish Government may overspend against its budget. That event has not happened before, and it requires a bit of thinking. What does that actually mean? In broad terms, overspends will be clawed back against next year's budget. There is also some reputational risk for the Scottish budget about overspending, given that the budget is fixed and up and down has been managed against those fixed requirements. It is fair to say that some of the events that have followed since the Government's recognition of the significant risk that overspending posed will have gone some way to mitigate that risk. We have touched on that already. As we set out in a bit more detail at Exhibit 2 just over the page about some of the planned budget changes that the Government has set about to offset parts of that risk, in spite of that, I do not think that we can sit here in December with, still in best part of, four months of the financial year remaining that we can say that that risk is entirely mitigated, given the scale of volatility of energy prices, unresolved public sector paydeals and the rates of inflation that are far, far higher than when the Government's budget was first set at the start of 2022-23. It is safe to summarize that steps have been taken, but it does not do away with the remaining risk. What scope might there be for the Scottish Government to identify further savings or reprioritisation of budgets to achieve a balanced budget for 2022-23? We can answer that up to a point. Maybe the Government is better placed to share with the committee about some of its additional options and thinking. That has identified £1.2 billion already. Some of those are quite hard choices in prioritisation for the Government, but they are in areas of significant policy and parliamentary interests, such as employability schemes, mental health support and so forth. Given the indication that many of the easy choices have already been made, some of the difficult ones have already been made, but the levers that are available to the Government become harder to exercise, given that most of the budget is already fixed. We have already touched today about the extent to which the budget is staff costs-related. The Government has committed to a no compulsory redundancy policy. Alongside that, it has unresolved public sector pay deals. There is work still to be done to secure financial balance in the current financial year, recognising that some significant steps have already been taken. Paragraph 29, bullet point 5. The briefing states that reductions in spending include £53 million in funding for employability schemes, and that £38 million of mental health spending has been reprioritised to support the NHS pay offer. How the £53 million reduction in employability schemes is likely to impact on achieving targets for tackling child poverty, and whether your future work in adult mental health will consider the extent to which the services have been impacted by the £38 million spending that has been reprioritised? We are in the midst of our work on our audit of adult mental health services. In Scotland, we will be publishing that during 2023. As with all of our audits, we will consider the funding environment and the budget available to it. Whether it specifically gets into the changes that £38 million have made in totality against the overall budget, and perhaps not be able to be definitive about that this morning, but certainly we will be looking at the budget and the outcomes achieved from that budget for adult mental health services in Scotland, and we will be bringing that to the committee next year. In terms of employability schemes, colleagues can maybe say a wee bit more, but certainly our understanding is that in identifying that as a potential budget saving, the Government was able to attribute the employment rates in Scotland and anticipated demand for employability schemes as being a factor and then able to offer that up as a saving. Whether that is going to be a consolidated saving and if there are anticipated changes in employment rates, especially as we are in a recession, I am going to be moving into a recession, that is likely to bring further changes in employment rates in the country, so the availability of those schemes will be important that the Government weighs that up. You are right, Deputy Convener. We have been doing work on child poverty arrangements in Scotland. What we have not yet done in the most recent briefing paper was to attribute employability arrangements and what impact that would have. What we did is to signal our intent to carry out further audit work on child poverty arrangements, and the availability of employment is a key factor in terms of household income and lifting families out of poverty. It is firmly on our radar for future activity. Again, I will pause and check with colleagues again if they wish to add. One of the points that we are making in the paper is about the financial consequences to making decisions and the consequences for people to be considered. One of the points that we are making in the paper is about why those difficult decisions might need to be made and, while they may have some impact on certain groups more than others, is the extent to which people are consulted and aware of the impact of those, and the extent to which the Scottish Government can demonstrate how it can mitigate it where it can or what the consequences are in a transparent way. One of the things that the paper is bringing through is that sense of a need for reform over that medium-term picture. It is not just about whether or not