 Fyddwch i Gwelftiwyr 15 ydda yn 2015 y duodd yr Ff Afroedd Cymru, ac serfodd i gael ddweud i amser honi ei deser o ddiwyd yn ddif Tigernol, Phewyd, ac mae'r rydwg cymryd gan Ysgrifennidol ym Mhysel Wennysol, felly i castoedd o'r ffynans, yn gwneud i gael i dda'rgeonu ddim, ond eisiau yn gweithio ddig inveceu i gyffredinol. Fyddwch i gael i gael i gael i ddefnyddio i gael i gael i gael i Gymryd i gael i Gwelftiwyr ac mae Gagwaint Fırdigol rhoi med «Yn Da fiwr mor iawn, wrth i garchfodus校nyddi Hen겨πach yrwallwyddau. A o kanol a'u gweld ar gyr percebodi kokonol awr. Mwnaen pwygoi mee rhaid yng nghymru ni'n cyfunbating ar 잠깐만 astidon awr, ddim yn chael chi'ch gweld ar awr. Na ddechEd, dwi'i nhw'n gweld revivead felly mae gyntafdwy ar gyfer Llyfrgell Pad changes ond y BirthdayVO, a amgylch yn cael eu gorfodol yna hefyd tuwc maen nhw caeth miAN proposeol. Parfwraith ," A answers to make orders to improve the exercise of public functions having regard to efficiency, effectiveness and economy and to remove or reduce burdens." Eight orders have to date been taken forward ynghylch ar gyfer y artistredd sy'n cymestiynau a'r Cyfrifolau Cymysigol Folaeth sy'n cyfrifolau ac byddwyr cyfrifolau Cymysigol Folaeth ac ystod peirnt gyfrifolau cyfrifolau cimysigol i newid cyfrifolau cyfrifolau cyfrifolau cyfrifolau cyfrifolau cyfrifolau cyfrifolau, a ddim bod ddodd iawn y gwaith o'i gwrsiau ysgrifennu Cymysigol Cymysigolstanbul. Diddygoedd y cyfrifolau cysybodaeth yn gwych, coördenat, ac y prifysmoc iddyn nhw i'r cyfrifolau a fyddwys iawn i ddechrau iawn o'r gweithiacol cymaint o'r ddysgu cymaint, byddwys iawn o'r gwneud o gweithio i gael i'r cyfreithio y ddigonol i'r rhaglen o'r relas yng Nghymru i ddau o'r gael i'r mwyafio a'r ddau i'r gweithiacol Cymru, yn cael ei bod yn cyfrifoedd o gyfryd o ddysgu'r gyffredinol, probbydd chi'n f tastio'r ffordd o'r ffordd i ddechrau meditating gymwneud, oeddych chi'n ffordd i'r gwneud o'r cynlî yng Nghymru i'w ddim ti'r syltiadau cyllidion a'r unigonau Cysigionol NHS sydd o'r gwneud o'r cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu Lってis cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cyfrannu cifor. Although, during the passage of the original bill, members expressed concern that those powers might be misused, the fact that a relatively small number of orders have been taken forward to make important but small-scale changes should provide reassurance that the powers have been used appropriately. In each case, the orders were subject to full public consultation, parliamentary scrutiny and where necessary to amendment. Where significant changes to the public body's landscape have been proposed, those have quite appropriately been delivered through primary legislation. A recent example is the merger of Historic Scotland and the Royal Commission on the Ancient and Historical Monuments of Scotland, which has taken forward through the Historic Environment Bill. It is vital to retain the order-making powers for another five years, as those provide government and Parliament with the flexibility to make changes quickly as and when opportunities arise without taking forward primary legislation. Streamlining and simplifying the public body's landscape is a continuing process, and wider developments such as the further devolution of powers to Scotland and the on-going challenging financial context mean that the powers continue to be relevant and necessary. I should like to reassure members that the additional safeguards introduced by Parliament during consideration of the original bill, including those in relation to consultation and scrutiny, will remain in place. In response to points raised by the Delegated Powers and Law Reform Committee that the Scottish Government has not revised its approach to consultation, we continue to believe that consultation is an important aspect of Scottish Government working methods and should be carried out on proposals for legislation except on rare occasions like this. As the order seeks only to extend the duration of part 2 and the provisions themselves contain no detail, the only views that a consultation could have elicited would have been for or against consultation and would not have led to any changes to the order. It is therefore unlike the vast majority of legislation on which full, substantive consultation on provisions can take place. We consider that the best evidence of the impact of part 2 is how it has been used in practice since it came into force. On each occasion, the orders have been subject to full consultation that has been no communications to the Scottish Government since the enactment of the 2010 act, suggesting that the powers have caused problems or have been used in an inappropriate manner. The Scottish Government continues to believe that it provides an essential mechanism for making small-scale changes to public functions. Ultimately, it is for the Parliament to decide whether or not the powers should be continued on the basis of the past use and potential future use in relation to improving efficiency, effectiveness and economy and removing and reducing burdens. I am very happy to address questions. Thank you very much for that opening statement. As you have touched on in your statement the issue that has come to prominence is the response of the Delegated Powers and Law Reform Committee and its consideration. It has, of course, written to me on the issue of consultation. You talked about your thinking behind that, but I want to highlight some of the issues that have been raised by the Delegated Powers and Law Reform Committee. It said, and I quote, The committee is concerned to know that the Government takes a view that it is unlikely that stakeholders would have any particular views on the matter. Furthermore, the committee considers it for members to make an informed decision that they would have been benefit in having the findings of a consultation exercise to draw on. Furthermore, the committee notes that individual occasions in which the powers are exercised have themselves been the subject of consultation, but such instruments raise an entirely different issue to that posed by the current draft order. The committee's committee colleague Nigel Dawn has therefore asked for an answer to pursue that. I assist Cabinet Secretary whether he can give us some further ideas of your thinking on that matter, given those concerns. I know that you are fully aware of what has been raised by the GP LRC. The issues around the provision of those powers in the bill in the first place were well exercised in parliamentary debate. Indeed, the Government responded to the discussions in the debate at that time with the provisions that were finally enacted, particularly the sunset clause. We have had the benefit of seeing over a five-year period how that power has been utilised. It would be impossible to sustain an argument that said that the power had been used for any purpose other than that for which it was originally conceived. As I indicated in my opening remarks, the Government has received no representations since 2010, suggesting in any way that the Government had not used those powers for any other purpose. Therefore, the judgment that I arrived at was that, given that any change that we would undertake using the powers in the act would, of itself, be subject to consultation, the mere provision of a continuation of that responsibility, which had been properly and fully and exhaustively debated within Parliament, did not merit a specific consultation. Given the fact that anything that arose from the exercise of those powers would be of itself subject to consultation and full parliamentary scrutiny as a consequence, that was the basis of my judgment as to why it was appropriate to proceed on that basis. There was some concern expressed on the principle of the thing. If there has not been very many issues taken forward in the past five years, why do we need to continue it for another five years? We have taken forward eight orders. If we had not had the ability to take forward the approach that has been provided for by the act, those changes would either not have taken place or they would have required more exhaustive primary legislation. As I deliberately went through the range of subjects that have been taken forward as part of the order or under this provision, those have been minor amendments to the landscape of public bodies. The things that have habitually been left unattended to until another primary legislation vehicle comes along, which enables some of those things to be done, and then the parliamentary debate often can be about the fact that the Government is bringing forward legislation that is covering a multitude of different topics, all crammed together under one piece of primary legislation that raises concern within Parliament about the focus of primary legislation that is taken forward. What that power has given us the ability to do has been to take forward relatively minor issues. Those minor issues will continue to occur as we continue to amend the public bodies landscape in Scotland and to address some of those questions. As a consequence, it is a useful and practical power to have at our disposal to avoid the recourse to more time-consuming primary legislation. On the specific point of the consultation, we know that it was considered quite controversial when the legislation went through. A number of groups raised the point that their independence might be compromised and issues like that. Presumably the sunset clause gave some reassurance that, if there were problems or whatever and issues like independence, it was for a limited period of time. Are we in the position now that we have any idea, do we know, if those groups say that they have not made many comments over the past five years, but we are certainly not going out to ask them if they have comments? Do they still have these fundamental concerns about independence? We do not know, do we? We know in the sense that, at the time of the passage of the legislation, there were a lot of comments made in Parliament about the nature of those provisions and what they would be used for. All sorts of suggestions were made about how those powers would be misused. There is not a single scintilla of evidence to support some of the rather lurid comments that were made during the passage of the legislation back in 2010. From that point of view, I think that there is considerable reassurance that the practical utilisation of those powers has been evidenced by the way in which that has been taken forward by the Government on legislation that Parliament clearly legislated for in primary legislation. The exercise of the powers has been handled in that effective way. If there were issues, causes and concerns that people had about the exercise of those powers, I am pretty sure that we would have heard about them, but we have not heard about them in the course of a five-year period. From my perspective, Parliament legislated for those powers. It provided the opportunity for those to be extended if Parliament so chose and the Parliament has been invited to do so today. One of the aspects that is considered as to whether there needs to be a consultation or not is the history of the policy area. Would you not accept that the history of this, because it has been controversial, would suggest that there should have been a consultation? No, because I think that the exercise of the responsibilities in this order has been done in such a fashion that it has not given rise to any of the concern that was put to Parliament back in 2010. All sorts of speculation was put to Parliament in 2010 by people who opposed the provisions that the Government was wishing to put in place. When we look at the developments since then, there has been no substance to those concerns. In my view, a provision that Parliament has properly and effectively legislated for is simply being provided for in the order that is before the committee today. In addition to that, any action that follows or arises out of that is the subject of consultation. Therefore, there is the protection of a consultation and the protection of parliamentary scrutiny and parliamentary decision making on any of those orders as a consequence. The crucial point is that Parliament has self-legislated for the provision five years ago. Therefore, the judgment that is made by Parliament that this is an appropriate power to have. The exercise of that power, and the history of the exercise of that power, has been entirely consistent with what I said to Parliament at the time that it would be the case. Gavan, to be followed by Malcolm Macleod. Over the past five years, if there have been any significant changes to the public sector landscape, you indicated that you have used primary legislation to do it. If this order is passed, there is a firm Government commitment to continue in that vein so that any significant changes to public sector landscapes should there be any will still be through primary legislation and you would use those powers in a broadly similar way to the way that you have used them over the past five years? I would propose to use the powers in an entirely similar way. The key point in addressing Mr Brown's question is that the exercise of those powers has been entirely consistent with what I told Parliament in the run-up to the passage of the legislation in 2010. I am very happy to confirm that our actions going forward would be entirely consistent with what has happened in the past five years and entirely consistent with the explanation and assurances that I gave Parliament five years ago. One of the reasons that the powers were sought initially by the Government at reviewing the various debates that seem to back it up was that the wear of changes in visits to the public sector were going through a period of reform throughout the public sector. One of the arguments given by the Government for having those powers was that because there was a huge amount of reform going on, it needed the ability to be fleet of foot. It was thought that five years was an appropriate time. That was not an easy question to answer, but do you envisage those powers being held by the Government in perpetuity and just simply renewed every five years, or is your view that, if