Investing in Scotland's Future: Resource Spending Review

3. Improving outcomes

The framework for the Resource Spending Review published for consultation in December 2021 set out a mission to deliver effective services for the people of Scotland today, and maintain sustainable public finances that ensure we can continue to meet the needs of future generations. In doing so, the Government's ambition is to drive a programme of reform that will enable significant progress in tackling child poverty, address the climate crisis, foster the transformation of Scotland's economy, and deliver strong public services.

This spending review provides fresh vision for our public services reform programme and sets out a coherent package of action that will drive progress over the life of the current parliament, improving outcomes while driving efficiency and value for public money.

3.1 Key Reforms over the Life of this Parliament

Over a decade on from the Christie Commission's report on the future delivery of public services, its legacy is even more relevant as we rebuild services from the COVID-19 pandemic and face new challenges such as the cost of living crisis, which has been further intensified by the situation in Ukraine, within the limited powers that are available to the Scottish Government.^[25]

Over the course of this parliament, we are committed to a number of key reforms intended to support delivery of the key priorities set out in section 2, improve services and secure better outcomes. These include:

• The establishment of the National Care Service, bringing social care into parity of esteem with healthcare and transforming the provision of this essential service. This will be backed by a 25 per cent increase in social care investment – the equivalent of more than £840 million – which will also support measures to strengthen the implementation of self-directed support, improve prevention and early intervention and increase community-based support.
• We remain committed to Keeping the Promise, including by investing £500 million in preventative spend through the Whole Family Wellbeing Funding to help transform services that support families, ensuring families can access the support they need, where and when they need it. Our Keeping the Promise implementation plan sets out a route for change to support the lives and wellbeing of our children, young people, adults and families across Scotland who have experience of the care system.
• The Vision for Justice in Scotland – our transformative vision of the future justice system for Scotland, spanning the full journey of criminal, civil and administrative justice, with a focus on creating safer communities and shifting societal attitudes and circumstances which perpetuate crimes and harm. Together with our justice partners, we are committed to this vision, with a recognition that work is required across the justice system, and government as a whole, to make this a reality.
• Education Reform – establishing a new national agency for education, a new qualifications body and a new inspectorate to replace the Scottish Qualifications Authority and Education Scotland, in order to better support and promote improved outcomes and continuous improvement through co-design and co-creation with learners, families, practitioners and providers.
• National Strategy for Economic Transformation (NSET) – five key priority programmes identified as having the greatest potential to deliver economic growth that significantly outperforms the last decade within the current constitutional arrangements.

Through all of these reforms our focus will be on achieving genuinely person-centred services, so people can more easily access the support they need, reducing and removing unnecessary barriers and reducing inequalities of outcome. The Scottish Government's reform principles of people, partnership, prevention, performance and place, will guide all of us across the public sector as we move through the rest of this parliament.

Building on that we can continue to work together to tackle long-standing and deep-rooted inequalities. We have set strong expectations on public bodies and public services to work effectively together and with the private and third sectors using the totality of resources available to improve outcomes.

The multi-year plans set out in this spending review offer an opportunity to address two key issues facing government, delivering the kind of transformation our communities and services need to be fit for the future, whilst ensuring public services are sustainable.

3.2 A New Deal for Local Government

Local Authorities play a vital role in delivering public services and are key partners in the delivery of the priorities set out by the spending review.

To support that, the spending review protects local government by guaranteeing the combination of General Revenue Grant and Non-Domestic Rates Income (NDRI) at existing levels between 2023-24 and 2025-26 including the baselining of the £120 million added during the 2022-23 Budget Bill and an extra £100 million by 2026-27.

As councils ultimately retain every penny of NDRI they collect, this guarantee protects councils from the post-COVID-19 pandemic volatility in the commercial property market and the uncertainties associated with the 2023 Non-Domestic Rates revaluation.

To support councils to plan for the future, the spending review confirms that existing transfers for Health and Social Care, Early Learning and Childcare and additional teachers worth £1 billion will also be maintained. Final decisions about the annual local government settlement including: additional funding to reflect the devolution of Empty Property Relief to councils on 1 April 2023; confirmation of any in-year transfers from other portfolios which were worth £345 million in 2022-23; and individual council allocations will be taken as normal through the annual Scottish Budget process.

