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You talked about the reskilling that is required, which is vital. It will not help in the short term, but we need to ensure that the money goes to the people who most need it.

On energy costs and fuel shortages, we engage closely with industry, as I said. I guess that the big tool that I have at my disposal right now, and on which I am giving you evidence, is the budget. Industry figures repeatedly tell us that they are not looking for financial support. They want to be able to trade. The economy is recovering, trade is available and markets are there, but industry cannot meet demand. The difficulty is with supply, not with demand. When it comes to prices, energy costs and shortages, in our close engagement with industry leaders, they repeatedly tell us that the solutions lie not in financial grants but in enabling them to access the adequate and affordable supplies that they need.

We will repeatedly engage with the UK Government, but I do not have any unallocated budget this year to meet the shortages in full. We have neither the consequential funding for that nor the headroom to provide additional financial support.

The short answer is that we will not hit that limit if we continue on the trajectory that we set out in the medium-term financial strategy, because we cannot. We have to allow for headroom and obviously have to manage our budget in a way that allows for unforeseen circumstances. The medium-term financial strategy set out our approach to borrowing, and clearly the next one will set out that approach as well.

That does not mean, however, that we could not use additional borrowing powers if the cap were higher. I believe that our borrowing powers should be more in line with those of local government, whose prudential borrowing scheme is based on affordability rather than arbitrary caps. The latter do not take into account the changing nature of the challenges or the economic imperatives to invest or not to invest, so the argument is for something that is more akin to the arrangement that local government has rather than arbitrary caps.

Thankfully, as far as our net zero commitments are concerned, two areas are already highly visible. The first is the capital spending review. It was completed last year and published alongside the infrastructure investment plan, and gives a long-term multiyear view of investment in infrastructure. I do not know whether this has come through in the evidence that the committee has received, but one of the primary drivers of the shift to net zero will be investment in low-carbon infrastructure.

We talk at length about the need for a transition in transport; however, that will require public and, indeed, private sector investment in transport systems. The same goes for heating and power. The capital spending review stands prior to this budget, which will action the next year of the capital spending review with regard to investment in low-carbon infrastructure. I also point out that that has been accompanied by a £2 billion low-carbon fund to accelerate investment.

The second area is the programme for government and the co-operation agreement with the Greens, which are quite clear about the shifts that need to be made. The budget is actually just the power behind the programme for government; it enacts the programme with real money, from a challenging settlement.

In short, we are not cautious about getting money out to the people and the services that need it as soon as we can, but what has really exacerbated things during the year is the level of volatility. You will forgive me for stating some basics here, but I want to build up my argument.

The fact is that we cannot overspend our budget; at the end of the financial year, I have to bring to Parliament through the outturn statement a budget with no overspending, because the Treasury would not look kindly on us if we overspent. In-year budget management is all about trying to maximise spending power for the services that need it and to meet all the asks. After all, every day in Parliament, there is always another ask for more money.

At the same time that we trying to maximise that spending power, we have to come in on budget. The difficulty is that, during the year, there is volatility. For example, with the UK Government’s announcement of health and social spend, we were told that we would get up to £520 million; that will be confirmed in the main estimates, which means that the final confirmed position will probably be known in January, February or March. If all that £520 million gets spent on the important services that it needs to be spent on—and we will spend that money; please do not read into what I am saying some lack of commitment to spending the money that needs to be spent—and we are told in January or February that we will get £400 million in consequentials, because the UK Government equivalent departments have not spent the full amount to generate the full £520 million or because it is recycled funding, I suddenly have a shortfall of £120 million that I need to make up with only a matter of weeks to go before the end of the financial year to ensure that our budget comes in on balance. That is the level of risk that we face.

Knowing that that is the position, we are managing our budget in year on a daily basis to maximise our spending power while at the same being cognisant of the fact that, once the money is spent, it is challenging to make up any shortfall. One actual example was a sum of £25 million for education. The UK Government announced some education funding, which was very welcome, and we passed that money on to education. However, when we saw the May estimates, we discovered that the actual funding was £25 million less. In other words, it was £25 million that I was not going to receive but which I had already passed on. This is not a complaint—it is a request for more levers to manage that kind of volatility and ensure that we come in on balance.

Last year, the Barnett guarantee made it clear that there would be no negative consequentials and that what had been announced would not be clawed back. I therefore had total reassurance that when the £25 million was announced it could be passed on without the fear that the actual sum might be less. The guarantee has been taken away this year, because the UK Government’s volatility is such that it cannot predict with any certainty what UK departments will spend. That is why the increased volatility this year has made things very difficult. We manage that volatility internally, but it makes things more challenging and any Government in this role would find huge value in having more tools to manage it.