that order is passed in five years' time, we probably won't have a need for such powers, or do you envisage that effectively being renewed constantly? It is me looking well into the future, but I think that the nature of the changes and the character of the changes that have been undertaken as a consequence of the use of those powers has been essentially for minor alterations to the landscape. I think that in the real world, those minor changes to the landscape are going to probably continue on an on-going basis. Yes, there will be major elements of reform of the public sector landscape in Scotland, but Mr Brown rightly highlights from my earlier remarks that the Government will bring forward those changes through primary legislation because they will require to have the extensive and full scrutiny that would be appropriate for such major changes. Without prejudging what the situation will be in five years' time, I would imagine that there would still be a cause and a need for the minor alterations that we have undertaken through those powers that have been taken forward in due course. Parliament gave approval for the part of the bill, but surely Parliament gave approval for this part of the bill for five years. Is it irrespective of the merits of the case, or is there not an issue about the nature of a sunset clause and what Parliament's intention is when they insist on a sunset clause? I think that that is correct, and that is precisely why the committee is considering an order to extend the exercise of those powers for a further five-year period, which was made in the primary legislation. Parliament has clearly provided the case, but it cannot happen automatically. It has to be the subject of parliamentary scrutiny and parliamentary consideration. On the basis of the fact that the exercise of the powers has been undertaken internally consistently with what I explained and proposed to Parliament five years ago, I think that that gives the basis of the framework for parliamentary assurance on those questions. Would it have been such a big problem to consult? It may even have proved your case for you if all the people who were concerned would now just write and say, it's fine, we haven't got a problem with this anymore. I suppose that it's more the nature of a sunset clause, as there's not a requirement after five years to look at it afresh, given you've only been given that. If you're looking at legislation afresh in the Scottish Parliament, you would normally consult on it. The issue for me is largely contained in the way in which we have exercised those responsibilities. If I went back to look at some of the points that I was accused of wishing to take those powers for in 2010, the evidence does not substantiate any of that argument that was put to Parliament at the time. I feel that the issues were well rehearsed in 2010. Parliament made provision for an extension of those provisions if it so chose. The manner and the basis of how those powers have been exercised is entirely consistent with that approach. Therefore, we are in a position where Parliament is able to take that decision today. Have you looked at any precedence in terms of the treatment of sunset clauses in previous legislation? There will be a variety of different examples where consultation will and will not have taken place. My judgment on that point was that it was a relatively straightforward judgment to arrive at that the powers that have been provided for acted consistent with what we said to Parliament. Therefore, there was a case for extending the powers or making the case for extending the powers in the fashion that we have done so. Thank you. Richard, you are followed by Jean. Thank you, convener. You said that the powers have been used eight times over the past five years. Do you have expectations to be used more frequently or less frequently over the next five years in terms of those numbers? I think that it is difficult to tell, but what I would say in response to Mr Baker's question is that I would envisage the powers that have been used for comparable circumstances. So, whether it is once or 20 times, they would be for broadly minor changes to the public body's landscape but, in all circumstances, they would be consulted upon individually as a consequence of the taking forward of any orders under this particular power. I cannot predict the general point that Mr Brown was pursuing in his questions. Are we dealing with an entirely static public sector in public body's landscape? The answer to that question is no. We will be facing changes and, I would imagine, we will have to make changes on the basis of efficiency and economy, as the bill provides for. However, as to providing a definitive view on how often I would imagine the provisions to be used, that is not possible for me to do that at this stage. Potentially, they could be used far more often over the next five years, depending on what the agenda is for public sector reform. Given that, it would not have been a Belt and Braces approach to ensure that there was full consultation at this point before we may embark on a period where they would be used more frequently than they were over the previous five years? No, because the assurance to Parliament is the fact, and the point that I have put on the record in response to Mr Brown as well, is that the utilisation of these powers would be entirely consistent with the type of changes that we have made and the type of changes that we suggested in the parliamentary debates in the run-up to the passage of the Public Services Reform Scotland Act 2010. If in five years the Government comes forward to extend those powers again for other five years, do you think that it would be acceptable at that point that they would say, once again, there is no need to consult on that provision, even then it would be ten years since the bill was originally passed? That would be a judgment to be arrived at at the time. Obviously, ministers would have to come to view at that stage, but I think that the basis of how we have taken forward the exercise of this power demonstrates that we have remained entirely faithful to the commitments that we gave to Parliament in 2010. My question was answered in your answer to Mr Brown and Mr Chisholm about when does the sunset on a sunset close. Given that you have been the cabinet secretary and have clearly been very canny about using this particular legislation, is there any opportunity, if God forbid, that you were not the cabinet secretary? However, there could be any abuse that would give members—clearly, there was anxiety in the debate before which allowed them to do a kind of temporary fix. I do not think that there is an opportunity for that for probably three reasons. Firstly, the power would have to be exercised consistent with what I said to Parliament in the run-up to the 2010 act. I think that a minister would really struggle, frankly, to sustain an argument if they were trying to undertake major reforms of the public sector landscape through this power because that would exceed what I put on the parliamentary record in 2010, so there would be poor foundations to the argument that a minister could put forward. Secondly, any individual instrument has to be the subject of separate, distinctive consultation and parliamentary scrutiny, so there is protection in that respect. Thirdly, there is now precedent because there is now five years of precedent where, if a minister was to come forward with a more significant change that one might consider merited primary legislation, the body of precedent would be against them in sustaining that argument. Indeed, in each of the provisions—I think that relates to the core question of consultation that the committee has wrestled with this morning—on every one of the orders that we have brought forward, which have been the subject to consultation, there would be the opportunity for stakeholders to say that this is a change that is being undertaken outwith the spirit of the 2010 act, and that has not been forthcoming. For all of those reasons, there is an established practice about the nature of how those powers can be utilised and exercised, and ministers would be unable to sustain an argument if they did not act consistent with the three elements that I have set out today. That has concluded questions from the committee cabinet secretary. We now move to debate on motion S4M-13108. I invite the cabinet secretary formally to move the motion. I now put the question on the motion. The question is that motion S4M-13108 be agreed to. Are we all agreed? Thank you very much. The committee will now publish a short report to the Parliament, setting out our decision on the statutory instrument. I thank the cabinet secretary and suspend the meeting for a couple of minutes in order to change over witnesses. Today is to continue to take evidence as part of our inquiry into Scotland's fiscal framework. I therefore like to welcome to the meeting Professor Ronald McDonald, Professor Michael Keating, Professor John Beath and Professor David Bell. Members have received briefing papers from our witnesses, so we will go straight to questions from the committee. The normal process here in the committee is that I will start with a few opening questions and then we will open up to colleagues around the table. I am sure that you all know the drill. If I ask a question to a specific member of the panel, please, if others wish to comment on that question, feel free to do so. We will have a wee bit of interaction, hopefully, among the panellists. The first question is going to be to Professor Beath, which is in terms of your summary. You have said in your second paragraph that it is crucial that the process allows sufficient time for deliberative consultation. The $64,000 question is how much time? If you are going to put a figure on it, I suppose we would have to say more than a year. The reason is that it is a very simple reason, and that is that if you actually want to have an enduring settlement, you have to be sure that you have got in place a fairly clear, robust framework. Developing those things inevitably takes time, because you need to consult with people, you need to test out the framework in simulations to see whether or not something works as you think it might work, or whether the something needs to be corrected. If you suddenly jump into a framework and adopt it and six months down the line, you find that something goes wrong, you have a problem. I am sure that nobody wants that sort of problem. That is exactly why we say that you need a proper process. Before I let other panellists comment on that, there are a couple of points. Calman was first proposed in December 2007, and some of it is still not being rolled out yet. A vow was made in September of last year, and there have been political commitments made to the electorate about implementation timescales. Do you not feel that, if it was to go on a year, a lot of people would feel really disappointed? They would feel, perhaps betrayed, is too strong a word, but there would be a real backlash that promises made in terms of rolling out additional powers, etc. Were we being delayed inadvertently or deliberately? Well, there will always be some people who will be concerned about delay. Again, it is how you explain the delay to them that matters, and I would have thought that I would go back to the phrases in the title of the document, of ensuring that we have an enduring settlement. I think that most people would realise that, if that were explained to them, that it made sense to make sure that you have all the pegs in place before you suddenly start playing the game. I would comment, obviously, that people would say, why was the promise made to deliver within a year if it could not be delivered within a year? Professor Bell? I do not want to go into the politics of this, but I agree with Professor Beath that, if there is to be an enduring settlement, there has to be in place a piece of legislation that makes sense and an administrative system in place that will be workable. As you say, the arrangements for the Scotland Act 2012 are still not in place. There seems to be still some doubt about the definition of Scottish tax payers and no complete clarity around the block grant adjustment mechanism. It may be difficult to explain to people that those things take time. It may be that it is possible to put in place some kind of legislation well in advance of the actual powers coming into force, whether that would suffice. It is difficult to say, but even legislation, it seems to me, has to be thought very carefully before it is put on the statute book. If it can be, do you think that the fiscal framework should be agreed before the legislation is passed? I think so. There are huge questions of detail here. I would think that you want a situation where there is no opportunity for retrenchment to post legislation being put in place. What that means is a huge amount of work in a very short time. I would be wary of that. Professor MacDonald, Professor Keating, do you want to comment at all? Yes, I am looking current with what my colleagues are saying. If you look at the process, a lot of that has been done in the hoof, if I may say so. The work that Paul Hallwood and I did on fiscal autonomy going way back to the early 2000s, we were making the case very strongly for some form of fiscal devolution, fiscal autonomy, but in our work we have an interesting little model, which is the threat of secession model. In that, we predict that the enhanced devolution powers that we are going to see will come about once we see threats of secession. That is exactly how I think the process has been. It has really not been done, I believe, on a scientific basis. I think that the key element that people have focused on is trying to address the vertical imbalance or the fiscal gap. Where we are now, we seem to have moved quite a lot in that direction. More generally, I do not think that there has been a proper discussion of what framework does the Scottish Government need to implement its policies. That is part of the problem at the moment. What do we need? What is the optimal mix of taxes, tax devolution, expenditure devolution? How is that financed in terms of borrowing