The spending review makes no assumptions about council tax, which is a decision taken at annual budgets. Decisions about fiscal autonomy are part of ongoing discussions to establish a fiscal framework with local government.

Over the course of this parliament there will be significant changes to functions currently delivered in full or in part by local authorities, for example through the creation of a National Care Service which will impact both funding and functions of local government. We have also heard from local government a desire to re-set the relationship with the Scottish Government – an ambition we share.

Discussions on strengthening our partnership began prior to the recent local government elections, and the Scottish Government will therefore work closely with COSLA and SOLACE over the coming months to agree a new deal for Local Government in Scotland in advance of the next financial year.

This will:

• Build on the Review of Local Democracy and develop a deeper dialogue and debate on how Scottish and Local Government will work together to achieve better outcomes for people and communities.
• Seek to balance greater flexibility over financial arrangements for local government with increased accountability for the delivery of national priorities so that both partners can have certainty over inputs and outcomes alongside scope to innovate and improve the delivery of services to local communities.
• Explore greater scope for discretionary revenue-raising, such as the Visitor Levy and the newly created Workplace Parking Levy.
• Explore further with COSLA, Digital Office and Revenue Scotland how best to transform the digital administration of the Non-Domestic Rates system.
• Confirm that further flexibilities requested by COSLA will be made available to councils for existing service concession arrangements such as PFI or NPD funded projects; and
• Ensure these decisions are supported by a phased approach towards alignment with the CIPFA Code of Practice for Local Authority Accounting through a comprehensive Capital Accounting Review in partnership with COSLA, Audit Scotland and CIPFA.

Local Government is responsible for deciding how its services are provided and making decisions about pay and workforce management for their staff within the funding available to them. We will engage with local government on the approach to reform set out in this spending review for the wider public sector and invite local authorities to adopt a complementary approach.

3.3 Innovation and Revenue Raising

Our collective approach to the COVID-19 pandemic, and to recovery from it across the public sector shows we can innovate together and create conditions for sustainable, outcome-led services.

It is imperative that this approach continues as we address the key challenges and priorities set out in this spending review.

In addition, the 'National Strategy for Economic Transformation' highlighted the Scottish Government's ambition to make Scotland an entrepreneurial nation, including building an entrepreneurial mindset within the public sector.

This should not be understood as having a solely financial focus, rather it is about challenging the way in which services are delivered, supporting innovation in pursuit of better outcomes and breaking down barriers to success. It also requires giving permission to organisations to try new approaches that may involve more risk but which could deliver greater reward.

Scotland's public services have a strong national and international reputation for innovation and performance. This spending review invites all public sector leaders to consider the scope for innovation that embraces entrepreneurship, improves value for money, offers opportunities for commercialisation, better manages assets and brings benefit to the public purse.

We will also expect public bodies within the scope of the review outlined in section 3.7 below who charge for services to identify ways to recover more of their costs.

Over the coming months, the Scottish Government will engage pro-actively with public sector leaders to identify options that should be prioritised over the spending review period. Initial conclusions will be included in the 2023-24 Scottish Budget.

3.4 Digital Public Services

The 2021 Digital Strategy for Scotland ('A Changing Nation: How Scotland Will Thrive In A Digital World') will enable a shared vision of a modern, digital and collaborative government, designed around people.^[26] This strategy outlines the actions the Scottish Government will take across three key areas covering: digital inclusion and connectivity; developing a strong digital economy; and enhancing the approach to delivering public services through investment in digital transformation.

Public services that are responsive, inclusive and simple to use are dependent upon people having good connectivity and the skills and confidence to use technology to access them. Our work programmes focus on developing common platforms and digital transformation, that will provide the building blocks for transforming the way government operates, centred on the user experience and implementing digital thinking as well as digital technology across the public sector.

