 Welcome to the 32nd and the last meeting of 2018 of the Finance and Constitution Committee. Those who have mobile phones, can you put them into a mode that won't interfere with a business? I'd be most grateful. I'd better do the same. Our first piece of business is to take evidence in a round table format. Today's round table will focus on the Scottish Government's approach to taxation. We'll be taking evidence from Mark Taylor, who's the Assistant Director of Audit Scotland, Charlotte Barbour, director of taxation at ICAS, Alan Birmingham, policy and technical director from SIPFA, Dr Angela Hagan, chair of equality and budget advisory group, David Phillips, associate director of institute of fiscal studies, Dr Alison Hose, who's the research officer at the Scottish Human Rights Commission, and Joanne Walker, who's a technical officer at the chartered institute of taxation. I'm very, very warm welcome to everybody this morning to come along and help us in the deliberations on our budgets. Our first of our sessions on the Scottish Government's budget will be doing a lot more in depth. Scrutiny, when we get into the new year, not only with the Cabinet Secretary, but obviously with the Office of Budget Responsibility in the Scottish Fiscal Commission, so I'm very grateful you're here to help us today. Thank you also to those who submitted us with written submissions. It's a round table format, intended to be as free-flowing as we can possibly make the morning. I know that MSPs have got a number of points they want to make themselves as we go through the morning to try to tease out some of the issues that are of importance to them. We have laid down the session in four distinct areas. Now, inevitably with this type of discussion, they're going to merge into each other at some stage, and therefore I'll take a judgment as we go on about whether or not actually we've exhausted a particular area as we proceed through the morning. First of our four themes, I'm glad to say that that will cover tax policy and the differences between Scotland and the United Kingdom, and I invite Murdo Fraser to begin that session in that area. Thank you, convener. The issue around the complexity of the budget and the issue of tax policy divergence is something that Audit Scotland commented on. There may be an issue that I could address to Mark Taylor just to give you a bit of advance. Mark, that might come to you first. One of the things that the committee has identified over the last couple of years is the increased volatility and uncertainty arising from the way that the fiscal framework operates, whereas previously we dealt with a fixed budget, where we took out £1, we had to find another £1 somewhere else. There are a lot more moving parts in the budget now. We have the fiscal framework projections for tax receipts that have to be played in. In the budget, we note, for example, that income tax is down a bit on the previous year, but that is balanced with the block grant adjustment, which again has to be compared to previous years. We overlay on top of that complexity an additional level of complexity, which is the issue of tax policy divergence, where there has been a lot of commentary in relation to the budget last week about what that means in terms of non-savings, non-dividend income tax and the way that the rates in Scotland will differ from the rates south of the border or in the rest of the UK. My question is given that we are already dealing with volatility and uncertainty, to what extent has increased tax policy divergence increased that, or is that something that we have to live with? That is what tax devolution leads us to. How do we best manage trying to reconcile all those moving parts? Thank you and good morning, everyone. There are a number of moving parts in the budget, and one of the key things to recognise is that it is the overall effect of all those moving parts that ultimately matter. Of course, there is a lot of value in drilling down into some of the different elements of that and exploring the different elements, but it is the overall effect of those things brought together that ultimately matters. In terms of the divergence of tax policy between the two Governments, is that interplay, is that divergence between the two Governments that has the effect? The choices made by the UK Government and the Scottish Government affect what the overall impact of the budget is. One of the things that is hard to see through the budget is how that builds up through time and through years. The Scottish Government has used the figure of £500 million to its assessment of that overall impact, but that overall impact does build up through time. In terms of the questions about volatility, the way that the system works, yes, there are additional complexities brought in by different tax rates being set, and the forecasters have to assess that. Ultimately, whether there is divergence or whether there is a status co-effectively between the two Governments, that volatility still exists in the system, because what drives that volatility are factors such as economic performance, the forecasting approach and those factors are still there in the system irrespective of whether or not there is tax divergence in the system. There is an additional layer of challenge in the forecasting process. There is an additional set of assessments about what the relationship between tax decisions made by both Governments and the impact on the economy are there, and those questions are part of that wider question. By sticking to—we have used the phrase in our paper, the status quo being the same tax levels across the two Governments—that does not remove that volatility, it does not remove that uncertainty. Who else would like to chip in from our guests this morning? I will echo that. The Audit Scotland report that was produced a wee while ago is much the best explanation that I have seen on how all those moving parts fit together, and I think that the moving parts are part of the system and what you can only expect. In terms of the tax policy, I am not convinced that it introduces a huge amount of volatility because actually I think that there is quite a lot of constraints and challenges because it is a part of the UK system and therefore there are constraints in what you can do and that is part of what we will be discussing later. David? Yes. Obviously, for the overall budget risk, looking at how all the moving parts together affect the budget is important, but I think that it is also important to break down the different parts that are moving to understand what are the things driving it. For instance, is the under-all performance due to a difference in the bloc on adjustment, so things happen elsewhere in the UK, or is it due to what is happening in Scotland, so the actual revenues, so that the proper government is held to account for the impact of its different decisions. Obviously, for a budgetary risk perspective, it is how it all fits together that matters. For a budget scrutiny and accountability perspective, it is how all the individual parts are moving as well matters a lot. It is a challenge because there are so many different moving parts and the bloc on adjustment for the current year, the reconciliations for previous years. For most people, that is too much information, but it needs to be there somehow for the likes of me and the likes of you. Too much information, in those descriptions. Alan, do you want to contribute on to this? I suppose that if you were looking at budget risk as a factor and getting a better understanding of how these parts fit together, from a scrutiny point of view, I would be looking towards trying to get an understanding of some of the sensitivities that there are in the modelling. If you go back to the recent budget in the UK Government, for example, where the Chancellor spent the extra money earned by income tax on the health service, I think that most commentators would agree that there was not a full understanding of how that extra tax revenue arrived. They knew that it was kind of across a range of taxes, but there was not a clear explanation of what drove that. As it happens in these budgets, he has now kind of spent that on the health service in my mind without a full understanding of what drove those increases. Having that sort of logic, if you like, to the situation here, understanding some of the sensitivity in the modelling, i.e., is it sensitive to economic growth factors or is it sensitive to the number of taxpayers? Those elements of the model, having that sensitivity analysis built up through the date that you have, would help the understanding, help the scrutiny of what the key risk factors are. I think that there is a bit more drilling down that needs to be done to get a better understanding of risk and, therefore, a better understanding of what is driving the changes and where the budget volatility is likely to come from, if you see what I mean. That sensitivity issue, how could you go on to go about that? If the Scottish Fiscal Commission on Modelling Attacks Revenues, just playing around with some of the key determinants in the model will help you understand the impact of lower taxpayer numbers over the years or lower economic growth or whatever. Just taking element by element and modelling that will show the impact on the budget. From that, you can determine whether the model is more sensitive to one factor or another. Obviously, if you can see that coming through forecasts, there is going to be the restraints on immigration after Brexit that will present a situation where the taxpayer growth numbers are not going to come through. You can say that that will be a key factor, a key risk factor, in the level of income tax that we are budgeting for. I want to follow up on one point that you raised. You mentioned the issue of income tax reconciliations, which is quite an important factor. In the Fiscal Commission paper that it produced last week, it projected ahead income tax reconciliations from last year's budget, which will then apply to the 2021 budget, which is £145 million, but in terms of the current year 2018-19, its forecasting outturn is £472 million. £472 million is a big chunk of the Scottish budget, and that will kick in in the year 2021-22. Those are only forecasts, we do not know whether those figures will work out until we see the outturn, but is there a danger that, in a way that we approach the budget, we might be inadvertently storing up huge budget problems for the next Parliament, as it will be? The idea behind this phone work is to give the Scottish Government a chance to adapt to changes in the forecast. First of all, the outturn's information is not available for a significant period, but that gap also gives the Scottish Government time to prepare for any adjustment that is required in the budget, whether that is paying back spending, whether that is throwing down Scottish reserve, whether that is changing tax policy. One of the issues with the Scottish fiscal payment, I guess, is that there is less flexibility for the Scottish Government to deal with these sorts of shocks to revenues than there would be if there was a free of power to borrow and save. That is how the fiscal framework has been set up. Is this storing up problems in the future? I am not sure that I would go that far, but it certainly means that the Scottish Government needs to have it constantly looking ahead, given the existing fiscal forecasts, to see what we are going to do to use down the line to adjust to those forecast changes. We are only talking about one side of the equation here at the moment, because we have still got the OBR on the other