 Rwyf i'n gweithio i ddechrau gwrsbaeth i ddweud o gweithio y Maes Cymru â Gweithgaldiad 28. We have apologies today from Jamie Halcro Johnson, who is unwell, and from Ross Greer, who will be late. Michael Marat is joining us remotely today. The first item on our agenda is the evidence session with the Office for Budget Responsibility on the UK autumn budget statement and wider UK context, with a view to informing our scrutiny of the upcoming Scottish Budget 2024-25. Therefore, I welcome to the meeting Richard Hughes, chair of the Budget Responsibility Committee, Tom Josephs, member of the Budget Responsibility Committee and joining us remotely, Professor David Miles, member of the Budget Responsibility Committee, Office for Budget Responsibility. I understand that questions will go to yourself, Richard, and if you need to bring in Professor Mills, you will do so. We are going to move directly to questions from myself, and then we will bring in members of the committee. In September, it appears that the chancellor was in, let's just say, some deep trouble in terms of the fiscal situation. By November, he had some significant rigour room thanks to OBR predictions of higher inflation and fiscal drag, which is around £14 billion since March alone. Can you talk us through how the OBR forecasts have changed over the months since March? That's right, and good morning. Thank you for the invitation to be here. Our forecast had changed considerably since March, and I suppose starting with a picture on real GDP, where one of the things we learned between March and November was that the economy recovered more fully from the pandemic and from the energy crisis than we thought. There were these big revisions to ONS GDP data mostly about the past, but what that meant was that the economy was actually 2% above pre-pandemic levels, whereas we thought it was still about 1% below. So, there was 3% more GDP being a starting point for our forecast, but what that also meant was that there was less scope for catch-up growth going forward. That, together with some other revisions to the drivers of growth, led us to slightly downgrade our forecast for real GDP growth going out into the medium term by about a quarter percentage point a year to 1.6% on average over the five years. What gave the chancellor extra fiscal rigour room was, in essence, the fact that inflation has also turned out to be considerably higher than we thought back in March, and most importantly, more persistent out over the forecast period. That lifted tax receipts, it also lifted benefit costs, and it also lifted interest rates, because interest rates have also risen since March, in line with higher inflation expectations. That raised the cost, so he got significant fiscal windfall from higher revenues, he had to spend some of it on indexing benefits to the same higher inflation, he had to spend a bit more of it on higher interest costs, but in particular, because he left public spending plans more or less unchanged in cash terms, that gave him a net fiscal windfall of about £27 billion, which he then spent on two big tax cuts, one on national insurance and the other on the making permanent the full-expensing measure within corporation tax. The expensive measure understands that it is about £3 billion a year, but the actual increase in co-operation tax from 19 to 25 per cent is worth about £18 billion. Is that right? That is why there is still a net increase in co-operation tax even after the full-expensing measure. You were talking about the difference between how you predicted the economy would be and the economy has been stronger than you think. That seems to be quite a big difference, a three per cent difference between thinking it would be two per cent below and it is actually one per cent higher. How has the forecast managed to have such a significant difference to what you had earlier anticipated? That was entirely driven by ONS revisions to history rather than anything that really changed about our forecast outlook. What the ONS found was that the economy had made more of a recovery from the pandemic in 2021 and 2022, so the starting point for our forecast was a higher level of real GDP. Our March forecast still assumed that we would be doing some catching up from the more depressed post-pandemic level of GDP because we had a higher starting level of GDP and there was less of that catching up to do over the medium term. More of growth was just dictated by our long-run view of the potential growth of the economy, which is around 1.6. Interestingly, the UK population is growing by about one-third of one per cent a year, almost very consistently over the past three years. I am just wondering whether it will be our when it looks at growth for the UK economy. Does it also look separately at per capita income growth or is it just basically looking at the economy globally? You are talking about 1.6 per cent growth in the UK economy, but that, if you take population accounts, is probably 1.2, 1.3 per cent. Do you look at that? We look at both GDP growth as well as GDP per capita. I wonder whether David might want to say more about how our estimates of the population also feed into our estimates of GDP employment and other things. David, do you want to come in on this one? Yes, if I could be able to meet it. Thank you very much. Apologies that I can't be in Edinburgh. I am afraid that a family issue has turned up and I was looking forward to being in Scotland. We certainly do take account of the demographics and the population change. You are quite right to say that a measure of welfare in the UK is far better measured by GDP per capita than just the change in GDP. GDP per capita will grow less than aggregate GDP and by a fairly disappointing amount over the forecast horizon. Population growth also has quite an impact on supply potential of the economy. Obviously, what matters there is the change in the proportion of the population that is working. It is a working-age population change that is a meaningful growth over the forecast horizon. There is a lot of uncertainty there, particularly about the level of net migration into the UK, which is probably more difficult to forecast than the natural growth of the population domestically. It is quite easy to predict what the natural growth in the population of people born in the UK is because you get about 16 to 18 years lead time on that. One of the issues about your report, of course, of concern is that almost 650,000 more adults were outside the labour market in the autumn of 2022 at the start of 2020. You go on to mention £7 billion being spent each year on health-related benefits as a result of £9 billion lost in foregone tax revenue. At the same time, unemployment is set to increase by around 85,000 people more than was predicted. What is the impact on the growth of those figures? A significant source of the sluggishness in the post-pandemic recovery has been the fact that there appears to have been a loss of workforce since the pandemic, as well as growing numbers of people on inactive benefits, and in particular for sighting health-related reasons. That turns out to be a drag on the participation rate of the adult population, especially amongst older workers. There are some measures taken in this autumn statement to try and move people off inactive benefits and into employment. We think that that has some effect on the problem to the tune of a few tens of thousands, but we still see persistent and growing levels of inactivity for health-related reasons, which also shows up in our estimates of the benefit rolls. Those people turn up as a cost in the welfare system. Tom, do you want to say more about that? Thank you. It's very nice to be here. The OBR did a lot of work on this in the summer. We produce in-depth reports on fiscal risks and fiscal sustainability. In the summer, it looked at the issue of rising inactivity rates that have been seen probably over the last decade, but particularly during COVID and since COVID. A large proportion of that is due to people who are inactive due to health-related reasons. That trend seems to have continued even after COVID. In our current forecast, a very significant driver of increased welfare spending is increased spending on health and disability-related benefits. We have made an assumption in this forecast that some of the recent increases that we have seen in this may be related to cost of living pressures in addition to the underlying health-driven factors. Therefore, in our forecast, because of the cost of living pressures that we expect to ease in the future, that means that we have some reduction in the growth rate of the case load of these health-related benefits over the medium term, but still a significant increase and a big driver of the increase in the Government's welfare bill. There is quite a lot of uncertainty around that part of the forecast. We try and underline the risks and uncertainty around all elements of our fiscal forecast, but that is certainly a particular uncertainty given that the big driver, the big increase that we have seen over the past decade, is not completely sure of the drivers of that. Therefore, that creates uncertainty as to how long it will continue for. I mean, legal migration to the UK was a net roughly three quarters of a million last year, which was a record number, I would imagine. Most of those will be of working age. So surely, has that not increased the growth in the UK economy? What has been the impact on that? One of the reasons why we have GDP growing in 2023 but per capita GDP falling in 2023 is the fact that there is relatively high levels of net migration assumed in this forecast. When we closed our forecast, the latest estimate that we were using for net migration was 606,000. As you said, the day after our forecast came out, we then got the latest migration figures, which were above 700,000. So the starting point for the level of migration turns out to be higher than the numbers that we have been using. Our forecast has always assumed that the Government takes some action to bring migration numbers down over the medium term and we assume that by the time you get to the fifth year of our forecast, migration levels are back to 245,000, which is a sort of average of where it was before the pandemic. A lot of the recent inflows have been students. They've also been dependents of students and dependents of workers. So it's not necessarily the case that all migrants are people coming here and working in employment. We did a box in economic and fiscal outlook, basically examining what are the right assumptions to make about this new cohort of migrants because this is a very new regime for us to get our heads around. It's only really been in force since 2020. We've only got a few years of outturned data. It's clearly bringing in a lot more people in total than the previous regime did. Some of that is temporary factors. It's students coming back to go back to universities. Some of it is refugees, but quite a lot of them are also dependents of people coming here to work. The assumption that we've made about the employment rates of the migrant population is that it's roughly in line with that of the native population once you take account of the fact that people here on work bases are very likely to work, but then the dependents that come with them may or may not be likely to work. Students sometimes work. They sometimes don't. It depends on the profile of the students. On average, we assume that the migrant population is basically similar to the resident population, but that's an assumption we keep under review. We're learning more about both the composition of migrants, but also more importantly, as importantly, how likely they are to stay in the country, because that obviously affects what their economic profile turns out to be. For the moment, we assume levels will come down from their very high levels of nearly three quarters of a million net migration down to 245, and the actions that the Government took in the past few weeks are consistent with that tightening up of the regime, which would bring the numbers down, but it's something that we keep under review. Overseas students, of course, even if they don't work, they still put billions into the economy. What's the contribution to the UK economy of the overseas student population? There's thousands and thousands here in Edinburgh and Glasgow and in Manchester, London, everywhere, so what is their net contribution to the economy? I think Professor Miles is probably the best place to answer that question, if I may be. I think that without the income that's generated to universities, there would be a severe funding problem with universities at the moment, and they would almost certainly, after cutback and some people who are working in universities would not be working in universities. A question about what they would then do because they were going to move into other jobs, they wouldn't necessarily become unemployed, but it seems plausible that in the short run it would cause significant problems in parts of the economy, particularly for cities which are heavily reliant on university populations. Edinburgh would be one, Oxford, Cambridge, Bristol, anyone can name actually quite a large number of cities where it would make a significant hit, but the impact on universities and their funding I think would be very significant. Unless there was some change in government funding. But we don't know the contribution to the economy as generally speaking. One way to assess that is to ask the question. Supposing that overseas student numbers were dramatically lower, what would happen to the level of GDP in the UK and that would depend a bit on what activities then wouldn't take place? Well it could be that universities would cut back and then the question would be those people who no longer had work at the universities, would they become unemployed for a long period of time, in which case GDP would fall materially? Or would they find other things to do and the economy would just rebalance and we might have a lower university sector but a larger other sectors of the economy? Sorry, would you not all also have billions of pounds that wouldn't be circulating in the economy because students tend to rent accommodation, they tend to go to cafes and buy food and test goods and all the rest of it and go and visit, you know, go around the country visiting, you know, castles and locks and God knows what else, you know, it's been running clothes and so surely there would be quite a significant impact overall. I think in the short run and the short run might last several years, I mean there would be a material hit to demand in particular sectors and it would have an impact on the property market. I mean one of the reasons I think that rents are rising so strongly in many cities across the UK and I'm sure this is true in Edinburgh, my daughter's at the university but first-hand experienced this, I mean is that student numbers have increased very sharply, I mean that has pluses and negatives, I mean it's good for the local economy in some ways, I mean it makes it obviously difficult for people to afford accommodation and there hasn't been as much of an increase in rental availability of property in line with probably the increase in demand in several cities. Okay, I wasn't really planning it down this road, I was just curiousity in terms of their overall contribution. In terms of other comments that the OBR has made, you've said in a quote, there's a little sign in the UK of significant new investment in low carbon energy and heating technologies in response to the rise in gas prices. Why is that, do you think? Probably a number of factors, most importantly what the industry highlights are the difficulties in attaching new renewable energy via windmills or solar power to the grid and the long delays in being able to hook up any new investment into the grid and actually starting to make money, so I think regulatory barriers and difficulties in basically getting the grid to where the renewable energy source is, so the windmill and then also just the delays at actually getting it connected is one of the big challenges. We