Examples of work programmes progressed through this spending review include:

• The Digital Payments Programme, which will drive efficiencies by providing a centralised payments out/in digital service for public sector organisations.
• The Digital Identity Programme, which will deliver a better user experience, by providing a single digital identity for Scottish citizens to access public services in Scotland.
• The Cloud First Programme, which enables the Scottish public sector to realise the benefits of secure cloud hosting services through accelerating the adoption of modern cloud technology.
• The digital planning programme, which will deliver modern public services that will make planning more accessible, engaging and efficient, realising economic and customer service benefits.

The adoption of common platforms and systems that cut across organisational boundaries, so organisations can focus their staff, resources and innovation on frontline services rather than back-office processes, could improve services and release investment. Innovations supported by this spending review to ensure there is greater capacity to deliver strategic digital policy commitments and better outcomes for Scotland's citizens, include:

• The Connecting Scotland programme bringing 300,000 households online over the parliament enabling the public to engage digitally with public services.
• Investment in connectivity infrastructure, delivering on the Reaching 100 per cent programme (R100) enabling access to superfast broadband to every home and business in Scotland.
• Driving innovation and delivering outcomes on Scotland's National Strategy for Economic Transformation (NSET) through the Programme for Government commitment to expand the CivTech programme.

3.5 Supporting People - public sector pay and workforce

The public sector in Scotland has been resilient and flexible in the face of the COVID-19 pandemic. We owe a debt of gratitude for the dedication and personal sacrifices made by thousands of public sector workers through the most challenging period in our recent history. The COVID-19 pandemic has also brought changes to ways of working across the public sector, including driving collaboration both across the public sector and with the private and third sectors, reprioritising activities, increasing the use of technology and flexible working, such as remote and hybrid working, and changes to the way in which citizens access public services.

As businesses, households and communities continue to adapt in response to the COVID-19 pandemic and high inflation, this spending review supports the devolved public sector in Scotland to do likewise.

The Scottish Government is committed to the principle of fair work and a public sector pay policy that balances affordability with the need to recognise cost of living challenges, particularly for those on lower incomes, and the ability of public bodies to retain and recruit people with the skills and experience they need to deliver effective services.

It has been necessary to expand the size of the public sector workforce in response to the many challenges presented by the pandemic. However, even before COVID-19 there had been significant underlying growth in the size and cost of the public sector workforce. The public sector employs around 444,000 full time equivalents (around a fifth of Scotland's workforce). This includes not just government employees but also wider public sector bodies such as the National Health Service. The total devolved public sector pay bill is over £21 billion per year, the majority of which supports the running of frontline public services.

Source: Scottish Government

While some of this growth relates to the devolution of new functions to Scotland such as elements of tax and social security, continued growth of the public sector away from frontline services is not sustainable. This is especially the case if UK Government spending levels – and the related block grant settlements for the devolved administrations – continue to track below inflation. If the total size of the workforce continues to grow this will increasingly squeeze our capacity to maintain services and increase rates of pay in the public sector, at a time of cost of living pressures and evidence of growth in private sector pay in some sectors.

As part of meeting current and future challenges we need to take an approach that balances investment in systems and processes, with targeted workforce growth in priority areas, investment in our people, and the reform and redesign of services, so that they deliver efficiently and effectively.

Accordingly, this spending review supports and invests in people, based on our principles of Fair Work established in dialogue with trade unions, and supports fair and affordable pay uplifts including through the Public Sector Pay Policy – whilst noting the separate responsibility that local government has for its own pay and workforce policies. Pay settlements will build on the current platform of more favourable remuneration for public sector workers in Scotland over recent years, compared with UK Government counterparts. On average, pay within the devolved public sector in Scotland is 7 per cent higher than where the UK Government has responsibility. During times of UK Government imposed austerity the Scottish Government acted to protect public sector jobs and to ease pay restraint at the earliest opportunity.

Today, while the financial challenge is different and largely relates to the cost of living crisis, the UK Government's response is worryingly familiar and presents a challenge to Scotland's public sector. Not only have they reduced Scotland's block grant funding (the largest component of the Scottish Budget), they froze public sector pay in the middle of the COVID-19 pandemic and are now announcing significant job cuts without proper dialogue. These UK Government decisions have a direct impact on Scotland's block grant and therefore the funding available to support public sector pay.