the Scottish Government budget comes in on its budget this year. If it did and it was borrowing off the next year, then there is the cumulative impact for then you have got a smaller budget for next year. One of the points is about demonstrating that need for reform to keep to the medium-term RSR. In paragraph 72 to 74, we are talking a little bit about what the Scottish Government is doing around that, which includes the public spending portfolio board, which has been set up to consider how those reforms can come together to ensure the flow of that RSR. This is a critical area to make sure that that medium-term position continues to be considered alongside that need for reform in the public sector. I need to refer members to my register of interests, but I wanted to ask a little bit more about wages and salaries because it is part of your public sector reform agenda and you have alluded to it a couple of times this morning already. Economists often look at wages and salaries as a percentage of overall GDP in the economy as a whole. Have you looked at wages and salaries as a percentage of public expenditure in Scotland over the past decade? Is it going up? Is it going down? Is it about the same? If you are not able to supply that immediately, if you could follow that, that would be of great interest, I think, in order to general. Thank you, convener. I am very happy to come back to the committee with additional detail that we have. By coincidence, convener, we were having a similar conversation with colleagues earlier this week. It is 10 years now since Audit Scotland published a report on Scotland's public sector workforce. Given the intended prioritisation that Richard mentioned about the Government's resource spending review, it feels timely for us to revisit some of that work. We are thinking carefully about how and when we best report on Scotland's public sector workforce, given the changes that have happened in the intervening period. You might be surprised to hear me say this, convener, but getting access to high-quality data is often a challenge in making some of the overall judgments that we want to do so. One of the things that we want to consider carefully is that, although we will have statistics and numbers about the percentage of Scotland's public sector workforce, those that deliver services on behalf of the public through public funding is typically far higher than that. As in funding through grant, it will go to voluntary organisations and third sector providers that are just as crucial in delivering public services but will not necessarily be captured in some of the statistics. We are going to think carefully how to scope that work and, given how important it will be for public spending and some of the reforms that will be necessary in the future, we can come back to the committee and write and keep you informed of our thinking on that. That would be great. You are well versed in dealing with complicated matters and giving us succinct reports. Willie Coffey wants to come in. I wonder if I could draw your attention to Paragraph 13, 14 and 15 in your report. Your opening remarks describe the budget as an inflation diminished one, and I wonder if you are able to put a figure on that. The First Minister put a figure on it that you have mentioned in Paragraph 14 of £1.7 billion. Are you broadly in agreement with that firstly at the outset? We quote the First Minister, as you say, Mr Coffey, in the paper of £1.7 billion less public spending or purchasing power, effectively as a consequence of some of the really volatile inflation rates that we have all seen over the past year or so. I repeat some of the comments of earlier that that is not universally felt. For some families, we will be experiencing a far higher rate of inflation than others and, similarly, public bodies. In terms of the scale of change, 3.5 per cent of some of the inflation assumptions when the Scottish budget was set for 2020-23, current inflation rates are more recent, more than 11 per cent for CPI, and it will be slightly higher for RPI. That forecast is anticipated to remain for a while yet as we move into 2023. All of that points to the Government's budget is buying less than it was when it was anticipated, and those challenges will remain into 2023-24. I look directly at your comments in paragraph 15 of the general that sets out there that the comprehensive spending review was projecting a 3.3 per cent real-terms growth in budgets that is now expected to be 1.9. Is that a further expectation of a, well, a diminishment, as you put it, of the budget? That is on top of that, isn't it? Is it estimated what the value of that might be? I am not sure if I have the detail of that to hand. It is something that we may need to come back to the committee in writing with Mr Coffey. It is certainly another example of the fiscal environment being incredibly challenging both in the current year and as we are moving into next year, that public funds, as they currently exist in their current spending plans, will at risk of doing less than they were intended to do so when the budget was originally set? It is interesting to get a flavour, convener, of whether the inflation element plus this diminished spending review percentage is going to be much less than was forecast added together and then compared with the one that was mentioned earlier of £1.5 billion. Where do we end up at? Do we have any idea what we are looking at in totality about the impact on the Scottish budget? You will certainly have a better idea in the next couple of weeks when the Scottish