also have recently relatively lower subsidies for renewable energy compared to in the past and certainly compared to in some other countries like the US and so I think those are two reasons why you've seen less of a supply response to what ought to be a relatively attractive price for energy from renewables so does this meeting Britain is falling back in terms of its international competitiveness sector? It certainly poses challenges for the transition to net zero. I think we got a head start in terms of the energy transition mostly because we just shut down coal-fired power plants but we are also quite good in getting renewables up and running especially offshore wind. There is still quite a ways to go to meet our net zero commitments and the power transition we are now we now remain very dependent on gas for much of our energy and so much of that transition is yet to happen and the fact that the pace has been slowing in recent years means that there's it's going to need to accelerate even faster if we're going to get there by by 2050. Public debt is a major issue now facing the UK economy and you've highlighted the fact that it is more than trebled from below 30 per cent of GDP at the start of this century to now almost 100 per cent of GDP and the IFS director Paul Johnson has said and I quote that early action to tackle these risks and vulnerabilities can help to contain their fiscal consequences, delaying in action is likely to see debt continue to rise towards unsustainable levels in the decades to come. I just want if you can talk to us about what is the level of debt in the UK? How many billion pounds a year are we now paying to service our debt and what is the impact that will be seen in terms of its forecast of where we are with regard to UK long-term sustainability? We're approaching £3 trillion worth of debt which means it's about the same size as the UK economy. Our debt to GDP ratio is approaching 100 per cent which is, as you pointed out, more than three times what we had at the start of the century. That might have been manageable had interest rates remained at their historic lows that we saw in the run-up to and immediately after the pandemic. The challenges at interest rates have also risen dramatically. They've gone from below 1 per cent to above 4 per cent and that just means that a larger and larger share of the government's revenues are being consumed by the need to service that large stock of debt and debt service costs are now getting up to more than £100 billion a year which means that if debt servicing were a government department it would be the second largest after the national health service for the UK. That just means that it constrains government's ability to pursue other priorities be they spending more on public services, spending more on benefits, cutting taxes and you can see the constraint that has been putting on chances in recent budgets. They've had relatively little wiggle room against their fiscal objectives and oftentimes find that wiggle room is eaten up by rising interest rates on their stock of debt. Tom, do you want to add anything to that? Maybe just a couple of things. We have looked in our report at the UK's public debt position compared to other similar economies, the G7 economies, and maybe a couple of things highlight. First, pretty much all of the G7 economies have seen this rapid increase in public debt levels over the past 15 years and quite a lot of that has been driven by the same factors which is basically the impact of two or three big global crises, the financial crisis, Covid and then the energy price shock after that which has pushed up levels of government debt both due to the impact those crises have had on the economy and also the cost of the very large government support packages that have been introduced to support economies through those periods. The UK is not unique in that respect. We are quite unique or at least we've experienced a more significant impact from rising interest rates on the cost of government debt compared to most of the other G7 economies for a couple of reasons. One is that we have a relatively large stock of index-linked guilds and therefore as RPI inflation has increased the cost of servicing that debt has increased very significantly. Secondly, because the Bank of England's quantitative easing programme means that quite a large stock of our guilds are now held by the bank and essentially renumerated bank rates. Our sensitivity to short-term interest rates has also increased quite significantly so that's why in the UK we've seen this very significant increase in debt interest costs, one of the largest in the G7. We do actually expect our debt interest costs to fall over the medium term and that's largely because we are expecting, obviously, inflation to fall back down to the Bank of England's target level, which reduces those debt interest costs over the medium term but they will still be at very high levels by historical comparison. Inflation, of course, as your own forecasts have shown, is shown to be persistently higher than you predicted even in March of this year. You're talking about over £100 billion, so it was £116 billion, £118 billion, was it the last figures I saw? Is that about right at this point? Yes, that's right. That's right. That's right. That's right. That's right. That's right. That's right. That's right. That's right. That's right. That's right. That's right. Okay. What's the impact on public service spending as a result of that? So, one of the things which has constrained public services spending has been rising interest costs and also the pressures that inflation has put on the welfare bill. Ultimately, what is spent on public services in England is a discretionary choice of the Chancellor. He was given a net windfall of £27 billion from our forecast, essentially from fiscal drag net of a few things. He opted to cut two taxes in his autumn statement rather than try and protect the real spending power of public services in this autumn statement. As a result, because he left public service spending plans unchanged in cash terms despite a higher forecast for inflation, that means that the real spending power of government departments in England goes down by about £19 billion over the forecast period. And what's the implications for the Scottish budget of this? So, the implication of that is that if those spending plans are sustained, then there are fewer real increases in violent consequentials for Scottish departments, because in practice, less is being spent in real terms on health education, transport and things that are devolved spending matters here in Scotland. So, what are we talking about? I mean, you've talked about the spending of unprotected departments. UK departments would fall by 2.3 per cent a year in real terms on 25, 26, increasing to 4.1 per cent a year, should the UK continue with its ambition to increase the spending of 2.5 per cent of GDP in the term that overseas development assistance is 0.7 per cent. So, what are we actually talking about in all figures at today's prices? Sorry, a 2 per cent real terms fall in unprotected departments. I would struggle to put a number on that, because I'm not quite sure what the baseline is, but the reduction, the real spending power of all public service spending over the five years of our forecast is about £19 billion. Part of the challenge we have is the government doesn't actually have any spending plans beyond March of 2025. So, we don't know how much the government is planning on spending on health, education, transport and other departments by the time we get to the end of our forecast period. But the real spending power of the entire sum of money that the government is planning to spend by the time we get to 2027-28 is about £19 billion lower, because basically those spending plans weren't changed in response to hiring. Okay, just two more questions for me before I let colleagues. One is the fact that a public sector capital spending has been frozen in cash terms, so what's that likely to mean in terms of infrastructure and economic growth? Well, I guess one thing to say on that, so you're right, the UK Government has chosen to freeze total capital spending. Beyond next year, the government has not set any detailed spending plans whatsoever, so beyond the end of the next year when the current spending review period ends, all we have is the sort of top level envelope for capital spending. So, in terms of the implications for actual public investment in the UK, you know, it's not really possible for us to say because the government is not saying how it would allocate that envelope. I mean, if you're looking at capital spending as a share of GDP, again just a sort of level of the envelope, it has increased as a share of GDP over the past few years, but then it's expected to fall back down again over the forecast period if it is frozen in cash terms. Clearly, if that were to be maintained, those sort of freezes over a long period, you would expect that to have a negative impact on economic growth over a longer term. Okay, thank you. My final question is really from the IFS. Paul Johnson has said and I quote, the Chancellor or a successor is going to have the mother and father of a headache when it comes to making the tough decisions applied by this statement in a year or two's time. What do you feel that the statement means in terms of the medium to long term with regard to the UK economy and, obviously, the knock-on effects to Scotland's economy? I would certainly agree with Paul that the public finances remain in a very constrained state that the Chancellor's left himself about £13 billion worth of headroom against his target to get debt falling in five years' time. It's important to point out that he's only got that headroom because the target year for the deadline year for the target has shifted forward a year, so he's taken full advantage of the fact that he's got himself an extra 12 months to get there. He is falling by 0.1 per cent of GDP in the previous year, so he's really scraping by in the year before. They are based on some historically relatively low growth in spending on current spending for departments and investment spending, which is frozen in cash terms and falling as a share of GDP. That would imply some very strict prioritisation of departmental spending in order to deliver those targets. One has to bear in mind that we have an ageing society that will naturally put pressure on things like the health service, social care and pensions. Those costs will need to somehow be accommodated either through finding efficiencies or additional resources. We have a tax burden that is rising to historic highs. Our forecast, which leads to the Chancellor vanishing the small amount of headroom in the grand scheme of things in five years' time, is premised on the tax burden getting to a historic high but also growth in spending on public services being relatively low, and that is partly an artifact of relatively high interest rates on a high stock of debt that needs to be serviced and an economy whose growth performance has been relatively disappointing compared to pre-financial crisis rates of growth. The historic tax burden is 37.7 per cent, I think, since the Second World War. Professor Miles, do you want to come in here? I think that one way to think about the rather tricky road ahead—tricky is a bit of a euphemism, really—is that last year the Government borrowed about 5 per cent of GDP, so that is the fiscal deficit, and yet the stock of debt to GDP was close to 100 per cent of GDP. If you want to stop that simply rising and rising and rising, you need to bring that deficit down. The way the Government does it on our forecasts is that it gets 5 per cent borrowing down to 1 per cent, and 1 per cent borrowing 1 per cent fiscal deficit about levels off the stock of debt begins to marginally see it come down but only 5 years down the road. You have to go for borrowing 5 per cent of GDP to 1 per cent, and essentially they do it through increasing taxes relative to GDP by 2 per cent of GDP and cutting spending relative to GDP by another 2 per cent, and that is how you get from 5 per cent deficit to 1 per cent. Things may turn out better than that if our central forecast of, for example, productivity growth turns out to be a bit pessimistic, although for most of the last 10 years it has been too optimistic, but if that were to be better then that could be almost transformation. If productivity growth were not at a miserable under 1 per cent and turned out to be one and a half or even 2 per cent, that would really transform the picture of the next five years. The risks are symmetric there and it may be that even our relatively pessimistic forecast of productivity turns out yet again to be too optimistic in which case things are even more difficult. On that note, I will open up the session to colleagues and the first task questions will be Liz to be followed by John. Thank you and good morning. Can I just pursue this issue about productivity, because obviously it is absolutely critical, just as Professor Miles has said, and can I interrogate a little bit about both the unemployment forecast and the participation forecast, because I think that that is extremely important. You said earlier in your reports that obviously when it comes to the unemployment forecast you are obviously using material from the business labour market surveys, such as HMRC information, DWP, etc. The prediction that you have for the end of next year is five and a half to six per cent for unemployment. Can I just ask if you are detecting any particular sectors of the economy where you think that there is a particular danger of an increase in unemployment? There are general signs across the labour market of labour demand weakening as firms come under financial pressure, as real wages start to recover and put burdens on payrolls. There are signs across the economy of the labour market cooling compared to its very tight position, which we saw last year and at the beginning of this year. The rise in unemployment that we see in this forecast is significant but relatively modest compared to past economic slowdowns. It stays below five per cent in this forecast and it got above that during the pandemic and it has been well above that in the recent past. I guess when we think about the state of the labour market we tend to think of unemployment and then inactivity together. Inactivity has risen rather more dramatically and poses the challenge of also being more persistent. Once people leave the labour market and no longer participate, they tend to stay out for a long period of time. I want to come on to that inactivity in just a minute. On the unemployment issue, are there trends that are suggesting that there are different parts of the UK where the threat of rising unemployment is worse or is that too early to tell? I think that it's probably too early to tell but David, anything that you want us to add on this? I think the softening in the labour market is pretty much across the board and maybe that's what you'd expect because it's partly a reflection of the tightening in monetary policy. We've seen interest rates go up a lot from Bank of England over the last year or so. Most of the effects of that is yet to come through, maybe more than half of the impact of that. The thing about interest rate increases is that they probably have a very broad brush impact across most sectors of the economy. Most companies borrow money and there's a squeeze there. A very large portion of households have got debt in one form or another. That's a pretty broad-based squeeze on household budgets coming on top of the squeeze from higher inflation. I don't see at the moment that there's a particular squeeze in one part of the economy and you have a booming labour market over here and a dramatically weakening one with major lay-offs in another area. It seems to be a pretty broad base at the moment. On the question of inactivity, which is another critical issue for the future of the economy, I think that the chancellor has tried various measures, some of them a bit more successful than others, to try to ensure that