We can only protect jobs and services if we can agree on settlements within what is available to the Scottish Budget. The Scottish Government will always look to support the lowest paid. However, a balance will be required to deliver sustainable settlements which we hope to achieve in a strategic and collaborative way, through considered dialogue with trade unions and employers, adhering to our Fair Work principles throughout.

To achieve this we propose an approach which aims to hold the total public-sector pay bill (as opposed to pay levels) at around 2022-23 levels whilst returning the overall size of the public sector broadly to pre-COVID-19 levels. This will enable space and flexibility for fair and affordable pay increases that support the lowest paid in these challenging times.

Actions we will discuss with trade unions and public sector bodies (as mentioned above, this excludes local government given their separate responsibilities) include:

• Ongoing negotiation over 2022-23 settlements based on public sector pay policy, including the pay reform option within current policy for 2022-23, which provides those public bodies to which it applies with greater flexibility on rates of pay, terms and conditions and supports re-shaping of workforces, reprioritisation and the delivery of strong public services; and also including the commitment to no compulsory redundancies. The next pay policy will be confirmed alongside the 2023-24 Scottish Budget.
• From 2023-24, a broad aim for the devolved public sector to maintain the total cost of the overall annual pay bill compared to 2022-23 levels.
• A broad aim to return the total size of the devolved public sector workforce to around pre-COVID-19 levels by 2026-27, through effective vacancy and recruitment management. We do not propose a uniform approach due to varying trends in demand for different services and the recovery of services from COVID-19. We will therefore support flexibility across the public sector, while driving the action needed in the current economic and fiscal context.
• The Scottish Government will also discuss these objectives with other public bodies (to establish the scope for reform, innovation and efficiency).
• Improved wellbeing within the public sector workforce. Employee engagement and innovative working environments can create the conditions to reduce stress and sickness absence. A reduction in Average Working Days Lost (AWDL) to illness in the public sector by a single day, equivalent to circa 1,700 FTE, could result in around £87 million in annual savings. The Scottish Government is committed to further action in partnership with public sector bodies and trade unions to support employee wellbeing.

• Invitation to parts of the public sector to participate in the pilot of the four day week set out in the Programme for Government.
• Continued development of the use of technology within the public sector to support hybrid and flexible working, as we also consider the future of the public sector estate and the preferences of employees who have developed new working patterns during the pandemic.

3.6 Levers to Drive Greater Efficiency

This spending review sets an expectation that public bodies will deliver recurring annual efficiencies of at least 3 per cent. As part of this approach, we will develop new approaches to:

• Shared services.
• Use of our estates.
• Effective procurement, and
• Grant management.

3.6.1 Shared Services

The Scottish Government will work with public bodies to consider where a more collaborative approach to service delivery could drive efficiencies as well as capitalising on the experience of partnership working throughout the COVID-19 pandemic. We know that to deliver high quality services to the people of Scotland, we all need to work across boundaries and find connections across organisations that deliver those services. This could be driven further and deeper into our public body landscape through further consideration of the potential of shared services.

Bodies with their own HR or finance functions may benefit from working closely with other bodies delivering similar functions to identify corporate services that can be shared. This may release cost, either of IT, estates, or people, to be more directly focused on service delivery to Scotland's people. The Scottish Government will lead a series of engagements with public body leaders about the potential for further sharing of services, with initial conclusions reported in the 2023-24 Scottish Budget.

3.6.2 Scotland's Public Sector Asset Base

A routemap for improvements to the public sector estate has been developed. We will further align the public estate strategy with the transformation, structural change and efficiency of the Christie-based approaches to stronger public services outlined in this spending review. There are around 30,000 public sector properties in Scotland in the local and central estate, ranging from tiny forestry huts to offices. We want to drive the best value from our estate to strategically maximise opportunities to be fit for purpose, efficient and adapt to the evolving demands of delivering government services.