and so on? Those are things that you cannot decide very quickly, because there are all other consequences that I mentioned in my submission about what happens to prices and competitiveness within a monetary union where you have devolved taxes. There are lots and lots of issues here that have not even begun to be discussed. I would suggest that we proceed with caution, because we have to get it right. If we do not get it right, the consequences for the electorate could, in my view, be much, much worse than going ahead with something that is not properly thought through. I do not know what the constitutional status of the vow was, but it was produced very late in the campaign when 20 per cent of the people had already voted. At the election, all the parties said that they would implement it, so that is hardly a mandate. It is sadly as though it was something that became part of the referendum campaign or the subsequent general election campaign. However, things have changed since the general election that we have now got a majority Conservative Government that seems to be committed to reducing the scope and size of the state over the long term as a percentage of GDP, if not in absolute terms. Scotland voted very differently if the trends in England particularly continue as at present we may see a radical restructuring of the state. It is very difficult to see any majority in this Parliament going along in that direction, so the question would be here whether, in Scotland, we want to continue to consume as much by way of public services and less by way of private consumption than is the preference in England. If we do, then do we want to pay that by taxation or by charging, whether it is university fees or prescription charges or whatever? If we do, then there are implications for the level and types of taxation. Now, all the proposals that have come forward for devolution of taxes either assume that we are going to have broadly the same mix and size of public services in Scotland as in England, and I am suggesting that that may not be the case, or else they have been tied to proposals for cutting taxes, which goes exactly the opposite direction for what I am suggesting, that maybe in Scotland if there is a political preference for more public services, then the level of taxation would have to be higher. If we accept that, then it has huge implications for what kinds of taxes and whether we have a broad base of taxation and whether we have taxes that are buoyant and whether we have taxes that can actually be used. I do not think that the Smith commission meets any of those requirements, so we need to go back to first principles and think through it again. That will take us a year or two years at least, but we have a five-year Parliament at Westminster, and we have the Scottish elections coming up next year, which is going to be an important thing, and we are going to make it even more difficult to try and get this thing through fast. I think that we have time to try and get this right, and it would be a mistake to rush through the Smith proposals now, because we will certainly have to revisit them again before too long. I think that the panel is using that issue quite clear, and I wish to explore it further. Continuing with the RAC, Professor Beave, you talked about the need to establish fiscal institutions that can provide independent and rigorous analysis and review. You said that the RAC is firmly the view that there is a need to establish an independent fiscal body in Scotland to provide authoritative and independent forecasts of the future fiscal revenues and budget positions. Where do you feel that the Scottish Fiscal Commission fits in with that framework? I would have thought that if you are looking for something to build on, there is a break in place at the moment, which is the Scottish Fiscal Commission. It is very small and it is not particularly well resourced, I do not think. It certainly does not have the capability to conduct the sorts of exercises and analysis and scrutiny of policy that would seem to be necessary if one has to have proper independent, almost auditing of what goes on. I think that we have mentioned that a very useful model might be something like the Congressional Budget Office in the United States. That is a well resourced organisation and does extraordinarily good work. It may be possible that one could do some mixing of the Fiscal Commission and SPICE. I do not know that that is not something that I am an expert on, but I have thought that. I think that there are bits in place, but the building is not. There are some foundation piles there, but you need a whole building in place to carry out that kind of exercise. Just for clarification, whether the Scottish Fiscal Commission should be expanded or replaced or there should be a parallel body, where do you see it fitting in? What I would recommend would be that it should be a properly independent body. At the moment, because the people are honest, Fiscal Commission are pretty vigorous in their defence in terms of being an independent body, but you do not believe that that is the case. I am sure that it is independent. I do not think that that is an issue, but it needs to be larger or more permanent in the way that it meets and debates. It is sort of having something like an OBR or something in place, and it is not that. Colleagues on the table, Professor Keating, do you have a view on that issue? It is critical for technical reasons to get the data out there and also for political reasons that it is independent and seems to be independent of both Governments. That makes a huge difference, and it should be able to initiate inquiries on its own. It should not simply review the Scottish Government's forecast but should have a more proactive role in itself. For that, it is very important that it should be responsible directly to the Parliament, not to the Government. The Congressional Budget Office, which is a much bigger operation than it would ever be, but it is a useful model because of its statutory independence. A cabinet secretary about heart attack, if you thought it would be as big as a CBO, but I take on board your comments on that. Professor MacDonald. I think that the Fiscal Commission needs to be bolstered. It needs, obviously, as people have been saying, to be independent, but it is a bit of a shoestream budget at the moment, so I think that more resource has to be devoted to it. I think that it has to do its own forecasting and not rely on Scottish Government forecasts, because only then will it become independent or be seen to be independent, but therein lies another detail that we really need to improve our data in Scottish Government. I know that steps are being made now to improve the GDP data but, as I understand it, we do not have proper price data and we do not have proper breakdowns of price data. It is very difficult to see how those guys could do their job properly if we do not have a really good data set, so I think that we need to be putting resources that way as well. In terms of that question, I would love to catch you to the end, Professor Burr, because you have always got a section on data, specifically in your paper, and you touch on the SNAP project, which committed to evidence or asked questions last week. You say that we need to identify where improvements might be made in both accuracy and timing, so in terms of the Scottish Fiscal Commission, do you feel that it should be beefed up considerably or, as I asked Professor Beath, should it be a separate body, should it be whatever, can you provide clarification on that? In terms of how the data can be improved, because that is obviously an issue of concern for the committee in terms of going forward. The Fiscal Commission, I go along with my colleagues, and not only has it to be independent, it has to be seen to be independent and perceptions really matter in this respect. I think that the OBR now is accepted to be an independent body, but there was quite a lot of suspicion around it in its early days. I do not think that we necessarily, in Scotland, need to go down the same route as has happened in Westminster in relation to the construction of that independent body. The key thing is that it is independent and it carries out a set of functions that are appropriate for whatever Scotland's fiscal framework is going to be. I go along with the idea that a body located in the Parliament would carry a great deal of weight. There are other models in Germany. We have the wise men in different universities who effectively provide the fiscal oversight of German fiscal policy. The office of budget responsibility has long and distinguished history, so there must be something there that could be worth looking at. In my paper, whatever the body is, it will have to work quite closely with the OBR. If you think about the block grant adjustment, the way that the block grant adjustment is going to work relates to the relative rate of growth in the tax base in Scotland and in England and the rest of the UK. You have to take somebody's forecast or develop your own view about how fast the rest of the UK economy is growing before you can forecast the Scottish budget. That, in itself, obviously requires a degree of interaction with the body south of the border. Immediately, in relation to the new powers, it seems to me to be very important to improve the kind of information that we have around the tax base and the tax revenues. One small point, for example, is the importance of understanding the 1 per cent. The 1 per cent are the top income earners who supply around 11 per cent of total income tax revenues. There aren't all that many of them, so if income tax is to be the key part of Scotland's fiscal structure, understanding how tax revenues are generated by whom is extremely important. We have some experience of that, but we will also have to learn a lot more about welfare benefits. DWP has a lot of statistics on welfare benefits, and it seems to me a need for some institutional agreement with DWP about how those are accessed and for what purposes they are used. That is a minimum in terms of data requirements, because it focuses just on the new powers. Behind that, we have all the other macro-type variables that the SNAP project has tried to address. We need them in a more timely fashion, and we need them with a degree of accuracy that is embodied in them. Funnily enough, yesterday, I was looking at estimates of Scotland's gross operating surplus, which is part of the SNAP project. It is based on lots and lots of assumptions. Assumptions are not always correct, so, to some extent, you pay your money and you take your chance. The more assumptions there are, the harder it is to get an accurate result in the end. Moving on to your paper, Professor MacDonald, on the issue of Barnett, you say that, once a block grant has been decided, following all the changes that we have touched on, absent a no detriment clause, it may be possible to use a method of indexation to adjust a block grant moving forward. Do you have any views on what form that indexation could take or should take? One idea that I proposed a while back was that you could look at the economic cycle in Scotland and perhaps you could index it in terms of GDP movements relative to some base. I think that the important point that I would make is that there would need to be some reform of Barnett. We are talking about a revised version of Barnett. It is some kind of block grant that, presumably, we would still need going forward. That might be in terms of the one idea that I had in the current paper, is to have something along the lines of the Australian Grants Commission, where, basically, on a year-by-year basis, the various regional components in Australia put in bids for their desired spending. The commission has to either agree or deny those unanimously. If it denies them, they use a simple GDP rule along the lines of what I mentioned earlier to mechanistically roll it forward. That perhaps is not the optimal way of doing it, if the desired spend of the Scottish Parliament is different to that rule. I think that the whole idea and no detriment that you have also touched on is that, once everything settles down, if the Scottish economy grows above the UK average, then the benefit would accrue to Scotland. If not, Scotland would take the hit on that, and it is looking at a mechanism that effectively allows that to happen without other factors coming into play. We are trying to wrestle with them over a couple of presentations on their away day, which show how difficult that would be. Professor Keating, you were at that away day. Have you got views on that particular issue? Barnett needs to be addressed, but we have been saying that for the past 40 years. I have been around all that time talking about it, but it is becoming really problematic because it is doing too many things that are not consistent. One is that it is providing revenue and making up revenue, not raised by taxes in Scotland. It is also supposed to be, according to some versions, an equalisation mechanism, but it is not. It never was. It is a counter-cyclical mechanism to cope with asymmetric shocks so that Scotland is not dependent on its own revenues if there is a downturn in the Scottish economy. Those are all very different things. It is the basic principles about what it is supposed to be doing that are reflected in the individual problems that we generate when we are trying to talk about indexation and so on. They have become very technical, but it is a problem of principle. The various proposals, the Smith proposals and so on, say that we will continue Barnett. Barnett has never been defined. Barnett is whatever the Treasury says Barnett is. They did not even use the Treasury of Barnett. It was invented by our colleague David Heal. The phrase and Lord Barnett immediately said, do not put my name to it. It is thrown around. It really meant something. Whatever we get after Smith is not going to be Barnett in the recognisable sense. It is going to be something else, so maybe we should have a different name. That would get us away from this incubus of thinking that it is going to be the same thing. Talking about Barnett also gets in the way of talking about