Government presents its draft budget to Parliament. I am conscious that I am using the word volatility a lot this morning, Mr Coffey. It is so unprecedented the circumstances that the Scottish budget is facing, the risk of overspending in the current year along with the fiscal impact of what that means for next year's budget. You will know more in the next couple of weeks, and you will have updated forecasts from the Scottish Fiscal Commission that will inform through their forecasts what the Scottish Government is able to do to set its budget for next year. Whatever policy choices that the Government looks to make around taxation and spending as it sets its priorities for 2023-24. I will turn to Exhibit 2 that you mentioned earlier. There is a clarification on that part of that. If I may, there is an orange section there that shows £193 million, an increased income. There is no detail that I can see surrounding that. I just wanted to ask you what that is and where it has come from. Fionna is going to talk to you through that. One of the bullets at paragraph 29 gives a little bit of additional income about some of the receipts that the Government has had from the Scotland wind clearance process and other factors, but Fionna can say more. That is right. In September, the Scottish Government announced some additional Barnett consequentials. There is £82 million there, but additional income was applied from the Scotland process. Since then, there have also been smaller additional receipts from capital projects. It clarifies that. It is a small drop in the ocean, but we are looking for any possible good news in any of this briefing at all. I wonder if I could move on to ask you generally about the fiscal framework. Leave, as you mentioned, and report as well, Lord Arthur General. Those circumstances were not designed for this scenario. They were meant to adjust volatility here and there. What should the impression of the fiscal framework levers be adequate to cover the situation that we find ourselves in? Should there be a revision, a review or a reconsideration of what those levers should do? I am happy to start. I will ask Richard to say a bit more about some of the fiscal framework arrangements. There are a couple of things from me, Mr Coffey. One is that it is fair to say that the fiscal framework was not designed to cope with the level of change that the fiscal environment is having upon Scotland's budget. To all intents and purposes, it was allowed to cope with annual volatility in terms of tax receipts, limited borrowing powers to cope with some of those changes in the Scottish Government's spending plans, not as we are currently seeing somewhat uncontrolled energy costs, inflation of double digits and so forth. My role is not one to comment upon policy choices. It is for negotiations that are currently in place between the Scottish Government and the UK Government to determine what any changes to the fiscal framework would look like and if there are any success to that. Of course, Scotland will be keeping a close track of that and what the implications might be for future fiscal sustainability arrangements. I think that it is perfectly fair to say that the framework as it currently stands was not designed for the environment that we are currently operating in. Briefly, the devolution of certain taxes in borrowing, etc. alongside the extension of devolution into social security brought with it a whole host of new complications and nuances to manage in the budget during the year. I touch on social security that we have already touched on. It is how the Scottish Government can manage that demand against its policy choices. On taxes, there are decisions that the Scottish Government will have to make about the relative performance of the Scottish income tax and its policies against the UK base, so it is obviously affected by that. Those things are within their gift, but difficult decisions will be complex to see how they work through. We will see how it works with the Scottish budget and the SFC forecasts. Another complication is that we touched on the CSR earlier. Our understanding is that there is not currently attention at the UK Government to come back and do another CSR. For the Scottish Government, managing that medium-term financial position against what is in place is really important. What also would matter is the way in which any additional spending get to the UK Government is funded. If it was funded from a new borrowing at the UK Government level, then that could generate an additional benefit for the Scottish Government to employ. Having said that, if the UK Government increases spending in one area by decreasing getting another, that will not come through to the Scottish Government as a Barnett consequential. What the fiscal framework does with the additional powers that it brings, it also brings the complications attached to that, which is why monitoring the budget and the medium-term position is so important. Lastly, convener, you mentioned a number of possible levers that might provide us with some sort of flexibility. You have talked about use or other ways of reserves in your paper, you have talked about capital borrowing powers, and you have even mentioned flexibility around ring-fence funding and so on. Could you just give us a little flavour of whether those can realistically be deployed, varied or otherwise, to help us through the situation that we are currently in? I am delighted to do that. I will bring a few more in a second with a bit more detail. All those levers are being used currently