that inactivity is reduced, which is again critical to productivity. Are you seeing any trends within the different age structures that you can point to that suggest that there is more likelihood of people coming back into the labour market? Is that something that you could expand on a wee bit? Maybe I can say a bit about the trends and then Tom might want to say more about the specific policies that were included in this autumn statement related to the long-term sick. Generally speaking, before the pandemic started, there was a relatively positive trend of both people with caring responsibilities coming into the labour market, especially women, female participation rising, and also older workers working longer through their lives and retiring later. One of the things that was supporting growth in the period since the financial crisis was rising participation rates among those two groups. What you saw in the aftermath of the pandemic was, for one thing, a big rise in inactivity for what is essentially a transitory reason, which is people going to university. More people went to university during the pandemic, they weren't in the labour market, but then what we've seen more recently is that they are coming back out of universities and heading into the labour market, and I would say that issue has not proved persistent. More worrying has been the fact that people out of the labour market for health reasons, oftentimes people who are older left the labour market in very large numbers, hundreds of thousands in the aftermath of the pandemic. Some have come back, but not all, and so there does look to be a persistent problem of higher and rising rates of inactivity amongst older workers, citing health reasons as their reason for being out of the labour force, and the most common health reason cited is mental illness. Is that largely in the sort of 45 years to 60 year group? It has a kind of bimodal distribution. There are a lot of young people and there are a lot of older people out of the labour force for those. And with different reasons, presumably? They both cite mental health as being their principal reason. Amongst older workers, there's also a significant proportion of people citing muscular skeletal conditions, and then there's a longer list of conditions. There's also a very large group of people whose reason is given as other, which obviously doesn't help you for analytical purposes. And is early retirement a big factor in there? It was at the very start of the pandemic, it was, but surprisingly that has not proven to be lasting, and some people have actually come out of retirement and rejoined the labour force. Do you have any idea of the numbers that are coming back from? Those numbers are relatively small. There's a chart in our economic and fiscal outlook chart, 2.11, which has got the number of retirees, and it really is in the low thousands, not more than tens of thousands, and that's compared to the number of people out of the workforce for long-term illness was in the hundreds of thousands coming out. Thank you, that's all very helpful. Obviously, we've had various deliberations over several years about how we articulate the forecasts from the yourselves, the OBR, with that from the Scottish Fiscal Commission and that from ONS statistics. And while it's absolutely nobody's fault, there is just a frustration that sometimes we can't get the forecasts all lined up and also on the same time period. It's very difficult for both Governments, particularly the Scottish Government, that's obviously having to interrogate all three of those, whereas that's not the case down in Westminster. I understand from comments that we've had from other witnesses that the co-operation between all these three groups is really very good. Is there any way that we can try to minimise the problem about the time lag between different forecasts and just try to ensure that they're all very much on the same page? I think that this is a perennial problem and one which is made more difficult, I think, when forecasts get separated by several months in time. It is also made particularly challenging just because we've been operating in a very volatile environment since 2020. And so a month can be a very long time in forecasting because gas prices change dramatically, inflation expectations change, interest rates change, what we understand about migration, GDP, all of those are proving very volatile at the moment. If we would have a period of stability, it would probably matter less what month you're doing a forecast, but you learn an awful lot in a month nowadays. I think we do our best to work closely with our colleagues in the SFC, as well as in Northern Ireland and the Welsh Government to basically share assumptions and be on the same page broadly speaking about where we think the economy is going and they're right up to putting our forecasts together, consistent with our obligations to maintain confidentiality without official counterparts in government. I think we've also, I think, gone quite a long way down the road of providing quite detailed reconciliations for when they have a different number from us. Why is that? And I think when you look at those, what you do find is that the single biggest difference is just time, that whoever went last has access to a bit more data about the state of the world than we did. We don't differ very much on the fundamental questions of what we think productivity growth is. We use the same assumptions about interest rates, about energy prices, and so in that sense, we don't take fundamentally different views of the economy, we just have more time to learn about it. It's all a very inexact science. I completely appreciate that, and I know how difficult it is on time periods. It's helpful if the forecasting improves both in terms of its accuracy. That's the critical thing for governments to make the right decisions on, and I was just interested to know what your views are about how we can try to continue to improve it. It's maybe worth saying a few things about our income tax forecast in particular. A couple of things maybe to add. First of all is whoever is doing the forecast, there is also always going to be a huge amount of risk and uncertainty around it. That is the nature of forecasting. It's especially the nature of forecasting, as Richard says, through what's been a very volatile period for the economy coming out of Covid and then the energy price shock. One way we try and deal with that is to provide as much analysis as we can of the risks around our forecast, so we aim to have a central forecast where the risks are broadly evenly balanced either way because that is the best basis on which governments should make their plans. We try and illustrate the scale of those risks through scenario analysis and sensitivity analysis in order to help policy makers to reach their decisions with that in mind. I know that the Scottish Fiscal Commission does the same. We also do a lot of evaluation of our forecasts, so looking back at our previous forecasts and explaining the differences without turn. Again, both to illustrate the scale of risks that we're dealing with and also to improve our forecasts so that they're more accurate and more central in the future. We did a big piece of work over the summer, which we published in the autumn, looking specifically at our devolved income tax forecasts for Scotland and Wales with some very detailed analysis of the drivers of the change in that forecast and of the outturned data over the past 10 years and looking in particular at reasons why income tax per capita in Scotland has not increased as quickly as in the UK as a whole, which is driving a sort of divergence and looking at whether we could identify any particular drivers of that to incorporate into our forecasts in the future in order to improve the forecasts. I think that what that taught us is that it is really trends in employment income that is driving this divergence and therefore our use of the most up-to-date outturned information from HMRC on employment income is a really important source of data for us and one we're going to look at how we can improve the use of in forecasts. That's just one example of how we're trying to improve our forecasts and particularly our devolved forecasts. I think that that's very helpful because that's an area that's the same, which is absolutely critical to productivity and ensuring that we have absolute accuracy when it comes to the numbers in the different categories of income levels who are obviously going to benefit the tax revenue and things like that. On the question of accuracy of forecasting and going back to the debt interest, I think that the forecast in March was £94 billion and now £116 billion, which is quite a change. Therefore, going forward, would that be one of the forecasts that is more difficult to pin down? I think that it's most difficult to predict. In some ways, it's one of the easiest things for us to put into a forecast because we just take the market expectations for interest rates. We don't try and guess what the Bank of England is going to do. We look at where the market is putting their money and then similarly with the gilt market and the cost of UK Government borrowing, we take the yield curve and use that as the basis for projecting debt interest on UK gilts. The issue is that market expectations have been jumping around a lot. One of the big changes from—I mean, they rose a lot post-pandemic, but they rose further between March and November as everyone expected inflation to prove to be more persistent and interest rates to have to remain higher for longer to bring it under control. Did you suggest earlier that it's more of a challenge for the UK because our interest rates are more index-linked, whereas other countries are different? It's a number of things. One is that our interest rates have risen by more than some other countries, especially elsewhere in Europe. Our interest rates have ended up somewhere between the US and the Euro zones, whereas they all started out in roughly the same place at around between zero and one per cent. The challenge for the UK is that any rise in interest rates hits our interest costs faster, partly because we've got lots of RPI—a quarter of our debt is in inflation-linked, as Tom mentioned. So higher inflation just feeds directly into our interest costs when inflation goes up on top of the increase in nominal interest rates. The other point Tom highlighted was that because quantitative easing by the Bank of England has effectively refinanced long-term debt, which the bank bought, and replaced it with short-term debt, which the bank has issued a bank rate, that means that much more of our debt is sensitive to day-to-day changes and bank rate rather than being paid at the interest rate of whatever the guilt was that they purchased, which oftentimes had a 15, 20-year maturity and was well below market interest rates. So those two factors, in particular, mean that when interest rates go up, they hit the government coffers much faster than in other countries who've got a relatively longer average maturity and much more of their debt in just straight nominal interest rates, rather than just rates that are just immediately to reflect what inflation turns out to be. So it's choices that other countries, certainly European countries, made that they didn't do the same amount of quantitative easing. They've done more traditional debt. It's partly that—so there's two things. One is that other European countries didn't issue as much inflation-linked debt, so we've got about a quarter of our debt stock as inflation-linked. The second highest issuer outside of the UK is Italy with about 10 per cent, so they've got much less of their debt costs are directly sensitive to higher inflation. The way in which we account for quantitative easing is also different from the rest of Europe because the Treasury directly indemnifies the Bank of England for any losses that they incur on quantitative easing, which means, in essence, any rise in bank rate feeds directly into the fiscal cost in the UK, whereas in other countries, including in the euro zone, those losses are accumulating in the European Central Bank. At some point, they may get visited on member states and they'll have to compensate the central bank for those costs, but that hasn't happened yet. So for now, those costs haven't been realised in fiscal terms in those countries, whereas they're immediately realised fiscally in the UK because of this indemnity that the Treasury provides in the Bank of England. Okay, I think I partly understand that. On the GDP deflator, which has come up at our committee a few times, I noted that, for 2023, it was thought to be 5.7 per cent and it's now 6.7 per cent. In practice, where does that impact? Does that make any difference? David, do you want to have a go at GDP deflator versus other flavours of inflation? Yes. The GDP deflator really is a decent indicator of what you might think of as inflation pressures within the UK because it's measuring the cost of things produced in the UK, whereas consumer prices on the retail price index is a reflection of the price of things consumed in the UK. Since we're a very open economy and a lot of what we consume is imported into the UK, then the consumer price index can move in quite different directions from the GDP deflator. In fact, when consumer price inflation was at its highest at the beginning of this year, where it gets up to 11 per cent, retail price inflation even higher, the GDP deflator was rising much less strongly than that. What's happened really over the last year or so is that inflation in the UK has become a bit more domestically generated and much less a reflection of big increases in import prices into the UK. In fact, the biggest single factor, the gas prices, has actually gone in the other direction and they've been falling. The GDP deflator now has moved up quite significantly relative to consumer price inflation. That sounds bad in some ways, but fiscally it's quite helpful because when the inflation reflects domestically generated sources, it's partly a counterpart to wage increases, that is increasing the tax base and increasing tax revenue coming into the UK Government. It's been a big factor behind, in some ways, a somewhat more favourable fiscal situation, certainly in terms of government tax revenue now than certainly a year ago or even back in March. The GDP deflator is probably also a better indicator of the cost of things that Government spends money on than is CPI inflation or retail price inflation. That's another reason why what happens to the GDP deflator and its difference from consumer prices is actually of fiscally rather important. Can I make it by my very briefly just one point about one of the major factors as to why interest costs of the UK Government have gone up so much, which is a reflection of having a large amount of inflation proof or indexing debt, and that rice is very sharp in cost when retail price inflation is high, and at the beginning of this year it was running in double figures, even higher than the 11% or so consumer price inflation. That's very painful when those inflation rates are high, but the cost of that debt will come down really quite sharply as retail price inflation falls away again. It's already fallen back quite a lot relative to where it was at the beginning of the year. We think it's going to fall quite a bit further, so at least one element of what's driven up the big rise in interest costs of the UK Government is going to go into reverse, and it does so in a way that's different from the other bits of Government debt, which really are linked to interest rates, the rates that the Bank of England sets or guilt yields. Those interest rates are probably not going to come down terribly sharply. The expectation is that the Bank of England may be able to reduce interest rates a little bit next year, but not very much, and in fact that's why inflation may be coming down, is because the Bank of England is not reducing interest rates. So there'll be a switch in the story about interest costs to the UK Government debt. The last year it looks like