other kinds of things. As long as we tweak Barnett, which is essentially driven by changes in expenditure in England, although there are other things that are now overlaying on that, we cannot talk about all kinds of other things and Scottish expenditure in a coherent way as being something other than the derivative of decisions taken in England. This pops up again in the debate about English votes for English laws or English votes for English taxes. We cannot do this. We cannot do that because of Barnett. Barnett has almost become the foundation stone upon which everything else is built. That is very unfortunate. We have to close off all kinds of things just because of Barnett. It is immensely difficult to reform Barnett because we have to agree on other principles. However, it is better to face up to those issues, head on, rather than pretend that it is still Barnett and keep on tweaking it in complicated ways. The experience of other countries when trying to do this is that it is a mixture of technical formulas, equalisation settlements and a fair dose of politics. That is the reality, of course. However, it would be useful to lay down some principles to try and get agreement on the principles, although we know that there is going to be a lot of political haggling on what will end up with this somewhere between where we are now and where we are ideally like to be. However, simply muddling through is not good enough. It is also causing immense irritation in other parts of the United Kingdom, where Barnett is interpreting it again in yet another way as something that benefits Scotland. It is a very misleading interpretation, but that is the interpretation in other parts of the United Kingdom. At some point, I think that that really has got to be addressed if we are going to have a stable settlement. Thank you very much for that answer. Professor Bell, you want to comment on— Just to agree with that last point, that is perhaps the main point that the Royal Society document is making. It is an argument for taking a longer time, but we really need a set of principles around risks that are shared across the whole of the UK and risks that are going to be dealt with on a Scottish basis specifically. Whatever is in Smith, there aren't many principles. Professor Beav, you have kept due to the end of the question, because you have a comprehensive section. In Barnett, you say, for example, in the RAC paper, that there is a need to reconsider the use of the Barnett formula as a basis for determining the fiscal relationships, although we have fought an election in which all political parties are committed to retaining Barnett. You also say that the principle of needs-based funding means revenue support should be allocated in the basis of some proper assessment of need, so I would be interested in how your view would impact on Scotland. Finally, before I let you come in, should the block grant continue to be determined through the operation of the Barnett formula, there must be a mechanism through which the UK and Scottish Governments can negotiate and agree on adjustments in an open and transparent manner, it is certainly not acceptable for HM treasuries and organ of the UK Government to make such decisions unilaterally, so Professor Beath? Yes. It is fairly clear that, as we are moving into a much more complicated set of devolutionary relationships with Wales and Northern Ireland to think about, there really does need to be a fundamental re-think of the way in which revenues and expenditures are shared. That is why you have to sit down and think about what risks are best carried at a national level, at a UK-wide level, and what risks are best carried at a local level. There is also the issue of the question of fairness, so one wants fair outcomes. A fair outcome might, for example, be a system in which, when there are unexpected negative shocks in one part of the economy, another part of the economy, which is where those are not present, essentially makes transfer resources. That is the kind of sharing, fiscal sharing relationship that you want to try and have in your mind. The actual structure and mechanisms are matters for determination by experts—I am not an expert on the workings of the Barnett formula—and other types of financial transfer mechanisms, but there are plenty of expertise out there on my left and on my right. That is all that I would want to say, so I will answer your question. I want all our colleagues to ask questions, so I will ask one final point about your own paper, Professor Bell. It is just about the tax gap. You have talked about the new fiscal body, which we have discussed, which should perhaps be asked to monitor Scotland's tax gap, which is the difference between tax collected and that, which HMRC's view should be collected. You have said in your previous paper that you suggest that, in 2007-08, the potential shortfall and self-assessment is about £550 million. I am just wondering why the gap is so large. If it is identifiable and what can be done, what will make us put in place so that both Governments North and South of the border can reduce the gap? I think that this is the so-called tightening of tax avoidance issue. The HMRC estimate has been out there for some time. Part of the trouble around this is that politicians are always willing to say in the run-up to an election that they are going to shore up their finances by reducing tax avoidance. That tends not to happen. It is quite difficult when you have a very complex tax system to ensure that you get 100 per cent compliance with what you think is the aggregate taxable income that is out there. One of the things that the paper out in the last few days suggests is that the effort that is put into tax avoidance increases with the top-most rate of tax. Increasing the top rate will not result in the increase in revenues that might have been expected because people will put more effort into tax avoidance. Tax avoidance is always a choice. You weigh up the costs and the benefits of tax avoidance and the greater the benefits, the more you are likely to go for it. Of course, in a complex tax system, there tend to be ways around regulations that allow you to put money in different forms that the tax man cannot access. I do not have an immediate solution to the problem, but one of the issues that may be created as a result of the new taxes is that it will be possible to play off the authorities north and south of the border in relation to your tax liabilities. I am almost tempted to ask Professor McEwen, who is a tax expert himself on her committee advisor, but he is not on her witness panel. I will move on to any other members of the panel who was to comment on that. I know that she was writing down some notes, Professor Beethas. I will say something. There is some very interesting research going on at the University of Exeter in the University of Kent. There is a thing called the Tax Administration Research Centre, led by Professor Miles. What they have been doing is trying to use the insights of behavioural economics and testing those out through field experiments to try and find methods by which the tax gap might be closed. I think that there are potentially very interesting things there, such as how do you pre-populate tax forms? Are there certain things that you could fill in in advance that would encourage people to tell the truth? I think that there is some very interesting work out there. In relation to that, I was at a meeting last week where Mr Swinney was talking about responsible taxation. KPMG is promoting this approach as one of the major accountancy firms. We discussed the joy of tax during that. That was one of the dinner's topics for discussion. However, as Professor Beeth implies, one of the ways of getting at this issue might be around finding behaviours that people feel that it is not appropriate to go in for elaborate tax avoidant schemes. It did not happen to me to be some bloat wheel on straggly hair and I came to be here directly at this joy of tax. Professor MacDonald, do you want to comment on that at all? I am going to open up the session and the first person to ask questions will be Mark. Thank you, convener. I wanted to touch first of all on the issue of no detriment because it appears in some of the papers that are before us. The RSE submission makes a very compelling case, and on the basis of the evidence that has been received by the committee and also at the devolution and further powers committee of which I am a member, I would suggest that there are a number of interpretations of the no detriment principle out there. I note in the submission that the RSE says that there is a pressing need for a comprehensive and independent analysis of how it will apply in practice. I look at a group of learned individuals sitting before us and wonder why that has not yet happened and is it something that organisations such as the RSE or others may wish to undertake because I think that it would be of great benefit to the committees of this Parliament in terms of scrutinising how it will work in practice. I have thought that it is almost certainly a question that is under active consideration in the Institute for Fiscal Studies, and I would have thought that that might be the place to look for the people who have the full-time expertise to go into this. There is no detriment one and there is no detriment two. The no detriment one is essentially a balanced budget constraint at the aggregate level. Other things remain equal, that is, if nothing changed and you devolved powers that the total budgets across the devolved and national language should be unchanged—you call that zero-budget condition. However, the rather more tricky one is, of course, no detriment two, which is that if there are spillovers, then there needs to be some kind of compensation mechanism put in place. Measuring spillovers is one problem. What is the appropriate—maybe you find them—how do you then decide on a compensatory mechanism? That is something that certainly requires quite a lot of detailed research to work that out, to identify the spillovers, to measure their scale and to decide a way in which they are corrected. Do you have any other questions, Professor Bell and Professor Key? Just to add to that, it is the second part of the no detriment principles that I think does cause considerable problems. The University of Stirling is currently, along with the Institute for Fiscal Studies, has got a grant application into the Nuffield Foundation to look at precisely this issue. I can think of it in terms of reasonably complex econometric models, but I would not have the data or anything like the data necessary to calculate the second round, the third round and the fourth round effects, which could be argued to be part of—if you are taking the full no detriment implication of the second part of the no detriment clauses. We would like to address this issue. We realise that it is very complex, and that is yet another reason why there is a need for some time to come to some kind of satisfactory solution. I think that there is a problem in the sense that some reactions might well be market reactions, and you say that the response of a market may have caused a detriment elsewhere. That is how markets operate. Where you draw the line about where a detriment starts and finishes seems extremely difficult. Presumably, you are saying that one of the difficulties that could be faced under this is that it is correctly apportioning cause and effect. What appears on the face value to perhaps be a policy decision that leads to a certain outcome might actually be somewhat more complex than that and could lead to difficulties in determining whether a detriment has in fact been caused. That is absolutely correct, it seems to me. Professor Keating, you want to visit a narrow and a broad definition of detriment, it seems to me. The narrow one is changes in taxation expenditure that have a direct implication for the other jurisdiction, most of which are in welfare, say the nexus of housing policy devolved welfare policy reserved. You can do things that increase the UK welfare bill or reduce the welfare bill. There is also a suggestion in some of the papers that there is a compliment to detriment, which is benefit. If you do something that benefits the other jurisdiction, you could get something back. If you provide more social housing and reduce the housing benefit bill coming from the UK Government, you should be rewarded for that. We can model those when it comes to things around public expenditure and direct impacts. There was a few years ago the argument about free personal care for the elder and the implications for attendance allowances in the Scottish Government saying that we should get that money back because we have saved you money. However, it is a broader one that is really difficult because that gets us into things like tax competition. If we cut air passenger duty here and flights are diverted from Newcastle airport to Edinburgh airport or if fracking is banned in Scotland and therefore revenues are foregone by the Treasury that it would have got, that becomes extremely difficult and it seems to be an excessive interpretation, but some interpretations go that way. We looked at other countries and we found various instances where detrimental action is not allowed as a triggering mechanism in an intergovernmental conference or things go to the courts. We have not found a single case anywhere in the world where detriment is allowed but compensation is required. I do not know where that came from because we have not found an example anywhere where that particular solution has been adopted. Before Professor MacDonald wants to contribute, one of the points that she made about benefit there has been some suggestion of how exactly would detriment be measured. Could it be measured on the basis that if decisions were taken that allowed for benefits to be accrued in Scotland but not in our UK or vice versa, would that constitute a consequential detriment? Do you think that what really needs to happen is that, within the fiscal framework, there needs to be a very clear outlining of what exactly no detriment would mean and how it would be measured and then addressed? Perhaps Professor