Memorandum from Andrew Kerr MSP. Finance Minister, Scottish Executive

10 February 2003
Richard Commission Visit On 12 February
Thank you for the invitation to meet with you during your visit on 12 February. Unfortunately due to prior commitments I am unable to attend.
I have attached a Memorandum answering the questions the Committee has raised, I hope this will assist your consideration of these issues.
Andy Kerr
Memorandum For Richard Commission Visit 12 February 03
Note on financial issues you raised in the note secretariat forwarded ahead by the secretariat of your visit.
Question 5: What proportion of Bills introduced so far have had significant financial implications and how have these been handled.
To date, of those Bills subsequently enacted, some 20% identified recurrent costs in excess of £lm.
Guidance has recently been issued with a view to improving the quality of the Financial Memoranda that accompany Bills. This should ensure that all possible costs are quantified together with an indication of the margins of risk and uncertainty in the estimates.
Annex A gives more background information and includes a copy of the guidance we recently issued.
Question 10: Fiscal Issues - understanding the nature of the tax varying powers, how would revenue generated or foregone interact with the Barnett settlement?
In responding to these questions I have focused on the power to vary the basic rate of income tax only - the Scottish Executive also has powers relating to Non-domestic rates and council tax. The arrangements would be as set out in paragraph 12.1 of the Statement of Funding Policy, which reads:
"The Inland Revenue will pay into the Scottish Consolidated Fund (SCF) an amount equivalent to the estimated yield of any increased Scottish Variable Rate of Income Tax. Similarly, the SCF will pay the Inland Revenue any shortfall in yield from a reduction in the Scottish Variable Rate as set out in Sections 77 and 78 of the Scotland Act 1998".
There is therefore no direct interaction with the Barnett settlement. The use of the power would result in something more akin to an adjustment in the Assigned Budget separate from any increases/decreases resulting from the application of Barnett.
Latest forecasts of revenue
The Treasury publish and update forecasts annually as part of the Financial Statement and Budget Report (part of the UK Budget documentation). The most recent FSBR, published in April 2002, says: "a one penny change in the Scottish Variable Rate in 2002-03 could be worth approximately plus or minus £230 million".
In relation to the use of the powers
Question 11: Costs of devolution in Scotland for the Executive - comparison with pre-devolution estimates.
Scottish Executive
The administration budget covers the costs of running the Scottish Executive. This is primarily staffing and associated costs such as accommodation and training. Actual SE Core staff numbers as at January 2003 stand at 4,257.7 (full time equivalent) an increase of 1,057.7 over April 1998 levels. This is still smaller than the most recent maximum size of 4,700 FTE in 1993.
Spending on administration as a proportion of total expenditure has been coming down steadily as a result of efficiency measures (from 1.12% in 1999 to 1.04% in 2002-03). It will continue to decline over the SR period - 0.95% by 2005-06. In 1998-99 the total expenditure on the Scottish Executive Administration budget was £158.7 million, in 2002-03 total planned expenditure on administration has risen to £218.5 million.
- Adults with Incapacity Bill
- Standards in Scotland's Schools Bill
- Education and Training Bill
- National Parks BillRegulation of Care Bill
- Protection from Abuse Bill
- Community Care and Health Bill
- Education (Disability Strategies and Pupil' Records) Act
In addition there were a number of Bills where costs were not quantified. The Education (Graduate Endowment and Support) Bill was one such Bill where the financial implications were certainly significant.
Under the Standing Orders a Financial Resolution should be required for any Bill (not just an Executive Bill) that contains provisions which would involve a call on the Scottish Consolidated Fund. The Presiding Officer decides whether such a resolution is required but it can only be moved by a member of the Scottish Executive or a junior Scottish Minister. Unless the motion is moved within 6 months of the completion of Stage 1 and the motion is agreed to the Bill falls.
The Executive's powers with regard to Financial Resolutions reflect the Executive's responsibilities relating to the management of public funds. Because the Executive has direct responsibility for the management of the Assigned Budget / SCF, Ministers need to weigh carefully the political implications of not moving a resolution (thereby effectively killing the Bill) with the convenience of avoiding unwelcome financial implications. There would be particular considerations in the case of a Bill which enjoyed popular Parliamentary support, and alternatives such as
amending the Bill after Stage 1 so as to limit or remove the financial impact would be considered.