the inflation proof debt has been a very costly thing to hold and the other kinds of debt where the costs linked to the Bank of England rate haven't gone up so much, but I think that'll switch around and it's one of the reasons why the interest burden of the stock of debts in the UK, either it is, probably gets a bit less painful over the next few years. Okay, thank you, that's helpful. If I could just press again on the GDP deflator and the practical impact it has, I mean my understanding is that the Government uses that for certain, like how much the Scottish Government can borrow and things like that, whereas the one that's always brought to us is the inflation in the capital sector, like if you're buying concrete and steel and things like that, that's been very expensive. So would I be right in thinking that the GDP inflator effectively constrains the amount of capital expenditure going forward or is that my understanding? It's generally the case that, as David pointed out, the index used to measure the purchasing power of government is the GDP deflator rather than CPI because governments tend to employ people mainly and then buy other things domestically produced rather than consumers who tend to buy food from overseas, go on foreign holidays and do other things where they're exposed to international prices. So generally speaking the GDP deflator is used to look at the purchasing power of government whereas things like CPI are used to index benefits because that's supposed to reflect the cost of living the individual's face, which as a country which imports half its energy and half its food, you've got to think more about international prices that feed into those imports. But it does stand to the reason that the lower the GDP deflator, the less you would index upwards whatever the things like the Scottish Reserve are or other things which are indexed to the deflator. To move on to something else, the concept of full expensing of fixed asset expenditure, which I think is just plant and machinery. Can you see how you think that's going to play out? As I understand it, there's going to be a kind of short term hit and then a longer term advantage. Is that the plan? David, do you want to have a go at that? Yes, so the expectation had been that full expensing so you can just offset the whole cost of investment against corporation tax, at least if it's plant and machinery, but that would be in place for a temporary period. That was giving companies some incentive to try and bring forward spending whilst that relatively generous allowance was in place. That gets replaced now with a strategy of there being permanent full expensing. Some of the investment spending that might otherwise have been brought forward, companies now don't need to do that because they can expect to get the allowances indefinitely. So there's a kind of slightly negative effect in the short run, but only in the short run on investment spending because of that. But there's a beneficial long run impact because with this measure in place, it increases the incentive to invest, at least in the types of capital that get the 100% allowance. So our estimate is that there's a a smallish reduction in investment in the very near turn just for next year or so, but followed by a persistently higher level of investment than what otherwise had taken place. So over the whole period that we look at from now until 2028 to 2029, the net effect is positive of the full expensing. I think it increases investment by about 14, 15 billion over that period, but it stretches further into the future. And as long as this is kept in place, the level of investment will be higher than it otherwise would have been. So positively, that should help productivity if companies have got more modern machinery, I would think. Is there also a risk, though, that they just invest for the sake of it to get their tax bill down and make poor investments? Well, it certainly reduces the cost of investing. I don't think I go so far as to say that the allowances are so generous that even something that you knew was going to lose money somehow becomes worth doing. So I think what it does is, in fact, in some ways, it makes the tax system a little bit more neutral, certainly for investments that is financed by a company out of retained profit or by issuing shares. So that part of investment that's financed through what you might call equity financing rather than debt, that now gets treated in a way for tax purposes that removes the general disincentive that corporation tax brings to not invest so much. So I think it's a movement for most types of investment in the direction of the tax system no longer disincentivising investment. For the bit of investment that companies undertake that's financed by debt, there now becomes a subsidy element. In many ways, though, because the UK is a relatively low investment country with a lower overall level of investment to GDP than most other relatively rich countries, if the recent change introduces some small element of subsidy, that's probably welcome in a country that actually has a very low investment rate. Okay, thanks so much. My final point, on the question of the tax burden, I think that that's higher, and maybe it was at 4 per cent higher, I can't remember, 4.5 per cent higher than before the pandemic. How does that compare to other countries? Is that having an impact on our economy? Tom, I want to say more about what drives the increase in the tax burden. So it means that we've always been well above the US and we're becoming less and less like the US and more and more, I would say, like other European countries with large welfare states which need to be paid for. We're still below countries with some of the highest tax burdens in the OECD like France, whose tax burden is getting up to close to 50 per cent of GDP, so 48 doesn't quite get you there. It's also the case that pretty much everywhere in the world tax burdens are rising, and that is because working populations are shrinking. People who are on state pensions or consuming public healthcare, those numbers are rising and so you just need to get more tax out of your working population in order to deliver those pensions and pay for those services if working people aren't becoming significantly more productive than they were in the past and what we've heard from the earlier part of the session is that they're less productive than they've been in the past. That's the arithmetic that's driving tax burdens higher everywhere. Our tax burden has gone up more quickly than in other countries. We've certainly delivered a much bigger tax rise over the last few years than you've seen in other places, but that's partly because we've got a fiscal rule in place that requires Chancellor's to get under control and stop falling. That might have precipitated some earlier policy action than you've seen in places like the US where they're still running a 7 per cent of GDP budget deficit and they seem to be at the moment content to let that ride rather than do as David was saying, get a 5 per cent of GDP deficit down to down to 1 per cent. Some of that adjustment may be yet to come in other countries which may also see their tax burden start to rise. Tom, do you want to say a bit about what's actually driving the increase in the tax burden? Maybe just briefly. As you say, we forecast the tax burden will rise compared to pre-COVID levels to about four and a half per cent of GDP higher, near 38 per cent of GDP. Quite a large part of that is driven by policy choices, so the increase in corporation tax headline rate is one. The biggest are the freezes in personal tax thresholds, which combined with what we're seeing now, which is very strong nominal earnings growth, is meaning that more people are pulled into paying tax or pulled into higher rate tax bans. That is driving much of the increase in the tax-GDP ratio over the forecast periods. That has increased since our last forecast in March because of the increase in all the higher nominal earnings that we're seeing. Again, this is a forecast five years down the line, so a lot of uncertainty around that number. As David mentioned, for example, if productivity turns out very differently, productivity, a big driver of wages, those numbers could change significantly if productivity increases compared to our forecast, or even weaker compared to our forecast. On our current numbers, you are seeing this big expected increase in the tax burden. Good morning. That has been fascinating. I just want to pick up on a couple of points and bottom them out. Professor Miles, when we were talking about productivity earlier, you had suggested that your forecast might be on an optimistic side. I was just thinking about the freezing of public sector capex spending, which is a fall in real terms. Do you think that that will have an impact? Logically, it would suggest that it would. Therefore, what's your feeling about how this continual limitation in capital expenditure will ultimately affect productivity? I mean, you're right. If the level of public sector investment is lower, it will reduce the quality of the size, the quality of the capital stock in the UK. That's not helpful. That will tend to make labour productivity a bit lower. We do take that into account in our forecast, because we keep track of not just the investment that is in the private sector and what that does to the productive capital stock in the UK, but also the public sector bit. I think I'd say that the size of that effect is not enormous over a relatively short horizon like four or five years, because the amount of investment done in one year relative to the overall size of the capital stock, and if you think about the road network, for example, in the UK, the amount of spending in one year relative to the value of the accumulated road stock is actually quite small, but nonetheless, if year after year you have very low public sector investment undoubtedly in the longer run, that has that material impact. I think the thing that's more likely to have a much bigger impact on the standard of living in the UK and the fiscal position in the UK is not so much the bit of productivity linked to the capital stock, but so-called total factor productivity, which is a piece of economic jargon, which really means how we get better at doing things because we discover new things, new inventions, we get better at doing things, you learn by doing, you look at advances in other countries and then you adopt what are the most successful techniques, not particularly linked to the capital stock, but just because you just get better at doing things. Historically, over the last 60, 70 years in the UK, we've got better by almost 2% a year at doing that stuff, and that's what's driven increases in living standards. Since the financial crisis last 15 years now, instead of getting 2% better a year, we've barely got better by half a percent, and so 15 years of underperforming by one and a half percent gets you a 20% hit to the standard of living of people in the UK, so it is absolutely enormous. It's not unique to the UK that the last 15 years has been bad, but it's been probably worse in the UK relative to history than in most of those other countries, and it would make an absolutely enormous difference if the next seven or eight years you got productivity growth a bit more like the long run average. What do I mean by transforming the situation? Well, we did a simulation where if the rate of that improvement in technological knowledge and productivity matched the longer run historical average for the UK, the fiscal position in the UK five years down the road in terms of how much debt there was outstanding would be £200 billion better than our central forecast, but if the next five or six years were as bad as the last 10 or 15 years, so we're a bit more optimistic than that on our central forecast, but if we shouldn't be and we just assume that things would carry on as poorly as the last period since the financial crisis 15 years ago, then the fiscal situation in terms of the stock of debt will be £200 billion worse, so it is hugely sensitive. Your view of the future and what will actually happen is hugely sensitive to this crucial assumption about whether in a sense what we've seen in the last 15 years is just an unusually bad period and we're going to go back to the 50 year average where things just get better and we get more productive or whether the next five or so years actually is no better than the last 15 years and our central forecast has taken an in-between position not based on very strong evidence, but more just like as a central assumption, we get to a sort of halfway point. Not as good as it used to be in the UK over the last 50 years, but not as bad as it's been over the last 15 years. That's what underpins our central forecast, but there must be a lot of uncertainty about whether things will be materially better than that or materially worse, so that's an indication of the risks to the fiscal position that Governments will face in the UK. That's very helpful that long-range looking back and the figures you've set out, but I wasn't entirely clear from the autumn statement what the significant trigger factors would be that would change that from what you've set out over the last 15 years. Some of it in fairness is because of the lack of flexibility for all the areas that we've discussed in terms of debt servicing and so on, but correct me if I'm wrong if I'm being somewhat pessimistic. Well, you're probably not wrong to be pessimistic. In the following sense, I think that there's limits to what the Governments can do in this area. To some extent, productivity improvements are a reflection of technological progress and inventing new things, and some economists are very pessimistic and say, actually, we've discovered all the really transformational things over the last 100 years with electricity and computing powers that have increased so much, and we can't expect those things, things like as transformational as those things to happen in the future. If that's true, there's not an awful what Governments can do about it. There was something that the Governments did do in the autumn statement. We've talked about one which was the changing allowances on investment, and we've fact that are into our forecasts and it adds a bit to the productive potential of the UK, but to a significant extent, I think, many of the forces that drive productivity are things that Government has a rather limited ability to influence. Right, thank you. On that, another question I had was what consideration you're giving, and I appreciate it's very complex, talking about technology to the impact that artificial intelligence could have specifically on productivity, and I appreciate that any consideration will by essence be wrong, but what is your thinking about that, because that's one possible area that could have an impact? No, I think you're absolutely right. One of the reasons why our central forecast is more optimistic than most for the UK is a belief that AI, as it's rolled out and has ever greater uses across the economy, actually may be the thing that makes productivity of the next five years and beyond better and higher than we've seen in this rather dismal period since the financial crisis 15 years ago, and it may be that it has particular impacts on the provision of some government services and in the health service in particular. Difficult to know yet, and lots of people who know a lot more than us at the OBR about the implications of AI take different views on this, but I think that was one of the reasons why, in our central forecast anyway, we have a more optimistic productivity profile than just looking back over the last 10 or 15 years. Just to finish off this point, in that respect, would you not have expected to see more incentive to encourage investment in AI rather than necessarily plant machinery that we were talking about earlier? In a sense, it's a question of affordability. The fiscal position is difficult. The full-expensing measure, which only applies to plant machinery, in the short term anyway, is pretty expensive in any ways for the government. It costs