MacDonald might want to lead off on that point. It strikes me as well that one of the difficulties here is that, often some of the data that might be required to determine detriment may not come into the knowledge for two years, perhaps more after the event and how then do you then compensate for a decision or an action that is historic in that respect? I just reinforce what colleagues have been saying. It is very complex. We need data, we need to work out counterfactuals, as you are saying. If we have the data, I am sure that we can do that, but it is not clear where we are at the moment that we have the tools to properly work out these repercussions, which could, as you say, be long-lasting. For me, it just underscores what we said earlier that we do need time, and probably a year is not enough time to get these issues right. For one thing, as I say, you need reasonably good data, you need to build models. As Professor Bell was saying, that is an on-going thing with institute physical studies. That all takes considerable time, and understanding what is going on in the models and in the data takes more time. To move on slightly, the issue around tax competition has been raised. One of the points that I have pursued through a number of evidence sessions is around the way that the budget process works in the two administrations. In Scotland, we have seen this most starkly with the LBTT stamp duty, where in Scotland the approach that it has taken is to consult on rates and the budgetary process. At Westminster, the long-standing tradition has been essentially the rabbit-out-of-the-hat approach that the chancellor will stand up at the dispatch box and will produce a tax change that affects at midnight that evening. Do you foresee that the evidence that we have received would suggest that it is unlikely that that is going to change, but do you foresee that, in the background, the fiscal framework and the inter-governmental relationships are going to have to change in order to avoid that kind of approach being taken when there are certainly more substantial tax levers being devolved than the LBTT stamp duty was? Perhaps Professor Bell, you do not lead on that. There is quite literature on tax competition where two authorities have effectively the power to set taxes but on the same tax base. The difficulty is the possibility that the general populace is overtaxed as a result of both Governments trying to extract as much as they can from that tax base. Your question, though, is about the process. It seems to me that—this is a general point about quite a lot of the things—there has to be more inter-governmental co-operation or formal mechanisms for inter-governmental co-operation in order to come to a more satisfactory situation. Given that Mr Swinney will announce towards the end of the year the Scottish rate of income tax and then the UK Government will announce what the basic rate and operates and so on will be at the time of the budget, then there is a first mover disadvantage here in that the Scottish Government has put its bid in place and the UK Government may just ignore as far as Scotland is concerned because nine-tenths of the revenues will come from the rest of the UK, which may leave the Scottish Government in a difficult position, as indeed it did with the Land and Building Transition Tax. I guess that you want a mechanism that avoids this possibility possibly in the background rather than something formal. There are reasons why sometimes taxes should be announced and then be in place by midnight to maximise tax revenue, but nevertheless it seems to me that again there is a need to think through what formal or informal mechanism has to be put in place so that I wouldn't say that tax competition is minimised but that there is an understanding in both Governments as to the likely overall amount of a tax that is going to be taken out of this pool of taxable income. In the literature, the so-called race to the bottom hypothesis, which addresses under taxation as a result of tax competition because jurisdictions are trying to attract businesses and wealthy individuals by cutting tax rates. The evidence of that is quite mixed because it depends on the circumstances. There is a lot of that in the United States where people and businesses are very mobile. There is quite a lot of evidence of that in Switzerland, which is a small place and distances involved in relocation are fairly small, so you can live in one place and work in another place. On what kind of taxes you are talking about, there is a danger of tax competition in business taxation and as a result of that, many devolved and federal systems have been trying to harmonise business taxation to avoid that. In Canada, there has been a trend towards trying to equalise business taxation even while other taxation rates are diverging. Even in France, which we think of as a very centralised country, local government actually did tax businesses and that has been more or less eliminated to avoid those kinds of distortions. It is less of a problem in personal taxation, although David has mentioned the problem of wealthy individuals, but generally speaking that is less of a problem because there are other reasons for living in a particular place because you are working there and you have family and other ties to a place. It is least of all a problem when it comes to land and property taxation because land and property is not easily movable. It gives me the opportunity to mention that something that belongs in this debate is local taxation and property taxation, which the Scottish Parliament already has. It is an important part of the mix and there are opportunities. There is a commission looking at this in Scotland at the moment, but that is going to be taken into consideration when thinking about the broad range of taxes in Scotland—income tax, assigned taxes, the minor taxes—but land and property taxation is important as well. Perhaps one final question. Professor MacDonald, in your paper, you mentioned what you see as an over-emphasis on deficit and death targets and an under-emphasis on economic growth targets. Professor Keating spoke about the divergence, if you will, in terms of the political debates that were had and the electoral outcomes that were had, where it seems as though the electoral preference in England was for a continuation around that deficit-debt discussion. However, in Scotland it seems to be more about the economic growth and use of fiscal powers to grow the economy and perhaps address things that way. Do you see a means by which, with, for example, borrowing powers, tax powers coming to Scotland, the fiscal framework would allow for those divergent approaches to perhaps be taken? I realise that it would not be absolute, but there is potential for different approaches to be taken. Yes, it potentially could, of course, but I think that there is potential available at the moment. One of the things that I was getting at in those comments was that certainly in terms of the UK position, whereas you say deficit reduction, is the key focus of microeconomic policy at the moment. My concern is how robust the recovery that we are seeing at the moment actually is. My concern is that we are simply returning to a situation where much of the recovery is dependent on private sector consumption and on the property market, when, in fact, we should be trying to improve productivity in the UK as a whole, but also in Scotland. We have very poor productivity rates at the moment, and all of the contributing factors to those productivity indicators are poor as well. For example, our R&D spend in the UK is lamentable and is the same story in Scotland. I am not sure that simply changing the tax structure gives you any value added in addressing some of these issues. I think that it is important to have these as objectives and then find ways of improving them. I think that there are tools available at the moment that would allow Governments in Scotland and the rest of the UK to do that. I guess that the point that I am making is that we are looking at the fiscal framework that is going to be established, and that will obviously have the potential to be both liberating or constraining depending on how the rules within it are drawn up. What opportunities do you see for a fiscal framework to allow for that difference of approach to be taken? If you have a broader range of taxes at your disposal, you can trade off one tax against another, or you can trade off spending against other forms of spending. However, I do not think that there is any magic or silver bullet in tax changes. For example, in terms of poor productivity performance, we know that, for example, in the Scottish context, there was a preference for diverting funds from higher education units towards the university sector, which is perhaps an implication for productivity in Scotland. There are lots of things that you can do with the current set-up, but at the end of the day, there is no simple silver bullet here in having more tax powers because you are at the end of the day going to have to trade off one tax against another or taxes more generally against your spending. I think that it is a very finely balanced mix, Professor Bell. I would just make one point, and that is that whatever that framework is, if it is transparent and seemed to be stable and enduring settlement, then that in itself will maybe provide business with confidence around investing in Scotland. It is important to provide business with a macro environment that they believe to be stable, and macro and taxation, I guess. That is vital for our financial services industry in the short to medium term. That, in a sense, goes a little bit against what we were all saying about taking some time to sort this out, but it may still be worth taking some time to get a stable and a stable fiscal framework that not only the people of Scotland but the business community believe to be an enduring settlement. The question on austerity, of course, is about the pace of deficit reduction and whether that should be accelerated or slowed down. But even aside from that, there is a broad issue of principle whether we want a larger public sector than might be the preference in England. I just put that out as a possibility of the political trends going in that direction. As far as the economy is concerned, the evidence seems to be that it is not so much the level of public spending but exactly what you spend it on. We are doing some work in our projects, which David is involved in as well, trying to work out what kinds of expenditure are productivity enhancing and what are not. Breaking down public expenditure and addressing these productivity problems and trying to model those so that we can work out what the long-term impact of different forms of spending is and what we are going to get back by way of economic return. The whole point is to understand what it is that acts as the determinants of productivity. That is what my colleagues have been talking about. Just two questions relating mainly to the speed of implementation. The first one is, at the beginning of the session, Professor Bell talked about problems identifying a definition of a Scottish taxpayer. Obviously, one of the arguments about why Smith could move forward expeditiously with proposals on income tax was that that work has been done for calm on the ready. I think that we have had evidence to committee that work is progressing expeditiously in identifying a Scottish taxpayer. Obviously, you are saying that there are problems arising in that. Could you give us any more details about where those specific areas of difficulty are? My understanding—and it is a pretty loose understanding—is that for 95 per cent of Scottish taxpayers, there are no problems. However, it is the ones who spend time in Scotland and the rest of the UK where there may be some doubt. My understanding is—and I could be wrong—that HMRC is still working on that issue. Of course, those five per cent might matter a lot because the number of additional rate taxpayers in Scotland is relatively small. However, they contribute highly disproportionately to the overall tax bill. It might be worth finding some more evidence from HMRC on that convener, because Professor Bell underlines that that is an important issue. However, it might be overcome before within the timescale that has been set out. My second question is—we have had evidence about an argument for slowing up this process to allow for a greater basket of taxes to be available to the Scottish Government to give it more opportunities to raise funds for public services. In particular, Professor Keating mentioned that earlier in the session. It is not also right to say that that will introduce greater complexity as well, potentially, to see how that complexity is managed in other countries within the European Union. I looked at the evidence that we had from Professor Macdonald, and I looked at the Bas country in particular. It seems to me that there is devolution of more taxes there, but it is a pretty complex arrangement. It seems to be quite narrow as to what the powers mean in practice. What do you think could be the lessons for Scotland and the UK from some of those examples? On the VASC stroke Navarra experience, that is often taken to be a situation of full fiscal autonomy. It is fair to say that you do have a devolution of nearly all taxes, apart from VAT. However, if you look at the agreement closely, really what they are about is marginal tax changes. It is tax changes at the margin. It is a highly constrained system. Again, what they call fiscal pressure, which is really just the tax burden, the fiscal pressure in the devolved areas cannot be very different to the rest of Spain. Although they have in principle a lot of devolved powers, they really cannot use them very much. In other words, they cannot have a slash and burn change in tax rates. They can have changes at the margin, and it seems to me that they want a change in corporation tax. They have got to offset that with some other tax, because they also have very tight borrowing rules on top of the marginal tax changes. Having said that, not so long ago, I was at a conference speaking to the guys who designed the system, and they said