FINANCE GUIDANCE NOTE 2003/1
FINANCIAL MEMORANDA
Purpose
1.  This note provides guidance to the Departments and Executive Agencies of the Scottish Executive on the preparation of the Financial Memoranda that accompany Executive Bills.
Key Points
2.  In preparing a Financial Memorandum the Bill Team, in conjunction with its Finance Team, must ensure full compliance with the requirements set out in the Standing Orders and the Bill Handbook.
3.  Finance Teams must clear Financial Memoranda with Finance: Standards & Guidance before giving Bill Teams the go-ahead to seek clearance from the Minister for Finance and Public Services.
Background
4.  Under rule 9.3.2 of the Standing Orders of the Scottish Parliament an Executive Bill must be accompanied by a Financial Memorandum setting out the best estimates of the administrative, compliance and other costs to which the provisions of the Bill would give rise. It must also include best estimates of the time scales over which such costs would be expected to arise, and an indication of the margins of risk and uncertainty in such estimates. The Memorandum must distinguish separately such costs as would fall upon (a) the Scottish Executive; (b) local authorities; and (c) other bodies, individuals and businesses.
5.  The Finance Committee has taken the view on more than one occasion that Financial Memoranda that accompany Executive Bills should have contained fuller information than had been provided. It is open to the Committee to ask for a revised version but this would slow up the legislative timetable which is something that both the Committee and the Scottish Executive would be keen to avoid. Financial Memoranda are required so that the Parliament can have the best possible information on the financial implications of the proposed legislation, and not just for expenditure under its control. They should, therefore, be comprehensive and include sufficient detail on the basis of figures to enable the Parliament to come to view on their robustness. Costings should be provided on both a gross and a net basis together with details of any anticipated savings on existing costs and any related income.
Preparation
6.  Paragraph 183 of the Bill Handbook requires Financial Memoranda to be prepared by Bill Teams in conjunction with their Finance Teams. And in preparing a Financial Memorandum the Bill Team and its Finance Team must ensure full compliance with the requirements set out in the Standing Orders and the Bill Handbook. Where a Bill proposes new duties, it should not be difficult to give full financial information since that ought to have formed part of the policy considerations leading to a Bill. And, if necessary, it could form part of the consultation.
7.  Where a Bill proposes powers, or implementation is dependent on the detail in secondary legislation (or further primary legislation), it may not be possible to be precise. In these cases, the Memorandum should say so. But this should be supported by an outline of what the current intentions of the Executive are, what the financial implications of these intentions will be, and what the effect of varying the major assumptions will be.
8.  If, however, the implementation of a Bill is to be dependent on secondary legislation and that legislation will be accompanied by a Regulatory Impact Assessment (RIA), it will be acceptable to give a broad indication of the likely financial implications in the Financial Memorandum. It will however be necessary to explain that further detail will be put before the Parliament in a RIA when it is asked to consider secondary legislation.
9.  In order to assist the Finance Committee's deliberations a Financial Memorandum should include a table summarising the additional costs attached to the Bill, cross-referenced to those paragraphs in the Explanatory Notes setting out the cost-bearing provisions of the Bill. Financial Memoranda should also include relevant cross-references to any consultation exercise as summarised in the Policy Memoranda. The Committee will be particularly interested in consultees views on the financial implications of the proposed legislation and on where the additional costs will fall.
Giving Evidence
10.  The Finance Committee may require persons to attend its proceedings for the purpose of giving evidence. Any official likely to be called before the Finance Committee to answer questions about Financial Memoranda should therefore be comfortable with the content and be prepared and able to explain the basis of figures and defend their robustness. Witnesses should also be able to defend the absence of figures in circumstances where estimates have not been provided and be able to differentiate between start up and ongoing costs.
Clearance
11.  It is a requirement of the Bill Handbook that Financial Memoranda should be cleared by the Minister for Finance and Public Services. Submissions from Bill Teams must be copied to the Principal Finance Officer and the Head of the Finance and Central Services Department in addition to other interested parties. Finance Teams must clear Financial Memoranda with Finance: Standards & Guidance before giving Bill Teams the go-ahead to seek clearance from the Minister for Finance and Public Services. Finance Teams not immediately involved in the preparation of Financial Memoranda should also be consulted where the provisions of the Bill might impact on the budgets for which they are responsible.