to support the Government's attempts to deliver financial balance in the current financial year. Paragraph 39 to the report has confirmed the Government's attempts to use reserves this year to support financial balance. In terms of some of the wider public sector flexibilities that have existed, the Scottish Government and its partners in the local government have used some additional flexibility for some of the reserves in local government bodies such as councils and integration joint boards, health and social care authorities, to access some of those reserves to support public sector pay arrangements in local government. Those flexibilities are important in the year, but you can only use them once. That is the issue that does not necessarily provide a template for addressing the financial challenges in the following financial year. Richard rightly mentioned it already, Mr Coffey, but it led us to the point in future part of this paper about securing the financial balance in health of public sector finances and service delivery that is more of a focus on what reform might look like, which will ultimately be the most important lever that the Government will have to deliver high-quality, fiscally-sustainable public services. The deployment of those levers is no way that they are sufficient to get to where we want to be. They are helpful, but they are in no way sufficient to overcome the difficulties that are already in the year. I think that the issue is that they will help us to overcome once, if they are sufficient in their scale to do so. Given that we already have some unresolved public sector pay arrangements, once you have used it, that might not be a source to go back to, but it will not address some of the very significant challenges and resultant prioritisation that local and central Government will have to take to secure high-quality services and fiscal balance. As a supplement to that line of questioning, Craig Hoy's got a question in this area. Good morning, Mr Ball. To take up the point in relation to local Government flexibilities and ring ffencing, when the UK Government hands the consequentials to the Scottish Government, it comes with no strings attached and very little in the way of a hypothetical other than some elements in relation to national insurance contributions. However, when that money flows to councils, it is that there is a significant degree of ring fencing. The flexibility that you have identified in the year this year, given that the cost of living crisis and the pressures that we see are likely to last into next year and possibly the following year, would we expect to see greater flexibility being given to councils in relation to their budgets? Is that something that would be desirable at this point in time? I think that this would be a fundamental policy choice for central and local Government to agree through the flow of funds from central and local Government. We have commented in previous papers, particularly around Covid spending, for example, that some of the requirements on public bodies, local government and some others that were eased for public bodies to spend as they so fit to deliver services. As we have just touched on, some of the ring ffencing arrangements have also been reduced to access financial resources to support public sector paydeals. Whether that access is a template for how the fiscal relationship between central and local government in years to come will need to be an informed choice that both parties make. I understand what the implications of doing so are and not doing so be, because earmarking, in its purest sense, is designed to ensure that the money is spent for the specific policy intent. As you will know well, Mr Hoy, there have been swings about the extent to which local government budgets have been earmarked over time, but in doing so it restricts some of the wider choices and flexibility that might be required. The briefing states that the Scottish Government has requested that some funding that is currently allocated for Covid-19 in IGB reserves can now be used for wider Covid-19 purposes. Is it appropriate for the Scottish Government to seek to influence how integration authorities use their reserves? Are there any examples of the way in which that money is being used in other areas? I will bring colleagues in if there is anything that they wish to add. In terms of the appropriateness of it, this has been a matter of discussion between the Scottish Government and its local government partners, COSLA. I think that it is specifically exploring the possibility of whether this could be a source to support public sector paydeals and looking at the scale of challenge that existed in terms of meeting that requirement. I think that it is fair to explore whether monies that were originally intended for Covid monies were still required to be spent in that way. If that was deemed not to be the case, then using that money to address other fiscal pressures will have been the reason why they arrived at that point. Your point will effectively explore the opportunity cost. Does that mean that there has been a reduction in Covid service? Those choices will have to be weighed up really clearly and again in the future, if that is the case. I will bring colleagues in if there is any detail that we have about the use of that money beyond paydeals. I do not have any of the details. I think that one of the things that we bring through and probably part one of the paper most is that the sense that there are now multiple challenges that the public sector has to deal with all