that it has worked. It has given the Bass Parliament the powers that they have needed to grow the economy relative to the rest of Spain, and perhaps for economists that is not surprising, given that a lot of economic decisions occur at the margin. In a broad nutshell, that is what is going on there. Whether that could be replicated here is unclear, but following on your other point about the complexity, I think that the reason there are so many constraints there is because of the complexity. If you were to allow all that freedom, then I think that the borrowing that would be needed by the Basque region would be inconsistent with the centres borrowing, and there would be clear issues there. I have also looked at the Bass case and read about it and talked to people about it. It is true indeed that the overall burden of taxation has been consistent with the rest of Spain. VAT is theoretically devolved, but under European rules it cannot vary so effectively. It is assigned rather than devolved, and half of it is assigned to the rest of Spain as well. There is a slightly lower rate of co-operation tax. That is more signalling. It is a headline rate. It is just saying that we are open for business. I do not know that 1 per cent makes that much difference to investment decisions. It annoys other regions of Spain, but that is part of the objective to say that we are open for business. A slightly higher rate of marginal income tax, so the income tax is more progressive and that is compensated by a slightly lower co-operation tax rate. Everybody that I talked to is in the detail that matters. It is the detailed allowances, so they have a big problem, like Scotland has, of a very poor private research and development performance. They have the same industrial structure. We have the whole heavy industries that did not traditionally invest a lot in research and development. There is a massive research and development effort that is really disproportionate to the rest of Spain and lots of tax credits for research and development. There is the linkage of taxation policy to other fields, so linking to labour market policy, linking to industrial reconversion. Whenever I talk to people about this, it is not the headline rates and not the overall burden. It is the detail of how we use this taxation as part of a broad social and economic strategy. It seems to have been fairly successful, but it is extremely complex because there are four separate authorities, because it is the three Basque provinces plus Navarre. That is for historic reasons that are untouchable. Nobody says that it makes any sense. I have also talked to business people. I have talked to the trade unions. The business community likes the idea that the tax authority is close. They are not worried about it. They say that we can cope with complexity. They like the idea that their indirect dialogue was government about taxation rather than having to go to Madrid to do things. The other interesting case is Canada, where there is extensive devolution of taxation. It is a federal system, so they have by right extensive income taxes, sales taxes and corporation taxes. The sales tax coexist with a federal value added tax called the goods and services tax. The provinces deal with this in very different ways. In Quebec, they have decided to link their sales tax to the federal value added tax, and the other provinces have not. In contrast, in Quebec, they have decided to delink their income tax from the federal income tax and have their own tax regimes, whereas the other provinces piggyback on the federal tax regime. We just pay a proportion of the federal taxes to the provincial authorities. There is scope when you look at the details of policy divergence that are possible there for quite a bit of differentiation. Quebec is very different from Alberta in its tax structure. Some recent evidence suggests that Quebec, because of its tax and welfare mix, has been able to resist the tendency to greater social and economic inequality that has happened in the rest of Canada. Those might look like marginal differences, but they can make a considerable difference to policy outcomes. I was going to ask about the mass country, which has been very comprehensively dealt with, but I suppose that it was part of Professor McDonald's paper and part of his more general discussion on full fiscal autonomy. Obviously, there is a lot of discussion about that, so I wondered whether we could have a little bit more light shed on that. Professor McDonald, you said in the past that you talked about, if you were advocating or just describing, some form of fiscal autonomy. You have various references in your paper that if a more radical form of fiscal autonomy were adopted, such as full fiscal autonomy, there would still need to be a block grant and the adjustment. Towards the end of your paper, you said that there would also need to be central bank and exchange policy, and that means independent. I wonder what form of full fiscal autonomy you think might be viable and what kind you think would be ruled out. I am saying full fiscal autonomy where you have the wholesale devolution of all-tanks revenue and expenditure, with some premium paid for defence and foreign affairs. I do not think that that is possible short of full independence, no. That was the point that I was making there. Fiscal autonomy, where you have a devolution mix perhaps along the lines of the bass country, is feasible because, for example, it works in other countries, as we have just heard. Obviously, the complexity of those systems takes a considerable amount of time to be worked out. It has to be borne in mind, of course, as well, and this is often forgotten in the mix, that Scotland is a very different, well, the United Kingdom is a very different set-up to most other countries, and Scotland, as part of that, is a very small open economy, as economists would call it. That has important implications when you start to think about the very significant price and inflation differentials that exist within monetary unions. For example, the Canadian case that Professor Keating has talked about, there are fairly dramatic inflation differentials within Canada. There are also fairly dramatic inflation differentials, as we know within the euro area. Now, if you are moving away from a system of co-insurance, if you are moving away from a fiscal union, as we have had in the UK, then basically the big issue is how do you address these competitiveness changes? For me, as a macroeconomist, it is one of the big things that we have got to think about, about any further devolutions in the UK context, particularly if we are going for, say, closer to a fiscal autonomy solution, because these competitiveness changes can be large and persistent and they can lead to imbalances, which, if you do not have a independent central bank or independent monetary policy, will be persistent and can lead to changes in the tax base, a whole host of macroeconomic implications. So, there are lots there to be addressed and thought about, I think. Well, I was interested in your paragraph about that and obviously you talked about productivity differences as well, usually explained in the context of the Balasa-Samuelson hypothesis, I'm afraid I don't know what that is, but I suppose a more general question is, I mean, you know, we've looked to full fiscal autonomy but that's not, I would imagine, going to happen any time soon and you're probably acting like it can't happen at all except within a constrained model. But in terms of what we're more likely to get around, Smith or Smith+, are these inflation and productivity issues important there as well and how should we factor them in if you think they are important? Yes, they are there and they are important and they can accumulate into big differences, as we see in some other experiences. It's especially tricky in the context of a monetary union where you have inflation targeting, which is what we have at the moment, because it's quite simple to demonstrate in a very simple economic model that your competitiveness, that's basically a relative inflation, becomes quite volatile and that volatility is bad news for business basically because they like a relatively stable cost space, they don't like volatility, they don't like that kind of uncertainty. Given my point about Scotland being a small open economy with a lot of capital and labour mobility, it would be very easy for the movement of capital and labour to undo fiscal changes that may be made by the Scottish Parliament. Huge complexity here and I think it is very important that the price or inflation issue is thought about and addressed, as I say, especially in the context of an inflation targeting central bank. But in terms of productivity, presumably a devolved Government, particularly one with more powers, could take some significant action in relation to that? Yes, indeed. I mean there are measures that could be taken now to address productivity. The issue that arises, though this is one of the better-known explanations for price differences within monetary unions, it basically says that if you have divergence of productivity, and of course that in a sense I suppose is what the devolution of powers is about, you want divergence, you want to be different to your partners, if you're successful in creating this divergence that will have further implications for these price differences, I'm talking about it, and it will have further implications for the competitiveness of your trading sector. But if we did succeed, if you could be a bit more concrete, if we did succeed in raising the rate of productivity in Scotland, are you saying that we'd have negative as well as positive consequences? Yes, potentially. It can have effects on prices and competitiveness. Depending on how the productivity works through, economists have various channels through which competitiveness works. If it goes through the service sector or the tradeable goods sector, it can have different implications. One of the big empirical stylised facts is that if you have improved productivity in your tradeable sector, that will often be transferred through to your non-traded or service sector, which can increase the prices of all goods in your economy relative to your trading partners. Although productivity is a good thing on the face of it, it can have important implications for your competitiveness, which needs to be thought through in a macroeconomic context. It seems that we're taking a bit longer to deal with Smith to factor all that, and thank you very much. John, to be followed by Gavin. Thanks, convener. We've got this phrase in enduring settlement, which I think is the UK Government's phrase, if I'm not mistaken. Is it actually so important to have an enduring settlement so that something is fixed for the next 25 or 50 years? Presumably the alternative is a more fluid settlement, and we look at things and we keep revising things, so if we've got 50 per cent of that, that might do us for a few years, then we might look at 75 per cent or 40 per cent and have it on a more movable feast. Would that be a possibility, or is that not a good thing? You're looking at me, probably, since I was the one that opened it up on the enduring settlement. What one is looking for is the right amount of stability so that business can plan properly, consumers can make sensible decisions about long-term investments in housing or in education or whatever. I think that it would be wrong to think that what a means by an enduring settlement is things chiseled in stone. As we know, those tend not to be terribly enduring. What one is looking for is a system that can adapt to change because, of course, there can be substantial external forces at work, which means that you need to rethink the way that you organise things. I certainly wouldn't want to think that what we're setting in place here is a kind of constitution for all time. I think that that would be a dreadful mistake. I think that we should have a constitution that is solid, where people feel that they know their rights and so on, but that, as things change, we can rethink the constitution. We should start saying that we should set a time limit of 10 years, so we would say that we'll look again at Barnett or whatever the formula is and the powers every 10 years, or every 15 years, or is that even too fixed? I think that, again, it depends on the strength of the winds that are buffeting you. For example, if you decided to plot a course in a boat for 10 years across some endless ocean and halfway across suddenly the winds change, it may not make sense to keep on your course. What you need is a sensible flexibility in your constitutional structure that allows you to say that things have changed sufficiently and that we need to think about the way that we've organised things. That's the point that I think I'd want to make. Professor Bell, you're nodding at that, although you were arguing earlier on for business likes to know where we're going. How do we tie the two of them together? Well, I think that it's important, as I said earlier, that the major stakeholders in the economy are in a position that they can make long-term plans, because the fulfilment of long-term plans, investment in infrastructure, factories or whatever, are the sorts of things that do enhance productivity and lead to higher living standards. You don't want a situation where business is uncertain because the tax regime may change at the moment's notice about the effect that it might have on willingness to invest. I guess that I'm not trying to roll back. I don't think, as Professor Beeth has said, that something set in stone is the answer. It's something that has the confidence of the key stakeholders in the economy, whether that would be consumers, producers or other levels of government, that, if there are changes, nevertheless, they don't disrupt the plans to enhance Scotland's productivity and general improvement in its economic conditions. I have to recognise the reality that a lot of this is driven by politics. That's part of the democratic process. Change is very often incremental. There's got to be a certain flexibility, but we do need a degree of stability and a degree of consistency. The trend internationally