something like £10 billion a year. The national insurance cut is another £10 billion a year. So the government essentially had used up the extra headroom it got for more tax revenue coming in. No doubt, it would have liked to make investment incentives even greater for investments beyond plant and machinery. It was a case of constraints on the fiscal position that kept it limited to just plant and machinery. That leads me on to my next area, which I think I will apply to you all. Going back to the point about renewables, I thought that it was a relatively low amount of £960 million for the green industry's growth accelerator. I recall what you said, Richard, about the fact that we have slightly ahead of the curve, but from the outside looking in at where there is significant competition in investing in some of the moves that you might make, the UK has to compete globally. I saw that £960 million as a signal plus the wider fiscal environment that, faced with the choice between investing in other locations, changes the risk profile of the UK because of appetite and ability in a longer-run environment. However, I would appreciate your thoughts about that as well. So, we took a detailed look at what the cost of getting to net zero might be for the UK economy and then the UK government as a subset of that in our 2021 sustainability report. More recently, what we have done is checked those estimates of cost against where the government has actually spent its money. I think what we found was that the government had spent roughly the amount of money that we had expected it would be spending by now to deliver that transition. All of the composition has been different than we expected. They have ended up spending more in particular on nuclear power and on the construction of new nuclear generation capacity. The challenge with that is that there is a very, very long lead time to get it up and running so it doesn't contribute very much to your decarbonisation in the near term. Also, some of the technologies in which they are investing are speculative, small modular reactors being one example. What there was less of than we expected were delivery of proven renewable resources and in particular onshore wind. That is not so much a lack of public investment as it is just these regulatory barriers that we talked about, the difficulties in getting planning permission, the difficulties in then getting a grid connection and then that just means that the payback period for an investment is just much longer than most private companies are willing to put up even what can be relatively competitive auction prices. Perhaps the third area where the transition has been slower than our estimates had assumed is in the conversion of domestic heating from gas-fired boilers to electric heat pumps where we are well behind some countries in terms of making that transition. The thing is that that is proven technology. We don't need to invent the heat pump, it already exists. It is expensive to install and especially if you are on low incomes it can be tens of thousands of pounds you have to find to make the conversion. In other countries they have more generous support to make that transition happen and also strict to requirements about making it happen although in countries like Germany some governments are trying to back off those but it is in particular on the transition of domestic and commercial heating to renewable sources where we have the furthest to go and are lagging behind some other European countries which have taken it much more seriously. My last question concerns Brexit which I know you have baked into numbers generally. For a period of time it was quite difficult to disaggregate the data between what was happening, the wider geopolitical issues, the energy crisis and so on. My guess is that only the longer run forecasts and the evidence therein will start to show or at least allow us to apportion some data to the impact of Brexit but am I right or wrong in that? That's right ever since the referendum we've assumed that in the long run the decision to leave the EU would reduce the trade intensity of the UK economy by about 15% and reduce the long run level of productivity in the UK relative to a counterfactual of staying in the EU by about 4%. Our departure from the EU and its impact on trade was complicated by the fact that we also had a pandemic in the middle of it which disrupted everybody's trade. What we've seen more recently is that if you look at advanced economies with a similar economic profile to us our trade intensity has recovered by less than trade intensity in those other countries and so we are toward the lower end of the sort of G7 league table in terms of trade intensity as a share of GDP. Within that there have been some surprises however. You've seen quite a strong recovery and strong growth in services exports for the UK whereas manufacturing has been doing relatively poorly. So there are some encouraging signs on the services side and predictable challenges in terms of manufactured exports but so far what we've seen doesn't really lead us to change our view that in the long run Brexit is going to have what we anticipated being the effect on trade and the effect on growth in the long run. Thank you very much, Michelle. That's just a few more questions for me. It was quite interesting that 10 years ago when Robert Chote used to give evidence to this committee productivity was a kind of bugbear then and there was a number of suggestions about how we can improve everything from further investment in research and development to indeed the new technologies. One thing of course since then has been the growth of working from home and the economist suggested a few weeks ago that working from home in the medium term reduces productivity by an average of about 19 per cent. I don't know if you want to comment on that but the Sunday Times certainly touched on that on Sunday in terms of the UK's 552,000 civil servants. I was going to ask in terms of unemployment in your prediction about an 85,000 headcount increase in the first quarter of 2025. How many of those do you feel will be because of a reduction in the public sector headcount? One of the things that the Scottish Government had that was looking to do a couple of years ago was to reduce public sector headcount to what it was pre-pandemic. It seemed to have gone a bit quiet on that and that's something that will probably be questioning the Government on in the weeks ahead. Does that factor into your figures if there's going to be a 2.3 per cent short term and 4.1 per cent real-term reduction in public spending? It is just driven by these cyclical factors and in particular, as David pointed out, rising interest rates putting financial pressure on firms. It really is just a general cooling of the labour market. The fact that the Government is also in the process of retrenching ffiscally will mean that they are adding less to aggregate demand in the economy and demand for labour in that sense. It's certainly not the case that Government is providing much counterweight to what is likely to be some retrenchment in the private sector and because they themselves are reducing spending as we've discussed over the next five years, it stands to reason that they will also be constrained in their employment choices. On top of the fact that they have been increasing public sector wages significantly in the recent past, which means that unit costs of employment in the public sector are also going to be higher. Have you looked at fiscal drag in terms of its impact on pensioners? We've seen an 8.5 per cent increase in the triple lock, but what that seems to have done is increase the number of pensioners who are now paying taxes in 2010. It was about half of all pensioners paid taxes. It's now about two thirds. Not pensioners in particular, but you would expect that fiscal drag would have its biggest impact on older workers because they tend to earn more and are more likely to end up in higher tax brackets. Not pensioners specifically, because obviously people who have retired have already paid the tax and they are having to pay tax on the pensions that they are getting. Is that not an issue of concern? David might want to say more, but the increase in the triple lock has been relatively generous to what people who are working have been getting. That might put them into higher tax brackets by virtue of the fact that they are getting either inflation or earnings uprating every time through the triple lock, but it's not something that we've looked at in a great deal of detail. It's a difficult one to look at in the triple lock, because it's certainly over the last decade that pensioners are relative to other age groups, particularly younger people have become relatively more prosperous. Your analysis of the UK standard of living will fall by about 3.1 per cent by 24-25. Have you looked at that in terms of how it impacts on different age groups? We haven't, but others have, particularly because benefits and pensions have been protected against the rise of inflation, whereas people who are earning have not, because their wages have not kept pace with inflation. The hit from living standards is particularly concentrated among those of working age. We talked about the GDP deflator. John asked questions about that. Professor Mills gave us a detailed answer to that, but one of the issues for me is the unrealistic nature of GDP deflator in terms of how it is likely to impact on capital. Over the next four years, it has predicted that GDP deflator impacting on Scotland's borrowing would allow the ceiling to go from £3 billion to £3.165 billion, which is a measly cumulative 5.5 per cent over four years. Would it not be more effect that this is baked into the fiscal framework? Is that in any way realistic? It was partly because we know that this committee is always interested in different kinds of inflation, that there is a box in this epoch that talks about the implications of different kinds of inflation for the public finances. One of the challenges of upgrade, one of the challenges in looking at the fiscal implications of different kinds of inflation, is that a lot of what is driving the volatility in tax receipts both in Scotland and in the rest of the UK is the fact that you have got much stronger wage growth recently. That ought to be reflected in a higher GDP deflator, however, because it is the biggest component of the GDP deflator that has higher wage growth. I am just thinking about the impact on capital, because capital inflation is running higher than resource inflation, yet the GDP deflator is predicted to only grow by 5.5 per cent over four years, which seems to mean nonsense. Anyone who wants to get a house built or a road patched and goes out to tender will not be quoted by 5.5 per cent increase over the next four years. Surely, it should be a much more realistic look at how inflation is impacting on capital in particular. We do not use a different deflator for capital, because we just apply the deflator to all of all of government spending. Sometimes in contracts people use sector-specific deflators, construction deflators, sometimes defence contractors use defence-specific inflation. We are forecasting at the macro level and not really looking at individual projects. It does not make a lot of sense for us to look at even more specific sector-specific inflation, but it is certainly the case that headline numbers can hide an awful lot of different trends and different things. As you say, if there has been in the past higher rates of inflation in the construction and investment sector, that means that that is much more constrained relative to the amount of money that you are getting from the reserve, because that is only going up by the economy-wide deflator. I am glad that you look at it in defence procurement, because if you look at the age act project at the cost of certain aircraft carriers, it has been billions higher than was initially estimated. Of course, HS2 was as well. All those major projects seem to be hugely overinflated. Incidentally, does the OBR ever look at the price of procurement in the UK relative to other parts of Europe? It seems to me that all capital projects seem to be phenomenally more expensive in the UK than they are in Europe, for example. Because we are doing macroeconomic forecasting rather than looking project by project and at value for money— I am just looking at it as a round, not individual projects. I am looking at capital procurement, which is a huge aspect of UK public spending relative to, for example, if the same projects were purchased on the continent. It is certainly a challenge in trying to get some kind of economic return from these projects, because the more you are spending on them per unit, the less return you are getting per pound spent. The fact that the spending is falling as a share of GDP compounds that challenge, because if its unit cost is also going up, then you are getting even less in terms of GDP. There was a recent and very good study done by a gentleman named Bent Fleberg, or Fleberg. I am not quite sure how to pronounce his name, but he is either from Netherlands or the Port of Belgium, and he has done an extraordinary panel study looking at cost over runs on different projects in different countries. What he found, interestingly, was that we do have some of these very big projects that overspend massively in the UK, but we are not unusual across the world in that lots of countries have mega projects that go over budget by several times, and we are not a particular outlier. I am thinking at how they are actually set initially, not really the cost over runs. When you go out to tender on a project within the UK, it seems to always be 30, 40, 50 per cent or more higher than an equivalent project would be in the continent, even in countries where the standard of living is comparable or higher. That seems to me rather odd. I was just asking to see if they would be able to take those kinds of things into account. Just one last thing for me, because it is 90 minutes. We will finish in about one minute, and I do not want to keep you too long. What the chancellor did in his autumn statement—obviously, it will impact on how the OBR forecasts in the spring—I just want you to comment on what the IFS has said and what Paul Johnson has said. In reality, debt is set to be just about flat at around 93 per cent of national income. That is on the basis of a series of questionable, if not plain, implausible assumptions. It assumes that many aspects of day-to-day public service spending will be cut. It assumes that substantial real cut in public investment spending. It assumes that rates of fuel duties will rise year on year with inflation, but they are not done in more than a decade and surely will not do next April. It assumes that the constant rollover of temporary business rates cuts will stop. It assumes, of course, that economy does not suffer any negative shocks. I would agree with them. There are a host of risks to the forecast that we have, which, as Paul pointed out, only sees the chancellor barely get debt falling in the 50th year of our forecast. Many of those risks are exogenous. They come from the outside world, the uncertain geological situation, the uncertain interest rate outlook, the uncertain inflation outlook, but some of those are risks that the Government generates for itself. The classic one in our forecast is fuel duty. It always claims that it is going to index it to inflation. It never does. It loses about £6 billion of revenue as a result. The fact that the Government also does not set out detailed spending plans beyond March of 2025 for the major public services also poses a risk in delivering what is implied in the totals, which is a big reduction in the growth rate of spending on those services. It stands to reason that, the longer you wait to set out detailed plans with specific implications for health, education and transport, the less likely it is that those plans will be delivered in practice. That poses another big risk to the realisation of our forecast, which is that if the Government cannot stick to its quite tough