side of that equation. In terms of that volatility issue, does that not induce even more volatility into the process? It depends on which way the forecasts are changing. For instance, if the Scottish Government overestimated its revenues, HMRC would have paid over too much revenue to Scotland in the year, and there would be a negative adjustment down, but if revenues elsewhere in the rest of the UK were also overestimated, then the block grant adjustment would have been too high, and there would be a reconciliation payment to reduce the block grant adjustment. If the forecast errors are going in the same direction between the OBR and the Scottish Government Commission, those tend to offset. It is when the forecast errors are in opposite directions, when the OBR is overestimating the block grant adjustment. Is that my way around? If the OBR is overestimated, it reduces it. No, it is actually when in the opposite direction. Let me just get this right. Sorry. This is how complicated it is. If the Scottish Government is overestimated revenues, then there will need to be a downwards adjustment in subsequent years, and it takes so many of the Scottish Government. If the OBR underestimated revenues in the rest of the UK, then it would have taken too little off, so it would need to take more off the Scottish Government. When the Scottish Government is overestimating and the OBR is underestimating revenues in the rest of the UK, that is when you see the particularly big risk. When the OBR is in the opposite direction, when they are in the same direction, you have less of a problem. Sorry about that. I think that that is quite helpful. Actually, what you are describing is a situation where we have the OBR on one side, the SFC on the other, perhaps sides the wrong word, but actually, to do no fault for the Government, because four carers' errors are wrong, their budget might be in turn either up or down significantly through no policy changes from the Scottish Government. I mean, I guess you will have changes in, so it depends on how you are viewing this. Ultimately, one would want the Government's budget to be determined by out turns. What has actually happened to revenues in Scotland, what has actually happened to revenues in the rest of the UK? Of course, there will be forecast errors, and that can mean that, with this current system, you have additional volatility in the system. In fact, you are delaying the volatility, if you like, because you base things on forecasts initially. The Scottish Government has some degree of certainty to plan during the year, and then, when things turn out to be different, you adjust at a later date. I think that it is important, given the constrained borrowing powers of the Scottish Government to deal with changes in forecasts in the year, because of the constrained borrowing powers under the fiscal framework, if we did not have this kind of delayed system, it could pose more of a problem to the Scottish Government, rather than less of a problem. You are absolutely right, convener, that it is the two sides of the equation. In terms of the figures that I think were quoted, we have forward forecasts from both the Fiscal Commission and the OBR, so those figures are the net position and take them into two accounts. In terms of the original question about storing up problems for the future, I think that one of the suggestions that Audit Scotland has made is that there needs to be an awareness that the volatility is built into the system. The decisions that the Government and the Parliament are making are a longer-term approach and a more strategic approach to take account of that. As well as looking at the detail of what are the year-to-year effects, what is the extent of the volatility through time and how can we design policies, how can we design tax policies and, indeed, spending policies that can respond to the volatility as it comes through? With the potential, for example, to think about where in the spending programmes is an opportunity to turn the tap on a bit and turn the tap off a bit without a general upset, without undermining the way in which public services work and the way those are set up and a real opportunity for the Government and the Parliament to try and think ahead more strategically about how that plays through. Of course, at the moment, we are in the very early years of that. We have got an assessment from the Fiscal Commission that the underlying error level on their side could be around half a billion pounds a year, small in the overall scheme of things, but big numbers. You would expect a similar error level from the OBR estimates through time. Fundamentally, as has been suggested, it is whether those amplify on another or offset one another, really gives you the issue or the opportunity as you go through. The other last thing for me to say is that we often think of that in terms of downside risk, what happens if the money is less and the forecasts that we have come through suggest that the money might be less for the years ahead, but forecasting risk is unbiased. It can go either way, and there will be other years in the future. I say this now with confidence, but we will see if it plays through. There will be other years in the future where that risk goes the other way, and the Government and the Parliament have the challenge of, well, we have more money than we have expected here, but we cannot depend on it. It is not a recurring effect, it is a one-off year effect. How do spending policies, how do taxation policies get determined to take account of the volatility that we know is in the system over the longer term? Can I just ask you to pick on one thing that David said as well, Mark, and I will come to Tom. I think that Tom wants to contribute. David talked about constrained borrowing powers to help to deal with this volatility. Is there a view from Audit Scotland on whether that is a constrained process or not? I think that our view is that the rules are the rules, and the challenge that Government and Parliament have is to operate within the rules. We would not expect us to convene a view on the policy. What I can say is that it is challenging. There is not a lot of room for manoeuvre built into the fiscal framework agreement. Again, through time, when we get more of an understanding about the level of volatility that this is suggesting, there will be an opportunity to reflect on that through the review. That is a very diplomatic answer. You would expect nothing less. That is absolutely right. Thank you, convener. Good morning. I am just reflecting on some of the language that we have heard in the first 20 minutes of this session—moving parts, volatility, challenges, inflexibility, problems around scrutiny. I am keen to get the view of our guests this morning, whether that is something that is hard baked into the system and is an inevitable consequence of the fiscal framework and the rules that we operate under, or if perhaps five, ten years down the line when it is had a chance to bed in, we will be able to observe patterns and there will be a greater degree of predictability. Or is it just something that all Scottish parliaments are going to have to contend with just as a consequence of the way in which the suite of tax powers are arranged between Holyrood and Westminster? Who would like to have a go at that? David, on you go. I think that I would always expect there to be errors in terms of forecasts, so I think there is always going to be the process of reconciliation. Over time, the Scottish Fiscal Commission will have more data, more outturns, effectively, to compare its forecast to and to look at the most sensitive assumptions, whether that is around the earnings forecast or the employment forecast or the pensions income forecast. Over time, you might expect there to be some improvement in the forecasting capabilities of the Scottish Fiscal Commission, but forecasts are fundamentally an educated guess, so there will be an error going forward. Over time, I would assume that the Scottish Government and the Scottish Parliament will become more fair with the process, and that will make it easier for committees and for Parliament to engage in the process. Over time, I would expect there to be a more educated public, more educated media, so people can engage on that side of things as well. I do not see this process becoming a whole lot easier. What I would say, though, is that this process is there in order to provide a degree of insurance to the Scottish Government. The block grant adjustment and the reconciliation process, et cetera, is there effectively to mean that the Scottish Government bears the relative risk of its revenues moving less quickly or more quickly than the rest of the UK, but to properly ensure the Scottish Government against border macroeconomic shocks. It is complex because it is trying to do a somewhat difficult task to provide this kind of insurance that Scotland needs, given that it has not got the borrowing powers. An alternative would be potentially to give Scotland significantly bigger borrowing powers and then significantly less insurance, whether the UK Government would want to do that, whether the Scottish Government would want to have that additional risk, given that many of the risks would be outside of the Scottish Government's control, having not got levers on monetary policy and things like that is another question. However, with the current set-up of what the fiscal framework is trying to do, it is inherently going to have these kinds of complexities. I am not commenting particularly on the fiscal framework or the forecasting side, but particularly on the Scottish income tax policy side. While it remains a shared tax, there is obviously going to remain a lot of constraints in terms of what can be done. Part of that is that it is almost a natural impulse to automatically make comparisons with the policies that are active in the UK, but it is naturally intertwined anyway. The Scottish Government's decisions are impacted by, for example, the choice of the personal allowance and the level of the personal allowance. With better education of the public, it might become easier to diverge and make that more acceptable to the public so that it is a less automatic comparison between UK and Scottish policy. However, while it is a shared tax, that is also automatically going to lead to that constraint. That is a good point. No, I was just thinking about, I agree with what David says, that obviously forecasting as a process itself is never going to be in exact science, but it is going to get refined over time as data improves. I suppose you are in a particular period of uncertainty at the moment, which is maybe not adding to factors. Under normal circumstances and with time and improvements to forecasting, you would expect it to improve. I would like to make the point that, obviously, borrowing powers come at a cost. Obviously, increasing your borrowing powers increases what you are going to spend on repaying that by way of interest out of your normal day-to-day resources. There is a constraint to bear in mind of what is affordable. The issue of managing volatility falls a bit more into the idea of reserves and holding reserves, because, obviously, if the impact of forecasting errors and so on can go both ways, it is also an issue about what you do when you have an upside. Do you tuck that away as a reserve? Do you replenish the reserve or whatever and use that to manage the volatility going forward? There is a combination of tools that you need to look at, rather than just think that where it is borrowing is our way of managing volatility, if you see what I mean. That