has been introducing incremental change, bits and pieces here and there, and then, occasionally, taking a pause and asking, what have we produced here? They're going through this at the moment in Spain, where they've had the revision of all their separate statutes of autonomy, their revised taxes, bits and pieces here and there, and produced something that's pretty incoherent and pretty dysfunctional, so they're having to sit down and think through how all this adds up, and at some point, with the changes going on in Wales and Northern Ireland and eventually in England as well, at some point, we're going to have to sit down and think how it all fits together. We also are in a situation where we don't have a political consensus on the end point, and we're not going to have it because there are people who want independence, people who don't. That's just a fact, and both of those are legitimate points of view. We've got to live with that, but we don't even have agreement here, it seems, on what the questions are, not the answers, but what the questions are, what the fundamental issues are. It would be useful to pause and think about what the fundamental issues are that we disagree about, and what the basis of the debate is here, before rushing into sorting out very detailed aspects of the settlement. That's where Smith went wrong. Go straight to the details, see what we can see, rather than thinking what are the main issues at stake here, and do we or do we not disagree about what the principles should be. I think that the political conjuncture at the moment is such that we do have a couple of years to think this through. It's impossible to do this maybe in the last legislature, or in the run-up to the referendum, but now we do have that opportunity. Another area is relations that we've talked about, and the suggestion that there should be more of a structure and perhaps something slightly more independent and arbiter or something like that. Is there any advantage for the UK Government in having different inter-government relations? At the moment, they can basically impose anything that they want, so why would they want to have some kind of more fair and open and transparent system? Is there any advantage for them in that? That's a question for a political scientist. I'm not aiming at anyone in particular, and I'll— I would be very suspicious of the proliferation of inter-governmental committees and joint ministerial committees and committees for this, that and the other thing, which don't have very much to do and which people don't attend. So I'd be very parsimonious in thinking about what inter-governmental mechanisms we do need to have, and I've suggested three. One is about Europe, which we already have, another is about welfare, and the third is about finance. It really does matter here, and we know that the UK Treasury has a very centralist mentality, and this is just an obstacle to thinking about devolution generally, but it would be in the interest of the Treasury, presumably, to have some kind of stability to know what the rules of the game are, and it is important that there should be some kind of forum where these things can be discussed and debated. They are political, of course, and it's about politics, but where they can be debated, and it's also important that somewhere within this inter-governmental machinery there should be independent sources of information, so at least we have a common database to have the arguments about the territorial distribution of finance. Do you think that decisions still be with the Treasury, or should we be removing that? That's absolutely critical, because there's been a lot of talk about federalism in recent months—federalism is the answer. In a federal system, the central government would not be allowed unilaterally to make those decisions. That's what makes federalism different from devolution. The difficulty getting there is that it's difficult to do it just for three parts of the United Kingdom. Certainly, in principle, in a proper federal system, the centre should not be allowed unilaterally to take those decisions. There should be some kind of statutory formula, which can be revised, but some formula and some certainty in the outcome, so that both sides will know what the rules are, and both sides will know what their basic entitlements are. If it's simply unilaterally being done by the Treasury, that's not federalism in any meaningful sense. Another area that I wanted to touch on was going back to the fiscal commission. It concerns me sometimes that we are a relatively small country with 5 million people, and we're trying to copy the things that are going on either in the United States with 300 million or even the UK with 50 million. I'm very keen that one of the advantages we have of being smaller is that we can do things in a more simple way. For example, the suggestion, which I think I'm picking up from your papers, is that the fiscal commission should maybe do its own forecasts, but then we've also got the Government doing its forecasts, and that worries me about duplication. Professor MacDonald used the word overseeing the forecasts, which I thought was interesting, as to whether that might mean they don't do it themselves but they just audit or look over it. We talked about independence earlier and it means that something like Audit Scotland, I think, is seen as very independent and quite trustworthy, but they don't actually do things themselves, they just check on others. Is it important that the fiscal commission does the forecasts or, as long as they are checking, is that okay? Well, let's suppose they just check. What would happen? They'd essentially be saying things like, well, it's true if you make this assumption and that assumption and this parameter is what it is and that parameter is what it is. Indeed, this is the number that you get out and they've done the calculations right. That, in a sense, is just checking that the arithmetic is right. I think that what we're thinking about is a rather more robust mechanism that says, well, we don't think that assumption is right. Our evidence suggests that this parameter in some relationship is a different number. That's the kind of independence that one's looking for. That is the proper refereeing. Professor McDonald? Yes, I agree with what John is saying there. I think that you've made a good point that we want to be able to do this as efficiently and economically as possible. There's no point in reinventing the wheel, as it were. However, in terms of forecasting, there are obviously different ways of setting a model up. The point that Professor Beath is making about the assumptions used could well affect the outcomes from the model. Even if we have an independent fiscal commission, it may be difficult for them to scrutinise someone else's model to really get to grips with what's going on there. The actual relationship between the organisations? Yes, it probably is. It's to do with resources, certainly. It may be that the Scottish Government has a different agenda to what the Fiscal Commission has. I think that it would be helpful. You could always buy in the forecast as well, if that were more effective, maybe from the OBR. Do you think that Scotland's model seems to be able to dig quite deep and really challenge Government and challenge anyone for that matter? That seems to me like a good model. Yes, I agree. I wonder whether they would have the skillsets to be able to understand what the econometric model that the Scottish Government is using. I suppose that they could hire a specialist team to do that. I think that you have raised a valid point in terms of not repeating what perhaps other units are doing. It may well be more efficient to buy our forecast, if we want independent forecasts from the OBR and for the Fiscal Commission to use those. Anyone else who wants to comment on that, Professor Bell? I think that we have discussed this before. Audit Scotland's role is really retrospective, and what we are talking about is a prospective role here. The committee has argued in the past that there is an argument for linking up those kinds of activities. I do not see a problem with that, but picking up the other's remarks about forecasting, I have been involved with forecasting models myself in the past. Inspecting what someone has done differs massively from running a model 100 to 200 times to just fine tune it to make sure that everything that is in there agrees with the best evidence that can be assembled. I think that there is always an argument for having a forecasting capability where that is cited may not matter too much. Another thing that I think is important to caution against is what is known as the herd instinct. Forecasters tend by magic, even with quite different models, to come up with quite similar forecasts. For example, in 2008, that was rather problematic. The whole area has to be thought through pretty carefully. Is there any way to stop the herd instinct? You could ask people to say, what is the methodology that you are using for your forecast? One of the big issues in the past few years has been what is called mean reversion. We have discussed productivity a lot. A lot of the models in the UK tend to deal with some cyclical ups and downs but revert to a situation in which productivity is growing at around 2 per cent per year. The past six years are hopeless. You want to have a situation in which whoever is involved with that activity is not necessarily tied into a methodology that has not served as well in the past, put it that way. One of the things that one might want to look at, for example, is how the activity carried out in Ireland—Scotland is larger than Ireland—is the ESRI, the Economic and Social Research Institute in Dublin, which does a lot of that work. It might be worth even speaking to the director of that institute, Alan Barrett, about their role and how they interact with the Irish Government. The first question is on borrowing powers. If any of the panellists want to share with us, the extent of borrowing powers that they think will be required during the implementation of Smith, as opposed to the borrowing powers that we get under Calman, do you have any firm views on the extent or levels that would be optimal? Well, following on from the last question, you just mentioned one quick point there, that the more accurate the forecasts are, the better, because you have got to allow for a buffer in terms of borrowing for bad forecasts. If the forecasting unit is poor, repeatedly, you are going to have a big buffer there for borrowing purposes just for your bad forecasts. I think that that is a point that is worth bearing in mind. In terms of Smith, is what is behind your question whether there are enough borrowing powers under Smith going forward relative to Calman? Some people suggest that the borrowing powers via Calman are not sufficient for Calman, so obviously Smith is far greater than Calman, so automatically the borrowing powers would have to be greater, but it is trying to work out whether there are no limits whatsoever. Should there be caps or limits both for revenue and capital, is there an optimal model in your view of what would be appropriate for borrowing powers? I am not sure that there is an optimal model, but I certainly do not think that you could have unfettered borrowing in the open market, which some people have suggested. The Canadians do that, and it has led to a lot of indiscipline in terms of borrowing, and it has affected the premium that some of the federal states pay on their borrowing. I would not recommend market borrowing. I think that there will need to be quite important constraints. The experience of other countries, if you look at it, is pretty strong constraints on borrowing. Going back to the BASC experience, for example, it has fairly dramatic strictures on borrowing, and it has a fairly dramatic limit. The short answer is that you would need more borrowing than Calman, but there is no magic formula for the amount of borrowing. I wonder if any other panels have different views or different thoughts on borrowing. I did a calculation about that. If the Scottish income tax revenues were subject to the same unexpected decline that happened to UK tax revenues in 2009, then that forecast error would have been around £500 million under Smith. There is a case for more to cover, but that was probably the best example of a complete forecasting snafu in the last century. There is an argument for that. Borrowing by the Scottish Government will count against the UK's borrowing total. It is likely, as Professor MacDonald says, that that is likely to be constrained, because the UK Government will not want excessive borrowing by the Scottish Government to lead to an increase in the rates on UK debt. It would be an interesting question about whether that is a detriment, because the cost of making good on the detriment of a small or tiny increase in interest rates, given that debt interest is around £70 billion a year at the moment, could be quite considerable. Just briefly on the £500 million figure that you put out, that was obviously 2008, which was an extreme situation, but was that just for income tax? If you are looking at other taxes, it would have been potentially much larger than that. Any other comments on borrowing from panellists? Just to say that across Europe the trend is for more controls on sub-state borrowing everywhere, because they count for national targets within Europe and in international markets. Professor Keating, you are sceptical about inter-governmental relations about having too many set-up that are ineffective. There have been criticisms by witnesses about the existing machinery. Every witness will tell us that we need to be more effective, we probably need to have a slightly more formal system. In terms of actual specifics, are there any concrete things that you think you must have that otherwise you are doomed to fail, or is it a case of working through it as we go along, or are there certain things that we must have in position if we are to have any chance of succeeding? The things that we have been talking about in this meeting to do with finance are absolutely critical and are not necessary for Smith or going beyond