together. The pre-existing challenges in terms of financial sustainability are paired with what we have seen over Covid-19 and the recovery from that and the backlog are paired with the cost crisis. At the same time, the importance of maintaining that long-term view and that view of preventative measures, so the extent to which there are flexibilities within the system to manage those things together is a policy decision, but that is the context in which that is set. Can I just move things on in another area? You will not be surprised to learn that I was drawn very much, Auditor General, to paragraph 42, in which you spell out once again that there remains a need for a public consolidated account to provide a comprehensive and transparent assessment of the state of Scotland's public finances. That has been something of a mission of yours and the Public Audit Committee to try to get to. Can you perhaps let us know what progress, as you understand it, is being made in the attainment of that? Yes, convener. It has been a long-standing conversation between the committee, myself, my predecessor and the Scottish Government on the need for and the progress that the Government is making on that. I should say that my section 22 report on the Scottish Government's consolidated accounts for 2021-22 will be published later this afternoon when the Government lays its accounts. I go into quite a bit of detail on the progress that the Government is making therein, but without pre-empting that it is yet an unfulfilled delivery requirement, convener, and I can say more in the paper about some of the circumstances as to why that is the case. Its absence, though, is a barrier to informing Government, informing Parliament of some of the choices that will lead to better public sector reform. It does not have that complete picture totality of assets, liabilities that will lead to those better choices on reform. One of the risks—I am happy to go into more detail, as you wish—is that public sector reform will be done on a piecemeal basis rather than having a view across Scotland as to assets, liabilities. However, as yet, unfortunately, we do not have the complete public sector accounts that the committee and auditor generals have called for. Do you have any idea when that end point will be reached? Have you had any indication from the permanent secretary or any other part of government about where that lies? It is reasonable to say that there has been some progress this year. One of the barriers to it—I am happy to go into more detail in this when brief the committee soon on the section 22 report relates to challenges that, in the preparation of whole-of-government accounts across the UK, that has been delayed this year due to some technical issues within HM Treasury. It is not entirely at the feet of the Scottish Government that progress has been delayed. However, there are requirements to prioritise the convener. The greater scheme of things, people say, is another set of public accounts, but it will be a key information source to inform policy decisions in the years to come. We will continue to look for its completion as quickly as possible. Before we turn to some questions on public sector reform, which Craig Hoy has got, I want to interrogate a little bit the idea that, traditionally, there are certain parts of Government expenditure that are protected at a time when there is a retrenchment in finances and so on. We have had briefings in Parliament and statements in Parliament about the areas that the Government is prioritising, but I wondered whether, in the work that you have been doing in this area, you have detected any sense that, within those protected areas, there has been any movement or any shifting of resources between one protected area to another protected area or within a protected area, or indeed the protections that are being reviewed? We expect that you will see that very clearly through the next budget that will come to Parliament in the next two weeks, that there is a clear articulation of those priorities flowing through two budget lines. If I may reference perhaps the finance and public administration's recent report about those priorities, it also flowed to the national performance framework and the national outcomes that it is clear that budget spending and outcomes have a connection between those. You will know, convener, that we have not seen that clearly enough thus far. In order to support scrutiny and transparency of public spending, it matters that there is progress on those fronts. Government's priorities, as they set out in the resource spending review on tackling child poverty, climate change, a fairer and greener economy, and delivering excellent public services, are therefore noted and we expect to see that flow through. In terms of our own work, we have mentioned adult mental health already, we have further work planned on child poverty, but for the committee's interests we will also publish an audit on the Scottish Government's arrangements to manage its climate change ambitions that will be coming in the early part of 2023. Alongside spending, there will be scrutiny to support the committee's interests therein. I do want to bring Liz Smith in at some point, but I am going to turn next to Craig Coyne. I will perhaps bring Liz in after that. Craig. Paragraph 70 and 71 of the briefing were the two that drew media attention. In those, you state that, in the face of the financial challenges, the pace and scale of reform needs to increase and this will require a sense of urgency from the Scottish Government