was great help for me. Last point. With regard to a greater suite of tools, would that, for example, increase the limits, the caps on what can be drawn down from the reserve along with increased borrowing powers and picking up on the point that Johann made about, for example, the interaction of UK-controlled aspects of taxation such as personal allowance? Another key one, which has a very significant interaction with income tax, is national insurance. Would there be a case, if, as David suggested, moving towards a position potential of greater responsibility with less insurance, that would necessitate an increased range of tax powers for the Parliament along with increased powers over borrowing and more flexibility with the reserve to manage that risk? I think that SIPFA would argue that wider tax powers for you would benefit you. Obviously, you have a large amount of your income tied into one particular tax that you have control over. Obviously, volatility in that impacts you perhaps more so than if you had a wider range of tax powers. Obviously, that has increased the evolution and so on. That is a different matter, but I would certainly agree that a wider range of tax powers would help to mitigate some of the risk, not all of it, but some of it. I guess that national insurance would have many of the same risks as income tax. If you were thinking about diversifying risks, you might want to have shares of taxes that have potentially somewhat different bases. You have part of VAT already. The other big one that you have not part of is the co-operation tax, but that has a lot of complexities around devolution. Is that what they are finding in Northern Ireland? A very final question about national insurance. If we could be keen to hear the views of you adding this about the interaction with income tax. Clearly, it is a UK-wide set of tax, but the upper earning limit is being paired with the higher rate of the UK, which can have an interaction in Scotland, which we do not have any control over. It is a way of trying to influence Scottish decisions that the Scottish Government would take by the back door. It would not be a case for either the UK Government moving in such a way to engage more closely with the Scottish Government of a diffidentiated rate in Scotland, or for that tax being devolved. I do not think that I can comment on the policy choices there, but in terms of now, what we will end up with is a band of £6,570 for employees that will be taxed at 53 per cent and joint marginal rates. A similar size band for, if you are self-employed, the joint rate will be 50 per cent. It is a significant kink in the effective marginal tax rate for those earners. I believe that it will affect about 120,000 taxpayers. That link was interesting, and it was commented on when the UK passed their budget in October that they did not mention the fact that, when they were raising the higher rate income tax threshold to £50,000, that was also raising the upper earnings limit and increasing the amount of national insurance that the rest of UK taxpayers would also be paying. It is a very complex issue to decide. Obviously, if you had more control over that, it would help, but equally, I think that there are a lot of things that would need unpicking. I apologise to you for being on the spot with the policy question. It was just more to get a sense that technically the two taxes interact and normally there would have been any decisions taken if one tax would be taken with a view without impact with the other. It is certainly something that we would like to see as a lot of collaboration between the UK and Scotland in terms of those interactions between taxes and national insurance and just generally to make sure that taxpayers are not necessarily adversely effective at all. If they are affected, at least everyone is aware of those effects going into it. I would like to add to some of the points around the national insurance, because I think that you need to be really careful about what you are comparing here, because all taxpayers right across the UK are going to be paying more national insurance. It has gone up by about £340, because the higher rate threshold went up south of the border and across the peace. You have to be really careful as to whether you are comparing income tax and income tax or net take-home pay, where you have one of the levers, and we were talking earlier on about lots of moving parts and balancing them and complexity. This is one of the illustrations. One of the things that is really interesting about the powers being devolved to Scotland around income tax is that it actually, because they are only partially devolved and because the whole system is still intertwined, not just with income tax being intertwined, but the way that income tax interacts with other taxes, corporation tax, NIC, CGT, all those meet together and one has to be careful about all those bits rubbed together. What changes in the Scottish higher rate threshold do on income tax is shine a light on difficulties with the overall UK system. I do not think that it sits with either the Scottish Government per se, but what you do is what you do. That is income tax. You cannot affect the national insurance. There has to be a knock-on consequence here, but everybody across the UK is going to pay more than national insurance. It has nothing to do with the Scottish Government. It has a flip side because you have changed the higher rate and the rest of the UK higher rate income tax and the NIC are married together. However, as Johann mentioned, in that UK budget, in October, everybody says that the higher rate threshold has gone up. You will be paying less income tax—it is like your story, David—and while you pay less income tax, if the national insurance threshold goes up too, you pay more national insurance, so the two net off against one another. It is that that does not have a lot of visibility across the UK. Throughout my working life in tax, there has been calls to amalgamate NIC and income tax. One of the really interesting things that we need to look at—not here today, but much more broadly across the UK is whether the two of them sit together or actually you want to be hypothecating them more so that NIC does whatever and income tax in Scotland does health and education, plus? I wanted to pick up on a point that David mentioned. We do not talk about VAT very much. In this segment of the conversation, it is really about volatility. I wanted to ask David and others what you think about using the partial devolution of VAT, which is still under way, as a means as part of the toolkit for managing the volatility in and around taxation on income. If I understood it correctly, what David was saying is that if you have a concern about the volatility arising out of taxation on income, you do not necessarily want to devolve more tax powers with regard to income, but we are not devolving powers only with regard to taxation on income. We are also at least partially devolving powers with regard to taxation on spending. Part of the thinking behind that, as I recall, was that income patterns and spending patterns can be counter-cyclical, so there is a way there of managing that volatility. The question is, to what extent do members of the panel think that when the partial devolution of VAT comes on stream, that will be an effective tool, limited but nonetheless effective tool that the Scottish Government will have in its box to manage the volatility that we are talking about, in addition to borrowing powers and the other things that we have talked about? I think that there will be two factors going in different directions when VAT assignment rather than devolution comes on board. First of all, yes, it will be a different tax base that the risks are not perfectly correlated with the income tax risks, and therefore you have two taxes that are not fully correlated that will offset each other to some extent in terms of the volatility there, but you also will have more of your revenue from volatile streams rather than from the block grant. The fact that you have two different taxes and different risk profiles should help to reduce the risk, the fact that more of the overall budget will be coming from risky tax streams rather than from block grant would tend to increase the amount of risk in the budget. Obviously, also with it being an assigned tax rather than a devolved tax, there is not scope to change rates or to change policy in the same way as income tax to change the revenue yield or to have different distributional impacts. Clearly, a more diversified tax and a tax basis will have less risk than one tax base on its own, but the fact that the overall budget is going to be more dependent on tax revenues would tend to increase risk. How those two things play out, I am not sure, my gut would tend to increase risk overall. Okay. Just before we move on for this session, because it is related to issues around divergence, the equality and fairer Scotland statement that was published alongside the budget said that it would be separately published distributional analysis of income tax changes across income groups, with respect to age, gender and disabled people. I just wonder whether any of our panellists and our contributors of today are involved in any of that analysis. Do you know if it has been published yet? Angela, are you aware of that? Yes, convener. It was our recommendation in the budget review group report that there should be more distributional analysis. There was a seminar in October and there was a position paper published on that. There is work in progress now to be developing the ways. The seminar explored with officials from those inside the Scottish Government and different departments of the UK Government as well around data needs, data analysis approaches to data, where there are gaps in the data, and what needs to be remedied to make effective analysis around the equality characteristics identified. That is going forward, as far as I understand. You understand where it has got to. It has not quite got to full publication. Before we move on from our first item, I just wanted to build a little bit on the helpful discussion that we have had thus far, complex, where volatility is characterised as the moving pieces of different decisions that different Governments take, economic performance and the good old science not of forecasting. I would be interested to have a view from our guest this morning in relation to something that the spice paper stated, which was that over the years, since 2016-17, the Scottish Government has adopted different income tax policies and the economies of Scotland and the rest of the UK will have performed differently. That seems to me—I think that we have touched upon it this morning—that even if Scotland adopted the UK tax policy, it might not generate enough tax revenues to offset block grant adjustments. That would seem to me to diminish any argument that we should be making the same tax decisions as the UK, given that the Fiscal Commission says that it changes the Scottish income tax policy and a more positive outlook for the economy, since it may have increased our income tax forecast. I would be interested in views on that and, in particular, that that would lead to our focus should be on the impact of what we do differently, particularly around the three P's of productivity, population and participation. I appreciate that there might be a technical theoretical argument or answer to some of that, but I think that there is also a contribution from our guests who will have an input and views on inclusive growth. Okay, who wants to take that for start