There are two parties involved and—as you will be aware—quite a lot of change is afoot for local government over the next year. I think that we can make some progress prior to the local government elections, but I imagine that the matter will be one of the first that will be picked up after the elections. We are committed to working with COSLA to develop a rules-based fiscal framework to support future funding settlements.

The other part of the issue—again, this is not a cop-out—-is that a big ask from local government is for the ability to set multiyear budgets. Along with the need for additional flexibilities, there is a need to know what will be in a budget from year to year. I sincerely hope that the resource spending review that we will set out will allow local government to look three years ahead. [Inaudible.]

There are a number of different points. The first is a real focus on innovation leading to productivity. You will be mindful of that, and, over the past few days, we have heard in the media a lot about UK-wide productivity challenges. There are real challenges when it comes to increasing levels of productivity. Those are being highlighted by population shortages right now. If we live in an environment in which we are unable to access additional labour from outwith the country, it is even more imperative that we invest in innovation and tech and that we improve productivity levels across the country. That point has been repeated for a number of years by the Confederation of British Industry and others. That focus is on how we incentivise innovation and invest in productivity; that includes investing in our people.

That takes me to my second point, which is a real focus on skills—making sure that we have the right skills in the right places for the right jobs. We have seen, post-pandemic—not that we have got through the pandemic—that unemployment is much lower than was originally forecast; however, that means that there are acute labour shortages in certain sectors. We therefore need to make sure that, through the young persons guarantee and our other interventions such as the national transition training fund, we are reskilling people with the right skills—those that are actually required.

Those are two areas that are coming through loud and clear in the conversations that we are having around the advisory council, that I am hearing regularly from business organisations and that I would like to see prioritised in the forthcoming budget.

In short, your characterisation is accurate. We have, where we can, used softer powers to try to crack down on tax avoidance. I would say that since its establishment Revenue Scotland has taken a firm and effective approach to tax avoidance, because it is working collaboratively with other public bodies—for example, it works closely with the Scottish Environment Protection Agency in relation to landfill. The taxes are small in the grand scheme of things, although they are important for the Scottish Government, but the point is that, since the establishment of Revenue Scotland and the development of other devolved taxation, we have taken a much more robust approach to tax avoidance. However, you are right that it is based only on soft powers rather than on actual legislation, because, ultimately, tax avoidance is a reserved matter.

I will answer that in two parts. First, I support the principle of conditionality across all Government spend. We should consider more carefully where we can embed proportionate conditionality; we have committed to do that, as part of the co-operation agreement.

The second part is perhaps more disappointing. I have looked at non-domestic rates through every lens to consider how we can expand conditionality, but doing so is extremely challenging, if not impossible, in places. We place a huge burden on non-domestic rates—which, we should bear in mind, are a property tax—because we have no other form of business taxation in Scotland.

It is difficult to use conditionality in non-domestic rates in any way but through conditions that relate to the property itself, because it is a property tax, not a business tax. Non-domestic rates are based entirely on a property’s rental value—what that property might get in the open market—which is applied to the poundage. The tax was not established to take into account income generation, nor was it ever based on employees. The various conditions that we might want to attach to reliefs are almost impossible for a property tax.

That is not to say that we have not considered the possibility. During the pandemic in particular, I was keen to see whether we could attach other conditions. However, the methodology behind non-domestic rates—the way in which rates are collected and the principle that underlies them—means that it is almost impossible to attach conditions that are not specifically related to the property.

People might argue that we should overhaul non-domestic rates and set up a taxation regime that is based on income and other factors. That is a perfectly legitimate argument to make, but because it is a property tax, we look to non-domestic rates to do more than it was set up to do or is capable of doing because it is the only form of semi-business taxation that we have in Scotland.

Yes, in short. I note that that applies to non-domestic rates as well, to link in with your previous question. The Barclay review of non-domestic rates specifically talked about what powers we might have in Scotland to crack down on tax avoidance. That was incorporated into a general tax avoidance provision. I am happy to send the committee more information about non-domestic rates in that context.

You will remember that in discussion about tax havens there was a lot of public debate about whether or not the Scottish Government had the power to act. Where we have powers or softer means of cracking down on tax avoidance, we will use them, but the issue is, ultimately, reserved. When it comes to having real teeth that can crack down on tax avoidance, the powers are still reserved to the UK Government.

No, I apologise for not grasping what you were asking. We have had a lot of engagement with the UK Government on those points, and Dougie McLaren might be able to give you a brief update on whether there will be full compensation.