at a time when it is also pressing to resolve short-term issues facing the budget. You are going to say that if this does not happen, it will become increasingly difficult for the Scottish Government to manage the pressures on the budget, meaning that the cuts to spending necessary to balance the budget will become larger and the quality of public services delivered will worsen. Obviously, to try and move to that point, there has to be some radical action and that will obviously have to start relatively quickly in terms of the pace and the scale of public sector reform. You will have seen that there was a report of NHS managers discussing some quite radical potential solutions to the problems within the NHS that are potentially charging or scaling back on free prescriptions. Are you aware that all those discussions happening right throughout the public sector, has the Government charged the public sector with the opportunity to go and look radically at the basis on which public services are operating in Scotland? We have seen from Government statements, Mr Hoy, particularly referencing the resource spending review and statements from the Deputy First Minister, that reform is inevitable. The number of public bodies that we have, the way in which public sector services are delivered, through our own work, through those of my colleagues in the Accounts Commission, we have called regularly for the need for a co-ordinated programme of public sector reform. Myself and my predecessor have highlighted the unsustainability of health and social care arrangements in Scotland through regular reporting. I will be publishing my next NHS in Scotland report at the end of February 2023. All those factors point to the need for leaders, both political and officials, to do the kind of thinking that is going to deliver high-quality public sector services in the future that are sustainable in fiscal terms as well. All those steps are the type of conversations that ought to be happening. It is important—I think that the point to emphasise on me is that that is not just done on a traditional silo basis from one organisation to the next. Health leaders with local authorities and other public bodies need to have those rounded conversations about how services are going to be delivered, whether it is about their workforce, their estate, the provision of services, sharing of services. All those factors need to be taken into account so that this is a sustainable public sector services in future. Obviously, you referred to health and social care in general. The creation of the national care service is attracting significant attention in parliamentary terms and in the care sector here in Scotland. When we discussed this in the past, you said that you would not wait until after the event to provide commentary and critique of the national care service. I noted earlier that you said that there was going to be a balance between short-term necessities and longer-term priorities. Just looking at social care in Scotland at this moment in time and looking at what the Government has brought forward in relation to the national care service and the financial memorandum that accompanies the bill, do you think that the creation of a national care service is a short-term necessity or should it be put into the category of a longer-term priority and should we therefore be targeting resource towards the necessity of the crisis in care today? To refer to a paper that we published not that long ago on social care arrangements, it really speaks to the issues that you described, Mr Hoy, that we said that there is a short-term crisis facing social care arrangements in Scotland that cannot wait for the creation of a national care service to deliver a sustainable level of social care in Scotland. As ever, whether it is a national care service or other parts of public sector reform, there will always be a coherent and reasonable argument that says that now is not the time for public sector reform. We are dealing with some very significant challenges, whether it is a cost of living crisis that we are in, whether it is a pandemic, Britain's exit from the European Union or the fiscal crisis before that. I fear that it will always be the next crisis that says that we cannot do these things right now, but looking at the scale of public finances currently, if we do not make the kind of radical changes in thinking that we need to, we will be sitting having the same conversations three, five, ten years from now. Gardening against the risk, I think, to repeat if I may, that we do not just do this one body by the next by another that there is a co-ordinated attempt, leadership from the Government that says that this is our intent, this is what we will prioritise and there will have to be those kind of prioritisations. Last point, if I may, just to address the national care service, but we did write to the Finance and Public Administration Committee as part of their consideration of evidence in terms of the financial memorandum for the national care service, highlighting some of the risks that were clear to us about the scale of numbers set out, about what the national care service might cost, relative to some of the learning that we have seen from other progress on public sector reform. All of those things have to be taken into account both the short-term and the longer-term reform. Paragraph 72 of the briefing notes that the Scottish Government has set up a new public spending portfolio board and a public spending analytical unit to help to drive the required changes and reforms. Are