for 10? Mark, when you go. Give it a go, convener. Thank you. In terms of what matters, there are essentially three factors that matter. One is how the forecast is made and what is the forecasting risk with that. One is how the economy grows and what the impact of that is through time. One is what the difference, similarity and tax policies are between the two Governments. When you strip back all the complexity and variability, those are the three things that matter to the budget this year in terms of the amount of funding available and the matter of the budget in future and what the knock-on effect of that is. The then question is, which one of those can we control and influence and which one are we passive recipients of? There is a variety of responses to that in different parts of all of that, but ultimately it is those three factors that matter. That is captured both in the spice paper and in fiscal commission's forecasts. A way of illustrating that is that, in terms of an assessment of the Government's government's tax policies, it has assessed that the differential tax policies make a difference of around £500 million to this year's budget. If you look at how that interacts with the block grant adjustment, the net effect is £182 million of a contribution in addition to the Scottish budget. The difference between those numbers are those other factors. That is about how is the economy performing relatively and how do the forecasts play through. One of the things that the committee might find helpful is to find a task for a wee bit more detail on how that £500 million figure is calculated and might give a bit more insight into the make-up of that difference, which helps to understand what can we control and what can we not control. In answering your question, it is worth going back to what the purposes of devolution are. I think that there are two broad purposes with tax devolution. The first is to provide incentives to the Scottish Government to have economic performance to grow the economy, to boost employment, etc. Those operate even if you have no policy divergence. Even if the Scottish Government had the same policies as the rest of the UK, you would still have the incentive to grow the revenues more quickly. That means that it would not be pointless to have devolution even if you did not change policy. Devolution also gives the Scottish Government the chance to vary policy if it wants to be more redistributive, to be more progressive, if it wants to raise more revenues, if it wants to change how the tax burdens are distributed. That can be another tool for which the Scottish Government can maybe try to boost the economy, but it can also help to meet its other objectives. If you look at what the Scottish Government is doing, it is clear that it values those powers to raise more revenues and to make the tax system more progressive. It is still worth having in mind what the system is in the rest of the UK for two reasons. First, it is a political reason in that, whether it is a joint system, some people will compare it, and I am sure that the Scottish Government will have that in mind. It is certainly what the Welsh Government has in mind when they are making tax policy, they are concerned about being seen as out of step to the rest of the UK and therefore being labelled a high tax economy or things like that. Also, because of the behavioural responses, not just migration, but because the dividend tax in Scotland is not subject to the Scottish rate of income tax, and you can see tax motivated incorporations if you see a very big X tax burden in Scotland. I guess what I was saying there is that the scope to vary policy needs to be careful in thinking about that in terms of what the behavioural impacts be and not be thinking that you always need to change policy to make it worthwhile having devolution because they still are the incentives there. On the three P's you mentioned, if I was to say which is the one that is most important for tax revenues, it is probably productivity rather than participation or population. You get more people into work, a lot of the income is going to be tax free because of the personal allowance, and that is really quite high now. You get someone into a minimum wage job, they are having to pay no tax. It is good from a social perspective to increase participation. In terms of revenue, it does not really get you that much any more because of such a high personal allowance. Productivity means increase in earnings for everyone, including those at the top of the distribution, and that is why you will rake in the extra revenue. In terms of thinking about the Scottish tax base, it is the productivity one that is the most important. I want to contribute to this one before we move on to the next area on the number of tax payers, which fits neatly to what David has just said. I think that we can go there now, James. I think that you are leading this session now. Thanks a lot, convener. One of the variables that feeds into the tax calculation is the number of tax payers, particularly at the higher rate and the additional rates, because it is in those bands that the bulk of the revenue comes from. If you go back to this time last year, the forecast was that we would have 337,000 higher rate tax payers and 18,000 additional rate tax payers, then HMRC produced an out-turn report, which for 1617 showed that there were actually less tax payers in these bands, 296,000 for the higher rate and 13,300 for the additional rate. The SFC forecast from last week shows a slight increase, but not back to the level we had last year in terms of the forecast for 1920 to 327,600 for the higher rate and 18,800 for the additional rate. Obviously, it is quite important if the number of tax payers has gone up in these bands, then ultimately your income tax forecast will go up if they go down, it will decrease. Therefore, it is clearly important to get these forecast figures accurate going forward. I am interested in an understanding of what are the drivers that feed into the number of tax payers, particularly in these higher rate and additional bands, and how can we build accuracy into when we are trying to forecast these figures? Mark Ruskell will answer the easy part of that first, and then we will go to the harder part. In terms of building accuracy into the forecast, the baseline is now known and the starting position is now known. As further out turns are published each summer, an update on that position will be available, albeit two years retrospectively, so there is a bit of forecasting that still needs to be done there. Immediately, we have seen corrections in both the OBR and the Fiscal Commission forecasts, which will largely offset one another—almost entirely offset one another. That baseline position is known. What matters going forward with many of those themes is what the interrelationship between the number of tax payers relatively in Scotland and across the bands are to the number of tax payers in the rest of the UK are, and how that changes through time. Are we able to grow the number of higher and additional rate tax payers faster in Scotland than we are at a UK level? That will have a positive effect on the tax take, and, similarly, the opposite of that would have effects. It is that movement through time against the base. The starting point—people around the table will know—is that, on average, we have a few relative tax payers in those higher bases in the rest of the UK. We have more than in Wales, and that is the starting point. I think that what really matters is what happens from here. Who is that? I would say that, yes, there was a downward estimate of the number of higher rate tax payers in the first year, but that gets put into the baseline block on adjustment. What matters is how they evolve going forwards, and that will fundamentally depend on productivity growth among higher-earning occupations and how you pay people in Scotland, but also the extent to which you see any responses to Scottish tax policy—whether that is migration, reduction of work effort, tax-motivated incorporation—and the beneficial impacts of Scottish Government policy on the economy that could boost the numbers. To link to Ms Constance's points, I certainly do not have an answer to how we boost a number of higher-rate tax payers. I do not have that policy magic wand, but what I can see in my personal reading of the budget is that there are significant challenges around being a low-wage or a no-wage economy in Scotland, with 2 million people not paying tax. That presents significant issues in terms of the other policy challenges. However, there are realities of people's lives and the level of poverty and the level of economic instability that there continues to be in people's lives. Although there are clearly a number of policy choices that have been made by the current Government, there are issues about the clarity of presentation of those policy choices across the budget in relation to accessing the labour markets, etc. There are a number of important interventions, but they are scattered throughout. Colleagues have commented on the importance of productivity over participation. The questions about participation are also about the quality of participation in the labour market. What types of jobs are being created, how sustainable and what the earnings levels are? Where we see spending decisions being made within the budget with proportionately smaller amounts of money being allocated to those kinds of interventions that will boost earnings capacity through employment and skills, which relates to your question about inclusive growth. Thinking about who is earning and this is where the work on distributional analysis is going to be very important. Who is earning and who is not earning? How do we characterise productivity? We continue in policy terms to see that investment in the care economy as key to our economic infrastructure is not characterised in that way. There was a Scottish Government publication on the rationale for investing in infrastructure, which talks about the positive benefits of education and health and other public services, but it does not talk about investment in care. Participation in productivity and how the unpaid economy supports the rest of the so-called productive economy is a real challenge. I think that that challenge has to be made much more visible. Talking about participation only in terms of economic activity, as it is currently defined, is problematic and continues to mask issues around economic contribution that are not measured through earnings and the tax base. Again, we have a way to go in working through the components of our economy and of the barriers to inclusive growth. We have to address some of the real challenges and the unresolved conflicts of what has been called around care. When we look at who is earning and who is earning what, we see 300,000 fewer women taxpayers. From that already very small tax base, there are a number of challenges within that. 91,000 of the higher-rate taxpayers are women compared to 275,000 higher-rate men, so there are all sorts of structural problems continuing in the labour market and in earnings that affect who is paying tax and at what level. Angela Constance stole all of my points. From a human rights perspective, one of the key principles of the obligations of Government is to maximise your available resources. When you look at our relatively small tax base, there is not a lot of movement. In terms of variants and income tax rates, there is not a lot of potential movement to increase our tax revenues, but having 2 million people who are not paying tax is a huge