plans for public spending and public investment, then the chancellor's ambitions for debt are not going to be delivered. Okay, thank you for that. Now, just to wind up, I just want to know if any of our guests, Mr Joseph, Mr Hughes or Professor Miles, have got any final comments you want to make. If there's any areas that you feel we haven't touched on that you want to emphasise anything. Okay, thank you. David Kay, how about us? Yeah, if I meant to. Just a comment on the Paul Johnson somewhat pessimistic assessment of the outlook. Everything he says is right, but there is an upside as well. The very final chart in the rather long report we put out after the autumn statement, I think it's the most important chart in the whole document, it's on page 145, which many people won't get to page 145 since the last page. It just shows that there's a sort of symmetry, there's an upside and a downside to a lot of the biggest risks that face the UK. One can certainly envisage situations where things turn out to be much more difficult than the central forecast in our analysis, but there are some which actually would, if they transpire, generate much more favourable outcomes. And we mentioned one that's probably the most important one, which is productivity. And it's not obvious that the next five, ten years is as dismal as the last 15, and there must be a risk, and it's a good risk, that things are much more like the long run average, and that really would be quite transformational in terms of the fiscal outlook in a positive direction. So it's not all too mungloon. Well, let's hope not. Okay, well thank you very much. I want to thank our witnesses for answering our questions so succinctly and so comprehensively. So thank you very much. I also want to thank Mr Joses and Mr Hughes specifically for coming to Edinburgh, and I hope to see Professor Miles in Edinburgh next time. So thank you very much. I'm going to call a five-minute break in order for our witnesses to change and also to give a natural break to members. Thank you very much. The second part of our evidence session on the UK autumn budget statement in wider UK context, we are joined remotely by Carl Emerson, deputy director and David Phillips, associate director and head of devolved and local government finance institute for fiscal studies. Good morning and I welcome you both to the meeting, and very helpfully you are both sitting together, so that should make life just a wee bit easier. I'm going to start where we left off. I was quoting Paul Johnson's response to the autumn statement to the OBR, who gave evidence just a few moments ago. Professor Miles said that he thought that the IFS was being somewhat pessimistic in terms of its outlook, so what's your view on that? Well, we have forward-looking fiscal targets, and I think there are some merits in having forward-looking fiscal targets, because it allows the chancellor to find to adjust if there's a shock, so actually the forward-looking nature of those targets has much to commend them. But one of the downsides of a forward-looking fiscal target, so we'll borrow less than X in five years' time or we'll have debt falling in five years' time, is you clearly need a credible set of tax and spending plans that apply to a credible set of economic forecasts. Now, the future is always uncertain. I think Professor Miles was right to point out that yes, there could be a recession, there could be weak productivity growth, but also we could get much higher productivity growth, things could be much better than we expect, and I certainly accept that. I think where I'd question the chancellor's plans much more is around some of the stated policies he has on tax and spend and question whether they're very credible. So we know that under his stated plan, field duty will go up by five pence plus RPI this coming April, and then by RPI every year going forwards, but I think we also strongly suspect that that won't happen and that we'll continue to freeze field duty, which by year five will reduce revenues by about £6 billion. We also suspect that the business rate reliefs that are applied on a temporary basis that were introduced during the pandemic for good reason at that time, they keep being extended by a year and we suspect they might continue to be extended again reducing tax revenues. And on the spending side, we don't know if the government's going to be able to deliver the spending plan set out beyond March 2025, but they do look incredibly tight. They do imply a return to austerity for some government departments and the government hasn't set out any detail about how it intends to apply those spending plans. So I think they're also pretty questionable, and we know that conservative chancellor's since 2010, when they get to a spending review, have often topped the spending plans up before they divide the cake between spending departments. So I think we wouldn't be surprised, we think it's more likely than not, that field duty and business rates will raise less than what those forecasts suggest, and that we'll end up spending more on day-to-day public services than the forecast suggests. So I think our central assumption is that the forecasts are a bit optimistic on those grounds. And if I can make our second then as well, I mean what we saw in the orphan statement was quite a big upwards revision in inflation forecasts for the current year 2023-24, but no upwards revision to spending plans either this year or next year, or actually in the longer term to account for that. So with the higher inflation, we had higher revenues coming through from the fiscal drag through the freeze of the income tax thresholds, and things like that. There was no higher increase in spending to offset that. Instead, sort of, you know, if Chancellor had wanted to offset the impacts of inflation, around say 19 billion pounds would need to be added on to the public service spending totals for next year and beyond. Instead, we didn't see that. What room that was created by the extra fiscal drag, sort of slightly improved in-line forecasts, was used instead for some discretionary tax cuts on corporation tax and national insurance. And I think the risk there is quite clear. We're paying for tax cuts that we almost certainly would like to have. I think, you know, having lower national insurance contributions, a more generous regime incorporation tax for investing are nice to have, but they have a certain cost to the public finances. How are they being paid for? Well, it's uncertain savings because we don't really know that we're going to be able to keep to the spending plans that are now tighter, as David says, than what was previously implied, because of the higher inflation. Yeah, I mean, you've said, obviously, or Paul said in his response to the statement that fiscal drag is now running at some 50 billion pounds and 10 billion of that, sorry, 14 billion of that is since March, so that kind of puts into perspective the 10 billion pounds are so cut to NIC. I mean, one of the things that you're actually talking about as well is, and we discussed this to some extent with the previous session, is the number of people who are actually on incapacity in related universal credit, increasing from around a million people to, you know, about 2.4 million over the last decade. Is this a trend that you think is likely to continue, or is it something that is going to reduce, or can I stay the same? How do you feel? Where do you think we are with that, and what impact is that going to have on the public finances? Yeah, we've certainly seen big increases in the numbers on incapacity and disability benefits both over the period from 2010, but in particular over the period since the summer of 2021, where the number of new claims to those benefits has been running well above pre-pandemic levels, that has a number of consequences. Clearly, it's very bad for those individuals if they're in worse health, that's disastrous for them. It also has a public finance consequence because they're not just making claims to these benefits, they're being successful in those claims, and getting extra money from the Exchequer. Now, the forecasts assume that there's going to be pretty strong growth in the numbers claiming and therefore spending over the next five years. I think there is a lot of uncertainty around that. I think, you know, it could be that yet again, we see an upward revision and that's been certainly the pattern that we've seen over the last 10 years, but I think it's also possible that, you know, we see a slowdown, and let's hope we do relative to what we've seen since the summer of 2021. I think one thing I would caution against is that there's a couple of reforms that government's been has announced. Now, we know that one of the history of reforms in this area is that when reforms are implemented and they're intended to reduce the number of claimants and they're intended to reduce spending, often they've not been anywhere near as successful on those grounds as what we've hoped. So, I think, you know, one lesson of history is that when we try and change the system to reduce the number of claimants or to reduce spending, we often fall short of what we expect. So, I think I certainly wouldn't put too much hope in the idea that the reforms will lead to a big saving. Yes, so the Chancellor has sort of announced a change to the working abilities test to make it basically more stringent, which, in his plans and in the OBR forecast, would basically freeze or stop the increase, the further increase in those getting the most support. I guess Carl is saying that that was meant to be the plan with Pitt, that was meant to be a reduction of 20%. I think it was, and the number of claimants instead, the number of claimants continued to rise. So, there's probably, you know, risks weighted to the sort of downside here, the sort of, what, by downside I mean, higher spending, higher numbers of claims, rather than the other way around lower spending, lower numbers of claims, rather than that central sort of projection, now the change as well will sort of arrest this increase. And of course, the changes to the incapacity benefit rules apply in Scotland company because universal credit, of course, is still a sort of benefit. There is sort of coming down the line sort of potential even more radical changes to these tests, so whether you get the disability element universal credit, so that rather than being a set foot, working on these tests, it will rely on the disability tests used in Pitt. But of course, Pitt is devolved to Scotland and has no payment, and whilst not there at this stage is how that will apply in Scotland. Yeah, I mean, I was going to actually move on to actual social security in Scotland, so that was, I was glad that you just mentioned that, David, I mean. Obviously, the problem with social security benefits is of course that they've demand led, so how do you see the Scottish Government being impacted over the next year and beyond by the kind of increase in the number of people who are seeking benefits? Where do you see that going? So, of course, in Scotland, for universal credit, the incapacity benefits, if you like, that is still a reserved function, so any changes in demand in Scotland for universal credit or ESA in point of support allowance, they will be covered by the UK Government. Of course, it will matter, you know, for Scottish people based on how the new tests affect them, if they unwell and need to claim benefits. I think the big issue for the Scottish Government's budget is what is happening to claims and expense of adult disability payment versus what is happening to Pitt. So, the forecast is still to Pitt expenditure and claim numbers to increase over the next few years. I think they actually revised up the forecast expenditure in the autumn statement, although that was largely related to inflation, I think, rather than numbers of claims. What will matter for Scotland actually is, as ADP is being rolled out, how are the numbers of claims that are successful and the duration of claims changing relative to Pitt? So, previously, the SFC's forecast that because of the changes in eligibility conditions, changes in how it is assessed, how it is reassessed, there will be more claims, more successful claims and longer claims in Scotland's disability benefit system. The aim is actually, I think, as part of the policy aim to have a system which is, as the Scottish Government would say, you know, more people-centred, takes more account of the circumstances, is less stressful, but, of course, if that is the case, if there are more claims, more successful claims and longer claims, that will push up costs. I think now we've got a few months of data coming through. The next set of SFC forecasts will hopefully give a little bit of an indication about, in the first 18 months or so of the role of ADP, to what it said, is that coming forth? Is it actually in line with their forecast that there will be somewhat more expenditure on claims? Is it running ahead or actually is it not quite as bad as that? So, I think the latest forecast, the next forecast next week, will be really important to see what potential implications are for the Scottish Government's budget. Just to add on that, I mean, it's the disability benefit claims where we've seen even bigger growth planning with the incapacity benefit claims and I suspect it's the disability claims where there's more uncertainty about where we'll land in five years' time. So, it's the bit that's been evolved to Scotland where there's actually more uncertainty and it looks like more growth in the cost pressures. I mean, we'll obviously be taking evidence from the SFC next week, but is your view that this is likely to be tens or hundreds of millions of additional expenditure in the years ahead? In terms of the total volume expenditure, it will grow by hundreds of millions of pounds in the coming years, partly because of inflation, partly because of increases in the volume of claims. I think it's not clear to me at this stage. I wouldn't want to say whether I think it's running ahead or running behind the SSEs' previous forecasts, which I think by the end of the forecast we're rising for about £500 million more per year than the equivalent duty benefits. That's about 20% increase, I think, about UK expenditure levels. It's not clear to me yet whether that is, by the ballpark, will be higher or lower than that. I would wait until the forecasts come out next week. Okay, I want to go to something else, which is obviously debt interest. I mean, one of the obvious concerns is the fact that we will get debt interest that's increasing. The national debt is now about 93 per cent of GDP, and the cost of servicing that debt is, I understand, about £116 billion this year. I wonder if you can discuss what you feel the impact of this is going to be on the next year or two and beyond. The physical situation is incredibly challenging. We know that the UK Government has accumulated a lot of debt through the financial crisis, the pandemic and now the cost of living crisis. All for good reasons, it's understandable when it be bad shock hits. We want to support households, businesses and public services, but up through the 2010s that big increase in debt didn't lead to an increase in debt interest spending because the Government was able to borrow so cheaply. Now interest rates are much higher. Also because of the way in which quantitative easing works, it means that increases in interest rates feed much more quickly into increases in the Government's debt interest bill. Over the next few years, debt interest spending will be running close to 4 per cent of national income. That's about 2 per cent of national income more than what we were used to through the 2010s or what was projected for now before the pandemic hit. A 2 per cent of GDP increase in spending on debt interest, that's a huge amount. That's the equivalent of what we spend on the defence budget in its entirety. Big fiscal pressure there, and of course it's combined with that weak growth outlook. Big increase in spending on debt interests alongside having pretty weak outlook for GDP growth translates into