you confident that those organisations will be effective or could they just further clutter what is already quite a crowded stage? I will ask Richard Cymru. He has mentioned it this morning, just to say a bit more detail on it. I think that it is rather insane if I am confident whether they will or will not be effective. I think that they have to be effective in order to support effective public sector sustainability and the reform that will need to be delivered to arrive at that point. That is the key point that Richard Cymru will elaborate on. It is not just that there is full transparency, collaboration and involvement of the public in those conversations about what public sector services will look like in the future. That matters and is done in a way that is open and accessible. I will bring Richard Cymru in to say a bit more about how that is intended to work. I think that, at a broad level and another point to refer back to Covid-19 and what happened over that with the relative nature of spending, one of the things that was coming through from Covid-19 changes was the need for a collaboration between leadership to work towards shared goals and the analytical support to enable them to make those good decisions. Having a public sector spending portfolio board that enables that within this context is reasonable in that sense. One of the things that we found with the Covid-19 was around some difficulties around data and the ability to see spending across portfolios. Again, as things have been prioritised in the current environment, being able to make those links between the elements of the budget and being able to see how they flow together is going to become increasingly important. It remains to be seen exactly what the work of the public spending analytical unit will be and will see over time as it develops, but having an analytical capacity to allow better joining up of data and spending across the public sector seems sensible. Just in relation to the issue about lessons learned from Covid, Covid pandemic precipitated quite a significant change in the way certain services were delivered drive-through testing and vaccinations greater use of digital. Are you picking up that those lessons learned and the capabilities that could bring to future public sector reform are being embraced within and across the public sector? It was a really strong feature of the pandemic that public bodies set aside some of the traditional decision making, some we call it bureaucracy, with which public spending activities were delivered. Public money was spent quickly where it was most needed. We have discussed with the committee on a number of occasions that, by and large in Scotland, that was done well. We did not see the level of fraud and error that has been reported in some of the other schemes elsewhere. Has that meant that that is how it currently operates? We have not done any specific work on following through that yet. There is always the risk that, as the pandemic has now eased, some of the traditional behaviours and ways of working that we saw before the pandemic come back to the four. Public bodies really have to guard against that and to grasp some of the innovation that we saw and embed that as part of their ways of working. Those are the types of behaviours that will result in better public services that will lead to some of the more preventative spend of the principles of Christy that we have spoken about on a number of occasions being embedded in doing better public services. We continue to monitor and report on some of the behaviours across all of our annual audit work and, if we always have the option, Mr Hoy, that has not been the case to highlight that through our own statutory reporting to the committee. Page 22 of the briefing states that the public should be fully involved in the key decisions about public services to change and are reformed. What evidence have you seen from the Scottish Government and other public bodies that they are engaging the public? Is there perhaps a risk in just looking and reflecting on the national care service, for example, that it is sometimes that there may be a difference of opinion between the public in terms of a stated public policy objective, the creation of a national care service and the actual deliverability and practical role out of that? For example, we had the minister today saying that the reason that we will press ahead with an NCS is that the public supports it, but when you have stakeholders, unions and the national health service and those involved in care saying that they do not support the model, is there a risk that sometimes public opinion and the reality on the ground may be divergent? That is a risk for implementation of any policy. There will always be those who support it and those who do not. What matters is that the public bodies, Government, national, local and elsewhere are seen to follow genuine, tried and tested where appropriate legislative engagement arrangements are followed through community empowerment legislation. I have been seen to take on views through consultation actively listening to those contributions. I don't think that we will do away from the fact that you are never going to please everybody through any extent of change, but that these are transparent. Ultimately, the public can see the nature of the change that is proposed and what it costs. That probably references back to the contribution that Audit Scotland and others have made in terms of the national care service, that the financial memorandum contains risks and that that is set out