and concerning number. Angela Constance referred to the difference in gender. For me, when I was reading through the analytical note that went alongside the budget, it presented it very much as a matter of fact. There are this percentage of men, this percentage of women who are or are not contributing in income tax and almost just accepted as fact rather than looking at how we look at our budget policy choices. If we are to address that 2 million who are not currently contributing in income tax, what are the budget policy decisions that we are making? Angela Constance referred to the bits and pieces throughout the budget, but looking at childcare policy and our extension in childcare policy in Scotland, what is the aim of that and is part of that outcome? We want to see more women in paid employment and in the issue around productivity, looking at the types of jobs and the value in the jobs that we have. The data that we have is limited in terms of distribution analysis at the moment, but do we use the data to ask the right questions? I do not think that we do that at the moment. Thank you, convener. Just to follow up on a couple of those issues, there are connections between spending choices and tax choices. We are focusing on the tax side, but I will highlight the proposed treatment of local government, where gender inequality and employment tends to be less than in the rest of the economy as a whole, including at the higher end of the income spectrum within local government employment. Will the proposed reduction in core funding for local government affect both the income tax that is paid by the tax receipts to the Scottish Government from that part of employment, as well as the gender impacts in terms of the effect on who is going to be employed there? Obviously, the policy question about local government spend is a matter for another day, but the impact on both tax receipts and the economic impact of gender inequality are relevant to the discussion. I want to agree that productivity is the key driver in this, but maybe David can keep me right. I would be aware that some of the devolved Governments of the UK are also fairly interested in foreign direct investment and things like that, so the nature of the jobs that you will bring into the marketplace or encouraging to bring attracting higher wage jobs, ones that are in maybe newer tech industries or whatever it happens to be, rather than focusing on getting people into work. It is about the policies that support the education, that support those jobs and that attract those types of jobs, which will improve the kind of earnings level that you want to get to, because there is also the demographic issue to factor in terms of people are getting older and some of those high earners now are going to retire and disappear, so I think it is also about if foreign direct investment and bringing in new jobs is a factor in the economy, it is about the policies that support that, which are going to underpin the future growth for those taxpayers in those brackets. Do you want to take on the specific issue that Patrick Lee has raised about the impact on the whole government? I will address the income tax implications rather than the gender equality implications, because that is a complicated question to address. It depends on particular types of roles that are being taken out of local government, etc. That is a question beyond my expertise. In terms of the income tax impacts, I think that I would make two points. First of all, this policy would still save the Scottish—if the government has to save money, it has to make cuts, it would still save money overall by cutting the cost, cutting the funded local government, that would save £100. It would lose income tax on the employees, if those employees do not find it any alternative work. That might cost them £20, £25 depending on where they are in the income distribution, the people who lose their jobs. It would still save the Scottish Government money if it needs to reduce its spending. The second point that I would make is that at least if the economy is operating close to potential in terms of its output, if there are vacancies available, many people who might lose their jobs if there is a reduction in local government employment would likely find jobs elsewhere and those who are paying income tax as well. The question is whether we think that those individuals who may lose their jobs if there is a reduction in local government spending would be able to find other jobs. If they are, that might not lead to much of a reduction in income tax. It comes back to the point that I was raising earlier about how income tax devolution is designed to incentivise the Scottish Government to find ways to help people to get into work and to stay in work and to improve their productivity. Maybe even more than usual, the Scottish Government now has strong incentives to actually help people back into work if they are affected by policies that it is making itself or other factors affecting the economy. Alexander Stewart, do you want to come in on some of the questions? I was really a question back on the number of tax rate payers. We were just following on from some of the comments that were made at the beginning and more recently on who is paying what. The number of additional rate tax payers is set to go up by 25 per cent by the next Parliament. The number of higher rate tax payers up by 10 per cent. If we are seeing a negative behavioural change just on the current of £13 million, which I presume does translate into a downward number, I was wondering if somebody could clarify how we are going to get those increases because, as I would understand it, either people are moving bans upwards or the bans are going to have to move downwards to capture more people. However, if real earnings are only going up by 0.3 per cent and 0.5 per cent, can someone explain how they think that 25 per cent is how valid that is or if that is possible? Let's just try to package that just slightly differently. HMRC said that, for $1617,000, with 13,300 additional rate payers, for instance, yet, by the time we get to 1920, the SFC is saying that that has grown in its forecast to $15,800. What's happened to that growth? I was puzzling about it as well. Are you going to tell me, Mark? Unfortunately not, and no doubt it will be top of the list of the questions that you have for the forecasters around that. The observation that I would have is that those are thresholds, and therefore someone who is just below the threshold and then becomes just above the threshold gets recounted above the threshold. The general upward movement of incomes through time and how that sits alongside the forecasters underlying assumptions about how the tax levels might grow will affect that, and both those things are tied back into their forecast of the economy. Just to come back on Patrick Harvie's point, without getting into the local government debate, which I am not in a position to do so, the system is designed so that spending decisions now have a feedback loop into the public finances and how much tax is raised, and increasingly, Governments will need to become more sophisticated about how they target those and their understanding of how that works. I am making any comment on how that works in the current budget proposals. The system is designed so that there is a feedback loop between expenditure and the income that is raised through taxes, and the discussion that we have had around the table today illustrates how there might be some fertile ground for some movement in expenditure decisions that might help to do that. Of course, politicians of all parties want the best. What the new system does is give a hard financial edge to some of that stuff and gives a hard financial set of motivations alongside the motivations that we have all got for things to be better to help to play through the system and make those links between expenditure decisions and how much tax is raised. On that point around the £150,000 threshold, it is important to look at nominal learning growth rather than real learning growth, because it is frozen in cash terms rather than frozen in real terms, like most of the thresholds. Between 2016-17 and 2019-20, we could be seeing earnings growth of around 10 per cent in nominal terms. Secondly, you could see differential earnings growth across the distribution, so that you might see higher earnings growth at the bottom. I am not sure what the SFCs have made on that, or if they have said what they have assumed about differential earnings growth. There is also income that is not counted as earnings, so the main one being self-employment income for the Scottish tax purposes, so whether that is growing at a differential rate. The point that Mark made about the threshold being very important, if there are quite a number of people just below that threshold, even to small earnings growth, can get quite a few people over the threshold. If I were to be the Scottish Fiscal Commission or be the Scottish Government, I would be looking at the detailed income distribution around that point and saying that, looking at the various services that the SPI, annual service hours, owns, are there lots of people in jobs that are just below that threshold or that are affected by that. Maybe that is what they have done and that is how they come up with those forecasts. If that is what they have done, perhaps a bit more information about what has driven that growth could be useful. Well, there is well forecast to them that this is coming up the next time when they come to see us in January. The better we are watching you are right, Adam. Angela, you are the point to make as well. I just need to revert a little bit to Patrick's points about the implications on women, particularly in local government. Given that women are concentrated in low-paid jobs in local government, I think that the reforms and the restructuring that there have been and that are continuing through remodelling of social care delivery, through integrated joint boards, and all those moving parts to use today's language, to reinforce the importance of scrutiny and scrutiny at the parliamentary level, again consistent with the budget review group recommendations for the committees across the Parliament to be alert to those changes, in part the feedback loop that Mark is talking about. However, I do not know that I share David's confidence necessarily in the likelihood of finding jobs elsewhere. Although that may be true, I think that again it is about looking at the character of those jobs and a point that Charlotte raised earlier on about having to look not just at the interrelated impacts of the basket of taxation measures, but at the interrelated factors around living costs and the interplay between low-wage and the UK welfare system that has had a particularly punishing effect on women and particularly women of colour. The living costs are particularly experienced by low-income workers, so travelling for work presents very high cost impacts on low-paid workers. Again, changes in who is employed in the public sector, particularly in the local government, we have to look at those impacts in the round. Emma, do you want to come in before I move on to the next section? Okay, thank you, convener. Just to pick up on what Angela and Alison were saying about women, because we have 56,000 nurses in Scotland and 87 per cent of those are female, and they are earning at a band five, six levels, so basic and intermediate. It is predictable that we know what tax we are going to raise from those nurses. I am interested in what Alan was saying about immigration and post-Brexit, because