Scottish Executive Finance
February 2003
Annex B - extract from Scottish Parliament Official Record 24 June 1999
The Presiding Officer (Sir David Steel): We now move to the next item, which is a ministerial statement on financial issues. There will be no interventions during this statement because the minister will take questions at the end.
The Minister for Finance (Mr Jack McConnell): I wish to make a statement on two aspects of our financial affairs: first, the procedures for this Parliament to approve expenditure by the Executive, for our accounting to Parliament for that expenditure, for the auditing of those accounts, and for the accountability of officials undertaking the expenditure; secondly, the infrastructure required to support the tax-varying power of the Scottish Parliament. Moving on from the debates and disagreements of the past four weeks, I am pleased to have this opportunity to address our financial affairs. As Minister for Finance, I want to develop an open and constructive dialogue with the new Parliament and its committees. We have huge financial responsibilities to spend our money wisely, to decide our priorities openly, and to account for our use of the nation's resources through this chamber to the people of Scotland.
We should seek to ensure minimum waste and maximum output, minimum duplication and maximum partnership in our financial dealings. Scottish taxpayers rightly expect the new Executive and this Parliament to spend money wisely and to try to extract more from the pot that we inherit. As Minister for Finance, I intend to do all I can to achieve that goal.
The legislative programme announced by the First Minister last week included a bill on financial procedures and auditing. Indeed, the Scotland Act 1998 requires this Parliament to legislate on those matters. However, the act does not go into great detail. It sets out a framework-no more than that. It is for this Parliament to decide on its own detailed procedures. That is, of course, right. As the First Minister said in his statement, the bill "will go to the heart of the relationship between the Parliament and the Executive".-[Official Report, 16 June 1999; Vol 1, c 407.]
In that relationship, we want the Parliament to be constructive, but we also want our decisions as an Executive to be transparent and sure of Parliament's support. I am particularly keen to endorse the new political system that we are developing here in Scotland and, to emphasise that new approach, I propose that the draft bill on financial procedures and auditing arrangements be named the accountability, budgeting and audit bill, to reflect that.
We also want the Parliament to have a world-class financial management system. We want a framework that helps to ensure that the Parliament's budget is spent to the best possible effect. We must have a system that encourages Parliament and the Executive constantly to secure the most from our financial resources.
At the same time, we have to ensure that at all times the people's money is handled with the highest standards of honesty and integrity. I hope that, in time, other Parliaments will look to us when searching for the best ways in which to manage the financial affairs of government. On this matter, we cannot afford delay. The transitional financial arrangements under which we are operating expire next March. We must have our own system in place well before then if we are going to be able to continue to spend money.
Fortunately, we have a flying start. In February last year, the financial issues advisory group was established as a sub-committee of the consultative steering group. Its task was to make proposals that "the Scottish Parliament might be invited to adopt for handling financial issues". Over the following 12 months or so, that group of finance professionals and other experts developed ideas that address the range of financial issues to be faced by this Parliament. The group's report covers everything from setting budgets to value for money audits. The group's recommendations were endorsed by the CSG and have been welcomed by specialists and lay people alike. I would like to add my thanks to the members of the group. Their work has been critical to the future success of this Parliament, and I am very pleased to welcome members of the group here today to view the debate on this statement.
The group's recommendations give us the chance to take financial issues away from the preserve of the specialists and to make them accessible to the Parliament and the people of Scotland. The new Scottish Executive has considered the group's report in the light of Parliament's need to set up a sound system of financial management, and this Executive warmly welcomes accountability for its stewardship of taxpayers' money. Holding the Executive to account is a basic function of any Parliament, one which goes far beyond the day-to-day knockabout of party politics, which we saw this morning.
We intend to broadly accept the report and will be considering, with the Finance and Audit Committees, how best to implement the recommendations. Before we finalise our proposals for legislation, I will this weekend place before the Finance and Audit Committees a memorandum setting out our proposals to accept the recommendations of the financial issues advisory group, and proposals for their detailed implementation. My officials and I will be available to the committees before the recess, so that they can discuss the details with us. Among the matters that I want to draw to the committees' attention are the advantages and disadvantages of primary and secondary legislation for budget approvals and amendments, and the management of and responsibility for public audit in Scotland. We hope that the committees will be able to give an initial response before the summer recess. That will enable the Executive to adjust its proposals, if that is necessary, before going out to wider consultation over the summer.