This spending review re-affirms the Scottish Government's commitment to minimise cost and maximise best value and introduce changes to property policy under the Scottish Public Finance Manual: we will:

• Reduce the public sector estate footprint and costs and have fewer, better buildings which support our people and our service delivery to the public.
• Increase co-location, collaboration and the interoperability of offices across the Scottish public sector incorporating flexible location models.
• Reduce public sector office carbon emissions.
• Increase on-site joint administrative services in public sector offices.

3.6.3 Effective Procurement

Since devolution, the Scottish Government has led significant reforms and efficiencies in public sector procurement aimed at offering value for public money while driving economic growth, building community wealth and delivering key outcomes through work on net zero and fair work priorities. Annual spending on procurement is £13.3 billion (financial year 2020-2021) or around 25 per cent of the Scottish Budget. The current economic climate and the ongoing impacts of the COVID-19 pandemic present challenges for public procurement, with cost increases in relation to labour, materials and utilities.

This makes it even more essential that commercial advice is brought into policy design early in the decision-making process, especially when the costs of change are high. Including commercial procurement or property advice from the inception of a policy idea can help to build in cost effectiveness and best value options from the start. This will also enable us to maximise our impact through procurement and property spend on wider socio-economic outcomes and ambitions for Scotland bringing the principles and practices of Community Wealth Building to the fore.

We will develop a public procurement strategy for Scotland which will improve how the public sector collaborates and delivers enhanced value for money and both economic and sustainability benefits to the Scottish Government and the wider public sector communities. We will develop new procurement measures which ensure socio-economic benefit is considered on a par with value for money.

This spending review also confirms that we will establish a refreshed strategic "make versus buy" framework for the Scottish Government, to support cross-cutting decision making about the balance between in-house capacity, outsourcing, loans of capacity, the development of capacity where it does not currently exist, or scaling back capacity that is no longer needed.

We will also review the current Scottish Procurement structure, with an aim of increasing cross-sectoral consolidated procurement, building on current sectorial centres of expertise to realise financial efficiencies over the spending review period across the public sector. This work will start in 2023.

3.6.4 Effective Management of Public Sector Grants

The spending review has identified a cross-cutting opportunity to improve the management of grants, particularly general grants, and the impact that grants can have on key outcomes. A multi-disciplinary programme of work will be launched, to report in 2023 to inform the setting of subsequent Scottish Budgets and future grant management.

This work will include:

• Mapping and analysing the value, distribution and purpose of public sector grants.
• The scope for improved commercial scrutiny pre-award and improved grant management post-award.
• The impact that additional conditionality, evaluation and potential clawback options can have in delivering outcomes for the people of Scotland.

3.7 Scotland's Public Bodies

There are currently 129 public bodies in Scotland with responsibilities across areas ranging from health and social care, education, transport, environment, and our culture, our heritage and the built environment. The functions these bodies carry out make a vital contribution to achieving the outcomes set out in the National Performance Framework, as well as driving innovation and reform whilst undertaking arms-length statutory, regulatory and advisory functions.

The COVID-19 pandemic has underlined the critical importance of an effective and vibrant public sector while also demonstrating ways to integrate, improve and reform services vital to families and communities across Scotland. We want to build on this experience and agree the optimal public body landscape for achieving improved outcomes.

Our public services, public bodies and public sector workers are working with commitment to support people and communities across Scotland. Yet we know that the persistence of key challenges, combined with shrinking fiscal resources together with our commitment to environmental and fiscal sustainability mean that reform is inevitable. Taking the opportunity to transform and improve how we work carries significantly less risk than continuing as we are, but with less to go around.

Leaders will already have ideas about where there is scope for transformation and change to improve outcomes. We expect all public bodies to demonstrate that they remain fit for purpose against the present and future needs of Scotland's people, places and communities. Seeking to work collectively, with common purpose, breaking down delivery silos and efficiently using the totality of available resources within the constraints we face. This is an overarching priority, and we will be working with public bodies leaders in the months to come to make tangible progress on this taking account of the wide range of possibilities for change. We will set out proposals for the future public body landscape alongside the 2023-24 Scottish Budget.