there is a particular group of people. There is a third of dairy farms employ migrant workers, and those are from Poland, Lithuania and Romania. Has any model been done to look at the forecasting post Brexit if we do not have those tax contributions from those folks? Those people are young, fit and healthy. They do not use the NHS. They send their kids to local schools, so has any model been done about what they contribute currently and what might be lost? Is anyone aware of any modelling that has been done in that area? Is it something that we need to ask the SFC when they come as well? I am not aware of any Scotland-specific modelling of that, but colleagues at University College London have done work looking at the fiscal costs and benefits of different groups of migrants, including post-2004 EU migrants. They look at the short-run impacts, so that tends to pick up a net fiscal benefit, because these are young, fit and healthy people who are in work. Over time, that has actually reduced somewhat, because the increase in the personal allowance has gone back in 2004. It was £5,000, so most of people's earnings, even in quite low-paid jobs, are being taxed. Now, with £12,500, a lot of these people are paying, a lot of low-ish paid people, which includes many migrants workers, are not paying so much tax, so their net contribution has probably fallen over time. Also, it would have fallen as more of them have had children and they are going into school. On average, you would expect a migrant worker with a given set of earnings to make a bigger net fiscal contribution to the tax system, for the simple reason that we have not paid for their education. They come here, educated and can start work, and we have not paid the upfront costs, if you like. It is not as simple as saying that, because migrant workers do not use services at the moment and are making an income tax contribution, etc. That means that there is a large net fiscal contribution here, because you need to look over a life cycle when there will be costs associated with having children and, potentially, if they stay here, costs of retirement. However, because people who migrate here as adults have not been educated here and are in England cost about £75,000 per child, that is a cost that has not been incurred by many migrant workers. That is a net fiscal benefit to the UK or to Scotland, in particular. However, UCL College London has done some work on that. I am going to take that as a nice way to go into behavioural responses, and Willie, I think that you were going to lead in this area. I would like to ask the panel's views and thoughts on behavioural change and responses to changes in tax policy. The fiscal commission paper suggests that there are possibly two types of responses that people may have. One is to reduce the hours that they work, particularly in relation to the higher-rate threshold issue. Another is that they may change their residence or location. They estimate that loss in tax revenue could be about £13 million in total. Counterbalancing that with the impact of that change in Scotland, we estimate that the receipt for that, not changing the threshold, will be about £68 million to the Scottish revenue. Do you think that we need to worry about behavioural change? Is it marginal at best? And what do you think we should do in the future to try and model this? The fiscal commission talks about the standard modelling of that, and I wonder what that is exactly. We can look at that in January. What are your thoughts about behavioural change and whether there is any evidence to actually back that up at this stage? I think that Alison wants to contribute, and so does John. Alison, on you go. I know that, in this case, Angela has got the right statistics for this, but we were talking about this this morning on the way here. In relation to behavioural change, it is also important when we are presenting the negative behavioural change to look at some of the social attitude surveys in and around this issue, which have generally been much more positive about people's impressions on increased tax and paying tax and the value of paying tax. I think that it is dangerous to only present one side quite often in the media. We hear the negative aspects, but the value in paying tax is underestimated in those discussions. The balancing on the cost of living in Scotland and introducing that into the discussion is quite significant when you look at different costs of living in other parts of the UK compared to how much tax we may be paying if it is marginally more. One other aspect in relation to behaviour that I think would be interesting to discuss is relation to tax avoidance and evasion in general. When you talk about £13 million, when we look at the HMRC's estimates of tax evasion, tax avoidance and tax debt being in the billions, it dwarfs that small percentage that you are talking about in relation to behavioural change. The Scottish and UK Government's efforts to promote human rights in general are meaningless unless there is an adequate effort to collect the necessary funds to provide for basic public services. I think that the issue of the tax gap is as important when we are talking in and around the issue of behavioural change. I would say that there are probably more potential behavioural changes that can be undertaken by taxpayers from fairly simple ones that may be higher-rate taxpayers might take like paying additional pension contributions. If a higher-rate taxpayer in Scotland pays more pension contributions under relief at source, they will end up with higher tax relief, so it is beneficial to stay in Scotland and pay more pension contributions and benefit from that. There is the possibility of evasion, which is an on-going issue in the whole of the UK. The issues about numbers of hours worked and things like that. Tax-motivated incorporation, but in terms of that, there are some restrictions. Obviously, you can only do that if you are self-employed. The UK Government has been introducing off-payroll working measures, which is going to come in for the private sector as well from April. That limits certain types of self-employed people and their ability to incorporate and effectively change their income tax from being Scottish to UK. In terms of migration, it is difficult to know how big an issue that is likely to be. Again, it is limited to who can undertake that. There are certain groups that, if they already split their time between somewhere else in the UK and Scotland and have a high enough income and enough wealth to do so, may be able to alter their circumstances to effectively become a UK taxpayer. For many other people, it is not that simple to say that I am going to move house to somewhere in the north of England and then commute to Scotland if their job is in Scotland, if their children are at school in Scotland and things like that. Of course, it costs to move house. We have done a bit already in this committee about the incorporation issue, but it is the first time that I have heard the issue of the pension matter that I am aware of. Can you just tell us a wee bit more about what you meant by that, so that we can understand it? If, for example, you are in, I think that this might affect more people who are taken into higher-rate tax and who have been paying, say, 21 per cent and moving to a 41 per cent band. They might be able to, say that they currently make a couple of thousand pounds of pension contributions a year, then they might be able to up that enough to make sure that they do not actually pay any higher-rate tax. The way that happens is that if you make pension contributions under the relief-at-source system, it effectively increases your basic rate band and your intermediate rate band by the gross amount of the pension contribution. It might mean that you can effectively pay less tax and get a bit of tax back. I do not quite know how that works in terms of all the block grant adjustments and whether that is a massive issue. I could not actually say whether that is an issue, but it is obviously part of the tax system. I know that Charlotte wanted to contribute. Maybe you can tell the sound so that... No, I am completely with Joanne there. I do not know how it flows through into block grant adjustments and all that kind of thing. I do not even know how easy it is to measure, given that some of our more basic points around the number of taxpayers is difficult to measure. Reverting back to the earlier conversation, I think that we are on a steep learning curve for decentralising statistics from the centre to getting national regional column what you will statistics, and that has probably got a 10-year upward curve to really pull out what you want. Coming back to those points about behavioural changes, and again, I do not have hard measurable evidence. A lot of what we have is anecdotal, but accountants are... Their bread and butter is designed to make sure that your tax is right, maybe less rather than right more. Would that be the way to put it perhaps? You want to look at two categories of people overall, in this debate. There are those who are in Scotland, and it is a moot point as to whether anybody would migrate to the north of England in order to sidestep some tax. On the other hand, there are measures that those folk can take, which Joanne has discussed and we could come back to. There are also all those who might think of migrating to Scotland, if we need doctors and what have you. They are in the kind of categories where they may be receiving messages about Scotland being expensive. I know that there are drives among some folk to try and look at the cost of living the overall package and not look at the thing, but in pure tax terms, if you compare a Scottish taxpayer with somebody south of the border, the higher rate upwards, they are going to be paying more, and that surely must be a driver of perceptions and or of behaviour. For those who move into the higher rate band, they have two considerations, one, they are going to be paying more. Secondly, if they look at their pay pack at the end of the day by the time you combine NIC and income tax, do you know if you earn another 100 quid, you will only get 47 in your hand here, so maybe that is less than half. What will I do about this? You could work less, take unpaid leave, perhaps if that is part of your package, not do overtime depending on where you sit. There are maybe some benefits that might be worth looking at. Certainly the pension contribution is a really sensible proposition for those who do not know what is not to like it, they are saving for the future and surely that is to be encouraged. It would reduce your tax bill now, the theory is that you might pick up tax in years to come, but there is quite a bit there if you are looking at impure, stark tax terms that might look like they might influence behaviour, and I think that it is quite difficult to measure across all those higher rate taxpayers those marginal changes around pensions and holidays, it could be quite subtle the way it flashes through. If people want to contribute, that is great, David. Can I make two small points? First, I think that we can think about behaviour responses short term and long term. There are some people who can respond relatively quickly to this by changing the status in terms of how they are categorised, whether they are employee, self-employed or incorporated. Similar short-run responses could be pay more into pensions, maybe cutting a bit back in your hours. Then there are longer-run responses, which you might think that overtime can have a bigger impact, so migration would be a longer-run