clearly so that the public can understand what that change in terms of service will be, but also what it is going to cost through to its establishment should that be where we get to. We have a few minutes left, so I will invite Liz Smith to put a couple of questions, if she has got some. Mr Boyle, you said in relation to the convener's first questions this morning that a very high percentage of the Barnett consequential spend in Scotland on Covid was something that was obviously very important in trying to get us through the pandemic. How easy is it to track where that Covid spend went and, secondly, are you aware of any unspent Covid money? I am happy to start, and I will bring it back to you in a second or two. The first thing is that we have published a number of reports and papers that set out that Scottish budget and financial reporting system was not designed to cope with a fiscal event such as the financial support for Covid. Financial reporting budget setting tends to be based around departmental budget lines. Covid spending covered all those budget lines, so there was a recognition through our reporting that there needs to be a gathering up of Covid spending. To an extent, as the pandemic evolved, aspects of that happened. That allowed a broader tracking of what Covid monies were spent. We are finalising some work around that through our reporting just to set out for the committee, for Parliament and public attention. Here is what our assessment has been of total Covid spending and we will be publishing that early into 2023. Overall, as we mentioned in the report, Ms Smith, some Covid monies, as at the end of 2021 and now 2022 financial years, will be held in reserves of local authorities or integration joint boards. During this financial year, some of that has been re-prioritised, no longer deemed necessary for the original intent and aspects of that used to support public sector paydeals. We hope to give as much clarity as possible on that through our reporting, but it probably illustrates the point where I started that the budget and financial reporting systems were not designed to cope with the pandemic or pan-spending style arrangement. It might just speak to the point that I mentioned this morning, and I have done so on a number of other occasions. Public budgeting and spending arrangements are quite rigid in terms of departmental arrangements. Encouragement for Government's financial reporting can deploy flexibility to better tease out public spending that links to events and, indeed, the national outcomes. That is a very helpful answer and it is good to hear that there is a paper coming in early 2023 about that. Is it your understanding that, for money that is held within councils in reserves or in IGBs, some of that money could be used to ease some of the financial pressures that councils are under just now? That is what we have seen through the reallocation of some of those monies to support public sector paydeals. That could help the budget in that angle. I think that I would add the caveat up to a point that I discussed with Mr Coffey earlier, that you can only use it once. In reality, the Covid aspect of those reserves is only like to be a pretty small part. Most of councils' reserves are earmarked for specific purposes before Covid. I have one more question. You mentioned in paragraph 35 quite rightly that the Scottish Government has got capital borrowing powers and that, although capital borrowing cannot be used to support resource spending, you say that there are certain types of capital spending that could be moved to resource spending. Can I seek your clarification to general on whether there are criteria that govern whether that capital spend can be moved to resources? Are there specific criteria that need to be adhered to for that to happen? In short, yes, there are criteria that frame the decision making around capital spending to resource spending. It is not a typical thing. It is safe to say that it is used in fairly specific circumstances. There is quite rightly a separation between capital and resource budgets about short-term recurring costs relative to longer-term investments. Richard has a bit more detail and can set that out for the committee. The rules that we refer to in paragraph 35 are the HM Treasury's consolidated budget guidance. What we do is point out here an example from what we saw in Covid-19 of how that might apply. In this particular instance, what happened was that there was an allowance made for local Government to use some of its capital reserves from selling buildings or whatever it may be to meet some of its short-term spending needs on the day-to-day basis. The reason we highlight that example in particular is that while there are some borrowing powers on the capital side, I think it is £450 million each year that is able to be borrowed, if that were to recur, if something like that were to happen again, as a scenario, the Scottish Government could use its capital borrowing to replace what has been lost. So any decision like that has to be set against the HM Treasury criteria? Yes. Right. That is very helpful. Thank you. Okay. Well, thanks very much indeed. Can I then conclude this session by thanking Fiona Diggle, Richard Robinson and the Auditor General for the time and evidence that you have given us. There are some areas that we agreed that it would be useful to follow up and perhaps get back to us on, so we would welcome that as you are able to do that. I would now like to draw this session of the committee to a close and we will move into a private session.