a very, very tricky fiscal situation. Of course, we've seen this substantial increase in the tax burden over this Parliament. That's around, I think, 4 per cent of GDP or the long-won increase in the tax burden. That 2 per cent increase in debt interest spending is around half of the increase in the tax that we've seen over this Parliament. It's now running. I think that the debt interest in the UK is now about six times Scotland's annual expenditure on the NHS. I think that puts it in some kind of perspective. You've touched on health and social care spending saying that it's reaching 45 per cent of total resource department expenditure limits compared to 25 per cent at the turn of the century. Clearly, that is on an upward trajectory. Given the fiscal position that we are in, how sustainable do you believe that to be? There's clearly lots of pressures on the NHS budget. The challenges of an increasing number of older people. The baby boom is reaching the point in their lives where they put an increasing strain on the NHS means that it is going to be under a lot of strain. There's the NHS workforce plan, which very commendably the Government has set out what it thinks the NHS is going to need in terms of a workforce over the next 10 years. Rather shockingly, that's the first time the NHS has produced a long-term workforce plan in its history. That's well overdue and very welcome. Both the Conservative Party and the Labour Party have signed up to that NHS workforce plan. We estimated that funding that will require something like 2 per cent of GDP extra to be spent on the NHS in about a decade's time. That's about £50 billion a year. That is sustainable if we want to do that. I think what gets increasingly difficult is to say, well, what we'll do is we'll fund that by cutting spending elsewhere. If you look back at UK history, we've seen the NHS grow as a share of GDP, but we've cut defence spending since 1983 pretty dramatically as we've reached the rewards of ending the Cold War, peace in Northern Ireland, et cetera. We're now one of the few countries that's compliant with the NATO commitment to spend 2 per cent of GDP, but it's pretty, it's only just, it seems unlikely we're going to be cutting defence spending. Indeed, the Chancellor has spoken about the need to increase it. So, I don't see how, I think I can see a world in which we pay for the, we increase NHS spending. I think what's really challenging is to see how would we do that without increasing the overall size of the state further. Of course, the flip side to that is, well, the UK tax burden is already high by UK standards. Do we, as a country, want to make the choice to push it up even further? Now, I wouldn't be surprised if we do make that choice, but there are clearly other options available. And if I might add another one or two small points there, of the overall pressures on NHS spending, because it's correct that sort of demographic is a key one, but a large part isn't sort of an increase in the kind of, if you like, unit costs of the NHS that's been predicted. And that's because traditionally health productivity rises by even less than productivity in the rest of the economy, which has been, you know, pretty weak as we know over the last, you know, decade and a half. So, in order to sort of maintain wages in the NHS, if productivity is not going up, you're increasing your unit costs. So, I think kind of the point that David Miles made at the end, you know, we need to be looking at the extent to which we can try to eke out what productivity we can and the way new technology can improve that. You know, I think that's a really important focus, whether or not we can kind of substantially reduce expenditure on NHS because of that, I do not know, but I think that is a key issue. And then colleagues at the IFES have looked at sort of what increase in the NHS budget over the next sort of, you know, spending period might mean for other service areas. So, these figures are for England, but it would be kind of fairly similar, I think, for Scotland as well. So, to meet the increase in spending for the NHS, sort of required by the NHS spending plans, the workforce plan, that's about 3.5% a year. But if you then also throw school spending, and then you also, you know, maintain commitments on defence and foreign office, and the new charter commitments in England, well, that would mean that other services seem cuts of 3.5% per year. So, really quite substantial cuts outside the NHS, and in Scotland it would be a different set of exact figures. But again, if you see the increases of NHS spending around 3.5% in the next spending period, that can imply cuts to many other services of 3.5%. Now, Carol, you said that there are other options to raising tax, which I find intriguing. Do you want to tell us what those other options are? Well, we could make the choice as a country not to accommodate the extra pressures on the NHS, and opt for having a less comprehensive, less good NHS than what the workforce plan implies. As I said, I'd be surprised if we went down that route. The Conservative Government and the Labour opposition, I believe, have signed up to the NHS Workforce Plan, so it's not what they want to do. But it is an option that's available. We could start to say, well, there's other parts of what the state does, and we really want to cut them back. I'd caution against a view that just says, oh, we just need some efficiency savings. I think it would be of a scale that says what we need to do is say, well, this is big thing the state currently does. Part of the education budget maybe, part of the defence budget maybe, part of the social security budget maybe, and say, well, we don't want to do that because we want to use that money to finance our NHS. Now, there are options available to us as a country if we want to do them. I don't think it's necessarily likely that we will take one as a matter. Yes, on the tax side, there's a number of sort of areas. So rather than just sort of looking at sort of tax rates or tax thresholds, they could be able to choose to kind of do fundamental the form of taxes. So, for example, one area that is right to reform in England and in Scotland actually is property tax. So one could look at reforming the property tax system so that you revalue council tax, you make it more proportional, you perhaps raise more through council tax and then raise less through stamp duty or in Scotland land development transactions tax. And because that system would actually impose less cost on the economy, less penalisation for moving around, taking new jobs, trading up and trading down, you can actually raise more for less efficiency cost. So rather than just looking at sort of like tax rate changes, fees and thresholds, one thing to look at will be actually reforming the systems to make them more efficient and you can therefore raise more for a lower economic cost, lower distortions of the economy. And there seems to be no property tax on the taxation of different forms of remuneration whether that's your earned income, self-employed income dividends, changes on corporate tax, go further with the changes that are specially made with full expenses and there's further to go there, inheritance taxes, a whole host of things that can be reformed beyond just changing rates and bans. Just two more questions for me and then I'm going to open up. One is in terms of capital, I mean just touched there on the full expenses, it's going to be a £3 billion tax cut but corporation tax going from 19 to 25 per cent is an £18 billion tax hit. What has been the impact of that corporation tax rise on investment, if any, and what is your view on the impact of the kind of flat cash for capital investment in terms of UK infrastructure and growth? Yeah, so in terms of the corporation tax changes, clearly the rate rise is going to raise a lot of money in the near term. In the longer run, I think there's pretty good economic evidence that having a flat corporation tax rate is going to lead to a reduction in investment. It will hit productivity a bit, it does mean in the long run while that tax rise may raise some money, it won't raise as much as what it does in the near term. I also think that actually what I would also criticise the Government for for sure in this space is not having a strategy. I think through the 2010s Mr Osborne when he was Chancellor said, well my strategy is going to be to cut the corporation tax rate broad in the base and then we followed through on that strategy. So we had a credible plan of what we were going to do to corporation tax to try and give certainty to those looking to make investments in the UK. Having over the last couple of years what we've seen is anything but a consistent corporation tax strategy, we had the increase in the rate announced by Chancellor Ishe Soon Act from 19 to 24%. We then saw it reversed by quasi-quartang then in the first day in his job Jeremy Hunt said no, I'm going to reinstate that. We have the big introduction of the super deduction to try and undo some of the harm from pre-announcing that corporation rate rise by Ishe Soon Act. Then we've had the full expensing policy announced and implemented and I think we could have done a more coherent package of reforms by considering a strategy working out what we want to do, working out what tax base we want which may well incorporate some of the elements of the full expensing policy, having a more generous corporation tax base. I think there is a case for that and we could have also at the same time said well actually we're going to make the rate a bit higher but I think the journey we've gone on is probably one that's also quite harmful for investments in the UK because we're not really providing certainty to investors. If you're a big multinational and you're thinking about investing in the UK, do you believe that the current UK corporation tax system is going to stick for the next three, four, five years, or might you worry that there'll be yet more changes coming and some of those changes might make you or potential changes might make you shy away from making that investment choice? I think one thing we've said is that we do think that the multiple expensing is on balance a good thing. It does remove a sort of a big disincentive to make marginal investments funded by equity or cash in the bank. So it is better to increase investment relative to that not happening. I don't have the figures to hand about whether you know that offset the reduction investment because of the higher corporation tax rate but on its own it's expected to increase investment by what looks like you know a fairly modest amounts in 0.1% of GDP, a boost of GDP of 0.1% by 2028 that seems like a very small amount but that's about £3 billion which is fairly similar to the £3 billion long long cost of the policy so it's not you know a big cost for a very little gain but as I said it's and I agree with Carl it's it's only sort of one part of the reform that's needed because this full investment allowance this full expensing for plant and machinery well that now means there's now a big incentive to invest in plant and machinery not buildings for example so if it's actually more profitable to invest in buildings there's now a tax incentive not to do that is to go to plant and machinery instead so we're distorting investment decisions there and actually there's now an even bigger subsidy to certain kinds of investments funded by debt and that means that you know if you're using debt to fund your investments well first of all that can increase the incentive to be overly leverage which might increase the risk to businesses but also means that they might invest in things which don't actually pay back because they get an attack subsidy to do that so I think this is very much kind of like one stage on a tax reform that needs to do more to actually fully look at all the different parts of the tax system so I agree that we need a strategy for corporate tax and not a series of ad-hop changes. You asked about the public services investment plan as well I think so public sector net investment has been on a you know this is remarkably volatile from year to year in the UK it has been increasing since over the last couple of years and we're now investing quite a lot more at the moment than what we have done on average over the last 40 years or so so the government since 2019 has been increasing investment spending pretty sharply and is now delivering by UK standards what's quite a high level of investment but I think it is disappointing to see that having got investment levels up for good reason we're now penciling in a plan which involves it being frozen in cash terms being cut pretty substantially as the share of GDP over the next five years I mean that would only return it roughly to that long run average but it seems that it seems a bit odd having gone through all the effort to ramp up investment spending having maybe arguments for why we need to invest more as a country having got there to then suddenly say well now we're going to freeze it and cut back it looks to get again like as soon as we hear a fiscal challenge perhaps investment spending is one of the easiest things to cut. Yeah but it's not good in terms of long-term growth is it? Okay the final question for me before I pass on to colleagues is you know that the OBR has predicted a 3% reduction in living standards 24-25 compared to pre-pandemic levels but when I asked them if they could advise what the impact is on different age groups they were unable to do so I'm just wondering if the IFS has got any detail on how it impacts on different age groups within the society. That's not something moved down on a forward-looking basis I mean it's certainly the case that over the period since 2008 we've had terrible growth in living standards and certainly the case that over that period the working age population has done worse than the pensioner population. There's a combination of things firstly the period of very low interest rates has benefited those with assets and obviously pensioners and those approaching retirement typically have more assets than younger individuals and also some of the very some of the big calls that the government made on which areas are spending to relatively protect and which ones to cut during the decade of austerity were clearly you know they were clearly targeted more working age individuals those cuts than they were at pensioners so we've made the state pension system more generous we've made the working age benefit system less generous for example through reforms. I mean looking ahead I mean I think or looking at this kind of period there's sort of two areas of costs which have which are going up you know quite substantially which I guess pensioners are less exposed to than the working age population that is five acceptor events and mortgage costs because of the higher interest rates so I wouldn't want to say you know okay given that that means that pensioners are more than better than the working age population but those two factors on their own the fact that most pensioners own their homes outright and those that are venting tend to be more in social venting sector as opposed to the private venting sector would mean on the housing cost side there's less pressure coming through for pensioners than there would be for the working age population. Yeah I mean you know they're at pensioner poverty as a reality in many parts of the country in many communities but the economist said that half of all the 14 million pensions in the UK don't actually have any housing costs because they've paid the mortgage they've paid it off. Okay I'm going to open out the session to first to Liz and then to John. Thank you good morning. Can I just ask you about one comment that your colleague Paul Johnson had said namely that he felt that Mr Hunt was on course to meet his and just on course to meet what he described as the poorly designed fiscal rule. Could I ask you what you feel is poorly designed about that and what you would like to see instead? So the chancellor said he wants to have debt falling over the medium term and I think there are very good reasons to