thing. In the short term, you might not migrate just because of the change in tax policy because there are big fixed costs associated with moving house, moving country, but if opportunities come up elsewhere, you can move to Scotland or move to the north of England. It is the kind of thing that will affect decisions in the long run. It could also affect decisions about promotions and risk-taking in the long run as well. If one is thinking about taking a promotion, but actually a 53 per cent is going to go in tax rather than 21 per cent in tax, that might affect your decision. It might affect your decision to take risks in setting my business if more of the earnings you get in terms of your small business get taxed. I think that short versus long run is an issue to bear in mind. The differential scale of responses at different parts of the income distribution is very important. When colleagues of mine and myself look at this for the UK as a whole, back with the changes that we saw around 2010, it looks like, around the higher-it threshold, responses apart from those with dividends income, including businesses, are actually really quite small. However, when you move to the additional rate tax payers, around 150,000 thresholds and above, those are much more responsive. Therefore, I think that the cautious approach that the Scottish Government has taken to the top rate in terms of thinking about the potential impacts is quite welcome, because that is the group that seems to be most responsive to changes in tax policy. Although, of course, it is also the richest group that you can get significant revenues from. Thank you. Both John Walker and David Phillips have talked about mobility as something that we perhaps do not quite know enough about, and how realistic it is as a factor to consider. When I have looked for information on that, I have found some amount of research from other countries, but very little from this country. However, what I have found from other countries seems to imply that, other than a hypermobile, a really small number of the super rich, the bulk of people at the upper end of the income scale are less mobile when they are later in their careers because they have invested economically and socially in the place that they are, and they have greater mobility earlier on in their careers when things like house prices are a bigger factor in terms of—or clusters of skills that are relevant to the industry that they are working in are a bigger factor in where they locate themselves. How much information do we still need to gather? How much research do we still need to conduct to understand the actual evidence about this within Scotland and the UK? Is anyone actually doing that at the moment, in the Scottish Government or in academia? Are there other aspects of behavioural effects that we need to understand better in order to inhibit or reduce more active, if I can put it this way, anti-social tax avoidance? Angela Constance I would like to tie my comments together around questions about public attitudes and perceptions about tax. It is a point that Johann made earlier on about public education. For as to better understand collectively in Scotland how tax revenue is raised and how it is spent and what the benefits are, I think that there is a need for improved public education and information around that, because there are a number of questions around public attitudes and perceptions to be addressed in terms of taxation. Ali referred to some of the data in preparation for this morning. I looked at the Scottish social attitudes survey and, in the last count, we see pretty much tied on public attitudes to taxation, with 47 per cent of the population thinking that we should pay more and spend more, and 46 per cent thinking that it should stay the same, with only 7 per cent saying that it should be cut. If we look at that, we have quite a fair tile basis in terms of public attitudes in Scotland to support a Scottish-appropriate tax system, and one that talks about the kind of social contracts benefits that colleagues have been talking about in relation to access to public services such as publicly funded childcare. I come back to the concentration of the focus on behavioural effects for higher earners. If you were to ask some very low-paid workers, it might be a problem that they might like to have to consider reducing their working hours rather than working three cleaning jobs and still not earning enough to come into a tax band at all. Whose behaviour might change there? Again, behaviour in relation to the relationship with the labour market and the relationship between earnings and the quality of work. Tom, you had something to add as well? Yes, just following on, Patrick's point about the exclusion of a mobile super rich. I am not entirely aware, given that the evidence seems to be anecdotal at best, that I am unsure what the evidence base for this is. I think that there is something quite reductive and sterile about the assumption that individuals would necessarily leave or defer decisions about seeking promotion. It is almost predicated upon a classical view of human beings as home economicists. The work of Canaan and Tversky is about 40 years old, but behavioural economics has been quite popularised and we understand that people take decisions based on a broad range of areas. It is a very holistic approach. The question that I would put is what is the flip side and what is the behavioural driver of public policies? For example, Scotland sought tax parity with the remainder of the UK. That would be below £500 million in public services. If that meant an end to the pupil equity fund, if it meant reintroduction of prescription charges and university tuition fees, surely that would have a perhaps even greater bearing on individuals' decisions whether or not to seek to work in Scotland or to remain in Scotland. I say that whether appreciating this session is focused on tax, but if we are going to look at behavioural changes, I think that it is rather artificial and abstract to simply consider tax as a driver of behaviour in isolation. I think that there are a few points that relate to both Tom's question and Patrick's question. On the question of what evidence do we have from the UK, we have had no evidence because tax rates have been the same across the UK until very recently. Colleagues of mine have been thinking is there now enough of a tax gap between Scotland and the rest of the UK to do some analysis? Probably not. If you want to help some economists to do some research, keep policy divergence going on and have a nice natural experiment. In terms of what the evidence international is, I think that I have seen some work from the US that suggests that one thing that matters for how mobile people are is are they in major agglomerations? The evidence from the United States says that if you are in New York or California, then high tax rates do not really affect you so much as if you are in Arkansas or Mississippi. You have big non-tax reasons for being located in New York or California if you are a high earner. That is not so much the case if you are in Mississippi or Alabama or Arkansas. The agglomeration effects can be an important veiling factor that will allow attractive locations to set higher tax rates. Does Scotland think that it has got those attractive attributes, whether that is the agglomeration effect within Edinburgh and Glasgow area to boost the strong economy or quality of life for other aspects? Scotland can effectively use its amenity value in order to set higher tax rates and not lose people. On the point that Tom raised about spending versus—if you were to cut the taxes, that would mean lower spending and that could also impact on quality of life and opportunities within Scotland. That is absolutely correct. If you look at the tax side in isolation, the standard model effectively does that. It looks at the tax and says that there is a higher tax rate, that money effectively goes into a black hole and therefore what is the impact going to be on people's work incentives, on people's migration incentives, et cetera. It is important to think about how is the money being spent? Can that act as a magnet for people of Scotland? Can that actually help people to stay and work or increase the labour supply? However, not all behavioural responses require migration, so you can still benefit from Scotland's higher spending on universities or hospitals or other things. If you have a second home, reclassify the London one as your main home or pay more into a pension or incorporate your business to pay the UK tax while still living in Scotland. Those benefits from the spending are spread across the whole of the population, whereas the additional tax burden is focused on a small part of the population. It could still be the case that the benefits from the spending do not fully compensate for the higher taxes, for the group of people paying the higher taxes. I guess what I am saying is that thinking about how the spending side is actually affecting the equation is really important, but there are still factors, the fact that you can avoid the tax or reduce your tax labour fees without leaving Scotland. The tax has come from a small group where the benefits are spread across a wider group, but it still means that it is still important to think about the tax and behavioural responses to taxation. I would say that perhaps this necessitates powers over tax avoidance to come into this Parliament so that we can just mitigate and eliminate these behavioural responses. To wrap there, we need to be careful when we are talking about if it is tax avoidance and something that should not be done. It is a perfectly legitimate proposition if I were to start up in business for me to decide whether I want to be Charlotte Barber, a sole trader and pay income tax and have unlimited liability and all the things that go with that. Tax is a part of that consideration. It is every bit as legitimate and within the laws of the country to say that I would sooner set up a company and have my business in there and the tax regime that flows from that is not only different in terms of corporation tax and income tax but also a further interplay between Scotland, Scottish income tax and UK corporation tax or UK income tax on dividends. It is wrong to classify that as something that should not be done. Those are legitimate business decisions and you need to work with that. Part of what needs to be worked with is across the UK because, again, back to the anecdotal evidence, I went to a training course just recently on the budget and there was talk about for businessmen—those who tend to be in the higher earning upper end—if they are running their business what is not to like about incorporating. That was a tax driver but I come back to the point that it is completely legitimate. It is not tax evasion, it is not illegal. In this course we were told that the dividend UK rate is staying constant, and corporation tax will be going down. Where would you put your business? This is a very interesting area that we are going into. We have done it before. We have been there before but I am just conscious of where we are, time-wise. I need to finish this properly and get through all the questions that we have. We have begun to move into areas of data and issues that Angela Brown raised. I am going to go to the other Angela Brown now to start the next discussion off. All that we want for Christmas is reliable forecast data and some transparency please. We would be really interested in what our guests have to say about what the main issues are for the published data on income tax and how