It is our intention to introduce a bill immediately after the summer recess, with a view to seeking the approval of the Parliament by Christmas. That timetable will result in the Parliament's having sufficient time to consider the Executive's spending proposals for the year 2000-01. Expenditure decisions on Government and public service priorities here in Scotland are a central feature of our new devolution settlement. It is vital that citizens of Scotland are aware of, and are included in, our annual deliberations on the Scottish budget. I therefore intend to invite the Parliament's committees to comment on proposals for wider public consultation at an appropriate stage in our budget decision-making timetable. Transparency and accountability do not stop at the doors of this chamber.
We must integrate our deliberations into the lives of Scots, who experience the impact of our decisions in their daily lives. I now turn to the Executive's proposals for the tax-varying power-the power to vary the basic rate of income tax in Scotland up or down, by a maximum of 3p in the pound. On 6 May, the Scottish electorate said that it did not support the use of that power, and we are determined to focus our efforts on maximising the benefits to Scotland of planned increases in spending that have already been announced. The comprehensive spending review has delivered a very generous overall settlement for Scotland. By 2001-02, public spending in real terms on programmes for which this Parliament is responsible will be at a record high. However, we have made it clear-in the partnership agreement and subsequently-that we will not use the tax-varying power during the lifetime of this Parliament and will not impose a new income tax burden on ordinary Scots.
Against that background, we have nevertheless been considering what level of infrastructure, if any, we should maintain to take account of the possibility that a future Scottish Executive might decide to use the tax-varying power.
We have concluded that it would be financially irresponsible and politically unacceptable to abandon all the implementation work that has already been done. If we were to do that, it would mean that a new Administration would have to wait up to three years before it could implement the power-obviously, we would not want to deny the Scottish National party that opportunity should it ever succeed in forming an Administration. The period would have to be spent painstakingly-and expensively - repeating all the implementation work that has already been done, but that quickly will go out of date if it is not maintained.
In close consultation with Inland Revenue, we have devised an option that would allow the tax to be introduced in the financial year immediately following a Scottish election that was held on the normal cycle-that is to say, in the April following a May election. In practice, that is the first opportunity at which the tax-varying power could be used, as changes cannot be introduced in mid-financial year.
The option will involve Inland Revenue, and to a lesser extent the Department of Social Security, in maintaining internally a range of supporting systems, including, in the case of Inland Revenue, a database of Scottish taxpayers. Those systems can be updated and activated quite quickly if a decision is taken to use the tax-varying power. We estimate that, once all outstanding implementation costs have been incurred-those fall mainly in the current year-the option will give rise to an annual running cost of around £2 million to £2.5 million.
However, we have decided to halt all other preparations, including the appointment of the additional staff that would have been necessary in other circumstances. That is a prudent decision, which will save vital resources and avoid waste. Indeed, it means that over the lifetime of this Parliament we can expect to realise savings of around £20 million on the provision for implementing and running the tax that was previously included in forward budgets.
Our decision to pursue this option will mean that employers of Scottish taxpayers will face significantly less work and cost in preparing for the tax. A typical small employer, for example, will face no additional work or costs until the rate has been varied. Where a computerised payroll is operated, minor changes will be required to keep in step with the Inlaid Revenue's IT changes, but set-up costs will be less than half of those previously estimated.
In conclusion, the course that we are proposing to maintain an infrastructure for the tax-varying power is sensible and pragmatic. Our decision not to use the power in the course of this Parliament will mean lower levels of income tax in Scotland from April 2000, a much-reduced administrative burden for the estimated 91,000 UK employers who have employees who are Scottish taxpayers, and a saving of around £20 million on the tax's implementation and operating costs over the lifetime of the Parliament.
We intend to make those resources, which axe available as a direct result of our decision not to use the tax-varying power, available for the Holyrood building project. As the First Minister promised, other budgets will not be affected to meet the Holyrood contract.
I therefore commend these proposals.