Smith. There was an absence in advance of those kinds of things, but it did not matter so much. However, if you are devolving the whole of income tax, it does become absolutely critical. I put an emphasis on the common database, or at least shared databases, so that we are not dependent entirely on treasury databases. A forum for political negotiation is not just unilaterally handed down and greater clarity, greater transparency in all of this so that the public and this Parliament and the Westminster Parliament can get to grips with this and see what is going on and where the money is actually going. I have just last assumed that we have talked about the fiscal commission in detail, but just one comment that was made in Professor Beath's paper you talked about providing forecasts, which I think has been well covered. You also mentioned in your paper, though, the idea that they should provide some kind of strategic commentary, especially over longer-term trends and issues. I just wonder if you can expand on that a little bit. I think that we were thinking on the working group that the role of the expanded fiscal commission would be not just to look at critique and comment on the things that the Government was proposing to do and came out of its departmental forecast, but to be able to say, okay, you are going down that line, that route. Are you sure that that is the right route to go down? It is that kind of asking questions and in some sense forcing the Government to say, well, the reason we are going down this route is for A, B, C, D. At least we have got a more transparent system. We can debate, we can discuss, and I think that it is more balanced and equal and probably valuable. I will add to that. There is not only the issue of testing the Government and the assumptions that it is making, but there is also the equivalent of what the Office of Budget Responsibility does with its fiscal sustainability reports. Remember that the annual fiscal deficit or surplus does not necessarily give you a clear perspective of all of the liabilities and the assets that the Government may face over the next 10, 20 years. If you are thinking of increasing your borrowing now a lot, what position will you be in when there is a big bulge in the baby boomers retiring? Those are the issues that this committee has dealt with quite a lot in the past. It would seem to me to be another, as well as the budget process, to be a very clear point of contact between the activities of this committee and that of the fiscal body, whatever it may be. Just to follow up on that, instead of just looking at the forecast period, which would be three or four years, you are saying that they ought to be looking over several decades about what might happen if things do not change. If you look at the whole of Government accounts rather than the annual profit and loss, you have all the things that are piling up—public sector pensions, the state pensions are not included in the whole of Government accounts. From that, you get a much broader perspective of the kinds of things that are likely to impact on finances, other than the cyclical, the economies up and the economies down, two to three-year effects. However, those longer-run effects should act as either encouraging or cautionary in terms of what you do with taxes in Scotland now, because what will it be like five years down the road? I want to go back to what you said about business confidence and the stakeholders. Over the years, we have had lots of predictions of what makes business nervous. In Scotland, although there have been predictions, business in Scotland has been extraordinary stable. It is a nation of small businesses that grant that. During the referendum debate, there were lots of shock headlines about businesses leaving and so on, but once we dug down into that, in fact, the reality, I believe, was quite different. That is an extraordinarily difficult thing to get a grasp of. Business in Scotland at the moment is doing well in the sense that, for example, employment in Scotland has never been higher. There are 2.3 million people working in Scotland, which is at least in recorded history at an all-time high. Scotland also has tended to very well in foreign direct investment, second to London in the UK. From the data that we have, the most recent data is 2013, where it looks like Scotland's performance on foreign direct investment is still relatively good. You have to think about not just the businesses that are currently here, but the businesses that could potentially be here if they thought that the environment was a suitable environment, if the tax structure was stable and all the things that we have talked about. I do not see that in the last few months there has been anything that has massively changed around the Scottish business environment. We have quite a lot of big-ish businesses. To be fair, it is not just a nation of small businesses. One of the things that is a little bit worrying is that relatively few of them are headquartered in Scotland, so decisions are being made dispassionately comparing Scotland to other parts of the world in terms of how competitive they are. The whole macro environment comes into that. I do not think that anything has massively changed in the past few months, but we do not really know much about what it might have been because we do not know about the foreign direct investment that did not happen. As a supplement to that, some of the issues that have scared the horses maybe were not predicted in any case. Would you agree whether, in terms of interest rates or other circumstances, that either politicians or economists did not foresee happening? There has been a lot of debate about how the economy, the UK economy and the Scottish economy, because the Scottish economy has pretty much tracked the economy of the UK as a whole over the past five years. There have been various predictions and various surprises. I think that the surprise was mainly the recovery in terms of growth and output and very surprisingly much stronger growth in the labour market and in its performance. There has been this complete flatlining of productivity, which labour economists and industrial economists are struggling to explain and have not satisfactorily explained. However, the unexpected recovery has really had a very big effect on employment, for example, in Scotland, and unemployment more than I would suggest than the political events that have occurred in the past year or so. One of the anxieties was the lack of data that we have in order to make, I think that we have all referred to that. However, in terms of timescales, is that a priority now for SNAP and ONS figures to be calibrated to show outcomes and so on before final decisions on Smith or are we going to live by taking the decision and living with the evidence after the event? The data cannot be put in place very quickly. If you are looking for data on things that you have not collected data on before, you are also looking not only for where we are now but for what the trend has been over the last five, ten, twenty years. The best course of action would be once some idea of the nature of the powers is out there. I suppose that you could treat Smith as a starting point. However, to think very carefully about what extra data requirements there would be for a body-like fiscal affair Scotland and to put some resource into relevant data collection but to do that jointly with ONS. ONS might ask for resources because they are extremely short of resources to carry out that kind of work. Given the nature of the supplement, there should be a committee or whatever looking at the information requirements that are necessary to take that kind of activity forward. That has concluded the questions from the committee. I have a couple more to round us off. First, Professor Keating said that there appear to be more controls on borrowing. In fact, there are more controls in sub-state and general borrowing, as we go forward. However, Smith has recommended that borrowing powers for Scotland should be subject to fiscal rules agreed with the two Governments. The UK already has such fiscal rules. Do you think that it is feasible for Scotland to have different rules? I leave the economic visibility to my colleagues. The critical thing in other countries is that the overall level of debt within the state should be in the euro countries within the euro limits but in other countries subject to different limits as well because there are also limits in the mass trade treaty as well. The question is how that is distributed between the central Government and the territorial Governments, the local and the devolved Governments. That is a matter of political negotiation. In Spain, it is done through the fiscal council, which represents the autonomous communities and the central Government. It is not unilateral. They have to agree on this. At the end of the day, the central Government has a limit that comes from Brussels and it has got to distribute that. Then the distribution amongst the autonomous communities is done within that council. This is because they have 17 autonomous communities, so they have devolution everywhere. They do not have the asymmetric system. However, it shows that it is possible to do this in a negotiated way. It does not have to be unilateral top down. In distributing the burden amongst the different autonomous communities, they take into account the conditions in those different regions and the economic conditions, the accumulated debt, the liabilities and so on. There is a way of trying to work out the distribution. Therefore, the target that is given to one region is not necessarily the same as it is in other regions. Presumably, something like that could be worked out in the UK as well, because the circumstances of different parts of the UK are quite different. However, the important thing is that it is something that has to be negotiated and agreed for the status of the whole. Negotiated and not imposed, Professor Beath? Any other comments, Bruce Beath? Scotland does not have a debt at the moment. That is the current position. Smith did not propose assigning debt to parceling it out in the way that Professor Keating has described. Scotland does not have a set of fiscal rules other than to not overspend its budget given a small amount of flexibility. We have discussed the end-year flexibility, and we have had various things replacing that. Scotland has always managed to stick to that rule. That has been its fiscal rule. Exploring a different one might take us even longer than we would be thinking about allowing to sort out the tax system, but I suspect that the UK Government is not aligned with the fact that it would really want to go down. Professor MacDonald, have you got any views on that? I think really bad, no. Okay, that's fine. What would be the implications for the Scottish budget of not having the second and no detriment principle at E? The principle is the result of UK or Scottish Government policy decisions following fuller devolution. Basically, what would be the implications for the Scottish budget of not having the second and no detriment principle being that, as a result of UK and Scottish Government policy decisions following fuller devolution? For example, the Scottish Government does something completely different from the UK, as opposed to the first no detriment principle, which is the devolution of powers per se. What I am saying is that the actual decisions need to be completely novel. You didn't have to worry about the impact that it had on elsewhere in the UK. Well, where would that stop? That's giving you this kind of unlimited power, isn't it? It would seem to me that if Scotland didn't do much relative to the rest of the UK, then no detriment principle wouldn't kick in, so it's the extent of divergence on how far it does what the back. The Basques reduce taxes on business rates, but increase the top rates of income tax, for example. Then you've got a calculation to work out, because you've got relative change, and it's really the extent of relative change that, in terms of tax rates and tax policies—tax rates, in the first instance, and tax policies. For example, in terms of that, it would be that the APD, which was touched on earlier on by the panel in the Newcastle, was cited, as it always seems to be. George Osborne on January, more or less, said that, as far as he was concerned, there wouldn't be a compensatory issue involving that. For example, even if there was a detriment to Newcastle allegedly—although I don't see why, given that we've just got to Scottish Air Poses and I'm going to travel south, I thought that would have been a natural thing in any case if it wasn't for the current situation—his view was that he wouldn't consider that to be non-detrimental. That's what I'm saying. Would, in actual fact, this allow much greater flexibility, without the Scottish Government, for example, having to look over its shoulder all the time? If we do this, we might have to compensate for that. George Osborne was saying that he was hugely relaxed about tax competition, because it's consistent with his ideological position anyway, and other parties might be more concerned about it. A Labour chancellor might be more concerned about that, but it's the definition of no detriment that is critical. Once you get into tax competition, well, almost anything then could potentially qualify. I can see a need for something very specific around the area of welfare benefits and the linkage of welfare benefits, whether it's compensation or simply an intergovernmental mechanism triggered to try and resolve the anomaly. The broad no detriment principle seems to be far too large, and it would get us into all kinds of problems. With that, we'll wind up the session. I want to thank the witnesses for contributions just to see if there's any further points that you would like to make on any issue that has been covered or indeed has been omitted from questions. Anybody got anything else that you want to add? No? Well, it's been quite a long session, so thank you very much for answering your questions so comprehensively. Thank you very much for being the final item on our agenda. That's the end of today's committee meeting. Thank you all.