we can make the fiscal framework more transparent and consumable. Since it is Christmas, I am going to fling in a question about Brexit. Given that the Fiscal Commission forecasts an orderly Brexit, I am not sure that I am going to lay money on that outcome. In paragraph 25 of the Fiscal Commission report, the highlight is that there is no meaningful basis for making predictions on the development of the UK-EU future economic relationship. Picking up on our earlier discussions, the Fiscal Commission is also predicting lower growth, primarily driven by lower productivity, which, in part, is due to Brexit. There are certain elements that the Scottish Fiscal Commission is really excelling itself in terms of the information that it provides to people. I am incredibly impressed by the information that is provided on policy costings. If you compare that to what the UK Government provides in its policy costing documents, which started off as a couple of pages and now are a couple of lines, we model this. The Scottish Fiscal Commission provides a lot of information to scrutinise and to understand the tax policy costings that it has made. I guess that one thing that it is difficult to get from the published figures by the Fiscal Commission and from the Scottish Government is a sense of how these things add up over time. I know that the Scottish Government has said that it is £500 million. That number is a bit of a black box, as far as I can tell. It would be nice if actually there was more—given that the Scottish Government has made a very clear strategic priority of increasing tax revenues to the UK and doing so in a progressive way, actually looking at the strategy, the policy as a whole, is quite an important thing. More transparency, more information around the different components of that, how that figure would be useful. In terms of the overall fiscal framework, the information is there in the Scottish Fiscal Commission's report, but personally I found it a little bit hard to get a grip of it all, because it is in different tables in different sections of the report. It could become a monster table, which would have the block-on adjustment and the different components of the block-on adjustment for each of the different taxes. The revenue gain from Scottish Government policies, having it all in one place, would at least for me—maybe not for most people—make it easier to see how the overall Scottish Government's budget—almost, yes, because actually seeing everything line by line in one table, if you are a numbers person, it helps to see the various components, how it all adds up to a Scottish Government budget that is £137 million more income tax, and this is how it all works out by the various components. This is how much because of Scottish Government policy decisions, this is how much because of UK Government policy decisions, and this is how much because of Scottish economic performance, because those are all important things for Scottish voters to know. What is the Scottish Government responsible for? This is how much the policy changes are making me pay more and how much they are raising from those. This is how much UK Government policies are raising or costing and how it is affecting me. This is how economic performance in Scotland is compared to the rest of the UK, and this is something that I can hope the Scottish Government to account for as well. I am not sure what this table would look like, but having one place where all this information is there but there is an infographic about this table, I think it would be very useful in terms of certainly someone like the—or a group like the committee here holding the Scottish Government and the Scottish Official Commission to account, but also if it can be disseminated in some way, potentially at least a subset of the population, the engaged part of the population to also hold the Scottish Government to account on policies as well. I like that idea. One table for the whole budget, that is a cracking idea. I am making things much more simple. To agree, transparency is a key fundamental principle of human rights-based approach. Fiscal policies are perceived generally as inaccessible by the general public, and to be able to have a good relationship between government and the public and an understanding of what money is being raised and how that money is being spent. There is no need for more transparency. I have a beautiful number of little tickets that you can see on my budget document. We have all got them. I am going through this, and the number of times I am finding figures, given in different ways, some in percentages, some over three years, some but we are not the same over three years. Others do not add up on the same table as what it said in the paragraph, and the headings in the paragraph are not the same as the headings in the budget lines. I am not bad with numbers, but it is—I would not—well, I do not know if it is deliberately confusing. It gives that impression that it is difficult and therefore people will not interrogate it. I think that the fiscal information needs to be more straightforward so that the general public can engage with it, and I would class myself on that sort of fiscal ability as a general public. Transparency is absolutely critical for any kind of scrutiny, whether it be by the public or by scrutiny bodies. I would vote for more transparent, easy-to-understand information on that one table. Does that mean that what we need is less rather than more? Not necessarily less, but the information that matches the same information in one place as it is in the other. It is very difficult to follow the budget through and find the information that you need and have it match. The challenge here, of course, is that there is a jigsaw with lots and lots of paces here. There is a 10,000-piece jigsaw rather than a 100-piece jigsaw. There is no picture in the box, but the boxes are held by different people. The Scottish Government has a bit of it. The Fiscal Commission has a bit of it. The OBR has a bit of it. The Treasury has a bit of it. How do you bring all those pieces together? For me, there are two broad things. One is the cumulative effect that often focuses on the margin, the year-to-year change, the policy effect of this particular policy. How can we pull that information together to show what the overall effect is through time? The other thing is to be able to drill into some of the detail that we were talking about earlier about what is the economic effect, what is the policy effect and what are the forecasting risks. It is a real need to compare what is in the Fiscal Commission forecast on that side with what is in the block grant adjustment and some visibility over how the block grant adjustment is constructed in the same way as we have from the Fiscal Commission. That is really difficult. There are some basics that we do not have yet, so we do not have any information about the calculation of the block grant adjustments yet. There is something about how that needs to be there to show how that links back into OBR forecasts, and then that will be a basis for the conversation with OBR about how your forecast is compared with the Fiscal Commission forecasts. There is a job that is certainly us in Audit Scotland, but we have all got an interest in doing which is to try to explain those things. The inherent nature of it is that it is very complicated. We will build up that understanding through time, and everybody who has those different boxes can try to explain how the whole system fits together. I should say that throughout my long career in tax, I do not think that anybody has ever much understood tax, but we can keep trying on a more sensible point. Just following on from what you have said, Mark, I think that some of the interesting bits that need greater clarity do not just sit here in Scotland. On the tax side, they fall across Scotland and the UK and far better working together. If we went back to those points on national insurance, in the UK alone, there was a lack of clarity and that your income tax went down and your national insurance went up. If you then put that into the mix here where you have Scottish Income Tax and UK national insurance, that adds to the complications. Again, it is incumbent on all of us when we are doing, if one does comparisons, they seem to be inevitable, that we say whether we are comparing a Scottish taxpayer with this year and next year, or whether we are comparing a Scottish taxpayer with a UK taxpayer because they come out completely different pictures, there is quite a lot that could add clarity around there. Joanne? Following up on Alison's points, I would agree that transparency is really important for accountability purposes and presentation plays a really big part in that. That is maybe what we have been effectively saying in the past few comments. On that, just following up Charlotte's point, as well when we have been comparing Scottish taxpayers with either Scottish taxpayers last year or UK taxpayers this year, there is a point at which you need to know how much of that effect is from the UK policy and how much of the effect is the Scottish policy. Maybe one big table would be really good, but it might mean that there is probably a need for a few more tables as well. Thank you, convener. Again, to echo the points on presentational clarity and ease of access, and those questions again took up a lot of time in the budget review process as well about the consistency in the presentation across the budget documents. I appreciate the challenges that colleagues have raised, but there is a way to go. I just wanted to mention that in a revised and hopefully re-energised equality budgets advisory group into 2019, one of the things on our work plan is the focus on revenue and taxation, looking at the equalities dimensions of the Scottish Government's principles and tests, but the implications around revenue raising and improvements in the equalities analysis of the outcomes. Colleagues today have learned a great deal on the technical aspects, and part of the challenge in scrutinising the outcomes is moving from the technical to the human and understanding what difference are those policies making in people's lives. I do not see anybody else wanting to contribute in the transparency section. Angela, you want to finish in a north, so you are quite happy. Nobody is taking the bait over Brexit. I got that. I am thanking you, convener. Okay. Oh, thank you very much. Oh, sorry, Alan. Just going to make the point now in terms of the consistency of presentation, I think, is an important point, but also one size does not necessarily fit all. I think the idea of a table for the more figures-minded people around here would be very good, but if it is the average Joe public, it probably does not take much interest in public finance, to be fair. Something that summarises the infographic of the key messages is probably all that you need in terms of the budget. One size does not fit. I would love to see the infographic that had the block grant adjustment, the fiscal framework. The difference between Scottish taxpayers and English and the rest of UK taxpayers, the difference between what we paid last year and what we paid this year in Scotland, that would be a cracking infographic. You would be probably the first in for that competition. Anyway, thank you very much everybody for your contributions. It has been a very useful discussion and genuinely has been. It will be helpful for our budget report, which will be publishing towards the end of January. It only remains me in the public session to wish everyone a nice festive period when it comes along.