aim to have debt falling over the medium term. I think we know in recent history shown that when a bad shock comes along government steps in helps people government debt goes up so whenever a bad shock comes along we're going to increase government debt I think that means that in the good years when we're looking forward and we don't expect a bad shock we should be aiming to get debt down to create that headspace so that that headroom so we can then increase debt again next time a bad shock unfortunately comes along. So the kind of principle behind the fiscal target I agree with I think aiming to get that down is a good idea. What I have a particular problem with is the idea that aiming to get it down in year five of the forecast to rise I mean taking literally that means that debt in March 2029 has to be lower as a share of GDP than debt in March 2028. There's nothing particularly magic about those two dates taking literally it would say that it's okay if debt is rising considerably then falling for 12 months and then rising again whereas it wouldn't be okay if debt was falling sharply ticked up slightly and then fell again. So I think that there's something rather odd about that particular let's focus on that to that two-year period and I think there's something also a little bit odd when you say when it when it's also predicated on as I was saying earlier some plans around fuel duty around business rates that are questionable and some plans for day-to-day spending on public services which I think also are pretty questionable. So I think you know the Chancellor's kind of principle behind his fiscal target is a good one the specific operations of it I don't think is very good I think it is poorly designed he's meeting it by a hair's breadth but actually it's really volatile in the sense of what you assume about growth in the economy in that last year really really matters if the OBR has said that growth was going to be a little bit higher in that last year he would have loads more quote unquote headroom but I don't really think that that should have been used to cut taxes or increase spending and if the OBR have been slightly more pessimistic about growth in that last year it could easily have wiped that supposed headroom out. Right thank you for that so it's really a problem about the timescale but also the fact that you feel that it's not sufficiently diverse in its targets that you know it's too tight is that really what you're saying? I think it might and sometimes it's loose in that only getting it down in five years time I mean previous fiscal targets that Gordon Brown, Alistair Darling, George Osborne set a rule tighter than that so the Chancellor has set himself the loosest fiscal rule I think of any Chancellor in modern history. Sorry can I just come back on that you're arguing that you feel that there should be other factors in improving that fiscal rule so I'm a bit confused as to why you think it's too loose when you feel... Well I think it's loose in the sense that it allows him lots of wiggle room over the next five years and I think we only barely have debt in his argument whether we have debt falling in five years time or not and I don't think it's very challenging to say oh we'll just have debt falling in the fifth year you could argue well why not falling in say four years time um so I think it's a pretty loose fiscal target what I don't like about it is how it's been operationalised it's the specifics of it has to just be falling in that last year and then everything's okay I think that's rather odd as a fiscal target I think what we want is fiscal policy being set so that we have debt on a decisively down with trajectory over the medium term and I particularly care about year five um as long as it's on a decisively down with trajectory over the medium term in a credible way placed on credible plans then I'd be much happier. Okay thank you so much. So briefly I mean I'm maybe going to go slightly off-scriptory and give a sort of personal view on this how this fiscal rule is operating the idea of the time the idea behind fiscal rules is that they provide something of a sort of at least somewhat of a straight jacket for for chancellers so that it constrains them for um being too profligate in terms of you know putting taxes on raising spending and my concern recently has been that it's not really being seen as a sort of fiscal that's constrained but more a target we need to meet so that any head room opens up what we do is we spend it either on extra spending or or tax cuts so I think that rather than be sort of focused on is debt falling just a little bit in this very final year we need them we should actually look do we think this is sustainable and my own personal view is there's a question there about actually is a numerical target in five years the better to do that or shouldn't be looking at something a bit more holistic which says look do we think that this is actually substantially reducing you know in the good times are we substantially reducing our debt costs so that in the bad times we have that head room to deal with the shops that's very helpful because I do think that's about other factors than perhaps is in the current setup can I just go to this issue about productivity I was asking the OBR witnesses this morning about where they feel that we've got the greatest challenge when it comes to productivity both in terms of unemployment and in terms of the participation rate one question which I quite like to ask you as well do you detect that in the slight increase that's forecast for unemployment that this is a UK basis or do you think there are particular aspects where unemployment in different parts of the UK is rising at a faster rate and also where there are different sectors that are showing different trends I think the challenge the UK has is not so much about formal unemployment it's about the number of individuals who are out of work and not formally classified as unemployed so it's the number of individuals for example who are out of work because of sickness disability that's clearly a huge challenge and one that's got a lot worse in recent years and then I think the second challenge is one about while those in work how are they progressing how much are they earning how do we get some productivity growth because that in the ultimate is what's going to be needed to fuel any wage growth so I think they're the two key labour market challenges I think the UK has it firstly getting people who are out of work and economically inactive into a state into into into into a strategy for getting them into work and then secondly for those in work how do we help them progress how do we get productivity gains that can ultimately deliver wage gains and on that latter one that's what we've done particularly badly over the last 15 years on the labour market side of things I think you also asked about the labour market side of things and I was going to say one of the challenges there at the moment is our data on the labour market has been exposed it's really quite poor the LFS labour force survey the responsibility has gone down massively and the information you get from that when you compare it to for example the data from the HMRC so the other information is often just completely inconsistent so to give an example of that looking at the labour force survey Scotland seems to have seen an improvement in this labour force participation and employment relative to the rest of the UK since before the pandemic the numbers of people employed going up in Scotland where they've fallen slightly in the UK as a whole according to the LFS but if you look at the HMRC data Scotland's got the lowest increase in employment in any region in the UK at 2.7% compared to about 4% in both England and Wales and 6% in Northern Ireland so at the moment we are I wouldn't want to say flying completely blind but certainly flying with blinkers when it comes to the labour force and labour market position yeah we were talking about this earlier because obviously there are different interpretations of the data that's available to allow the OBR to make its predictions I think the interesting thing I think you're absolutely right to say that this is the biggest challenge for the UK economy in terms of productivity is to ensure that we get far more people back into the labour market than we currently have but there seem to be different reasons amongst different age groups as to why they are out of the labour market and you know that's something that I think is a really big challenge so that obviously different policies will have different effects at different levels whether it's a younger people cohort or whether it's older people approaching retirement who just happened to take early retirement because of the pandemic etc and I think I'm interested as to what policies we should be pursuing especially if we've got different reasons for people being out of the labour market and whether you feel that you know there are specific trends that we should be wary of so certainly that the increase in people out of the labour market for reasons of sickness disability is something we observe across all age groups it also seems to be there seems to be growth in both people out of the work for physical health problems and also growth in people out of work for mental health problems there seems to be a particular challenge around the group of people who've moved out of paid work unemployed and then subsequently getting sick or disabled as well so that on my point of policy challenges around maybe we need to engage more of unemployed people before they get perhaps depression or other health problems developing so it's not quite as simple as stories people in work get ill leave the labour market it's a more complicated story going on I'm going to guess the other group people often point to are the older people who've left the labour market and often classify themselves as early retired I think for that group it's much harder to imagine policy levers that you can pull to get them back into the labour market you know it too well be them they've made essentially what looks more like a choice to leave the labour market I think we might worry about whether that's a choice they'll always be pleased with or whether in a few years time it might be a choice they'll regret so we certainly have to look at the advice we provide them around accessing their pension early and making sure that they're aware that if they're accessing accessing for example a defined contribution pension it's not something they'll subsequently regret and that they wish they'd remained in the labour market for a bit longer but often these individuals are not for example customers of DWP so it might be harder to work out what policy lever you pull and how you best engage with them okay thank you very much thank you john thanks convener um problem going to ask some of the same questions so if you're watching previously you'll know what they're going to be um the first one would be on the debt interest the the OBR had forecast in march I think it was 94 billion debt interest in it they're now saying 116 billion for 23 24 I mean when I asked them about that they just said well we follow the markets that's what the market said I mean should they be able to forecast a bit more accurately on a figure like that so there's dying there's two reasons why their debt interest spending is a lot higher than what the OBR fought back in march firstly it's because inflation has been far more persistent than the OBR forecast and a quarter of the government's debt stock is tied to um the RPI measure of inflation um and I think it is I think it is fair to say that the OBR's forecast from march which showed inflation dropping really very very sharply to very low levels looked rather odd in my opinion um so I think that you know for example if they looked at the bank of England's forecast for inflation they would have seen a less quick sharp and sharp less sharp fall even at the time let's alone what's actually materialized I think perhaps they should be asking themselves questions about their inflation forecast which is one which has consequences for their debt interest forecast the other component of how they forecast debt interest is simply to take market expectations of interest rates this is literally what people are betting on interest rates being um and so they're they're basically saying well let's assume that the market is wise um we don't have more information than what is out there in the world people are trading on the idea that interest rates are going to be a certain level over the next few years we'll just take the average of those interest rates over a window before our forecast has produced so I think I have some sympathy with that method of forecasting for taking the interest rate I think it might be quite difficult for the OBR to say well you know market expectation is this but we take the view the interest rates will be higher or lower what market participants think um so I think our sympathy for that I don't have forecasts to have perhaps a little bit less sympathy around their inflation forecast as of last march where I think it did look perhaps a little odd in how quickly like forced inflation was kind of full and how low down to zero descent yeah I mean you seem to be you've got a lot of faith in the market which maybe I don't entirely share I mean is it not like the same as following the bookies that it's just what's popular rather than what is your actually expecting well I mean at one level if you took a different view to the market and you were right you could make a rather large sum of money by betting on your own view um I mean I think I would out I think yeah I mean it is fair to say I'm to partly agree with you I mean if you if you ask economists who work in the city what's going to happen to the bank of England's interest rate over the next few years it is the case they think it's going to run lower than what is implied by taking the market expectations so I think it is noticeable that if you just take the kind of bookies approach if you like and see what people are betting on it seems to imply a higher level of interest rate over the next few years than if you go and speak to city economists who've been thinking about the issues and take their view so the OBR perhaps could go in that direction and saying well perhaps we'll survey a few people consider that alongside the market expectation I mean at the moment it's also true that interest rates and market expectations of interest rates are not just high they're pretty volatile they move around a lot so maybe what partly we're seeing is it's just harder to forecast interest rates at the moment and perhaps we shouldn't be surprised that whatever method you come up with for forecasting we shouldn't be surprised if it turns out to be wrong perhaps compared to what would be used to pre-pandemic where perhaps it was just much easier to forecast interest rates things just didn't look as volatile I mean tremendous tremendous amount of volatility and interest rate expectations over the last couple of years okay fair enough and the comparison with other countries the fact that the suggestion was that we the UK is more index linked other countries have got more fixed rates so they're kind of gaining at the moment but in the long run it's all even out they'll have to pay more and we'll pay less is that fair assessment I think that's a fair assessment obviously whoever ends up winning or losing will depend a bit on whether inflation turns out over the long run to be higher or lower than what was expected when we sold those when the government sold those guilds but in expectation we shouldn't worry too much if our higher exposure to index linked guilds turned out to be a bit expensive for a period like the current one equivalently when we have a period of negative inflation or low inflation we'll be gaining from that as we will have done in many of the years of the last decade so you know it's a bad time at the moment for the UK in terms of debt interest part of that is a temporary bad time I wouldn't worry too much about the big spike this year I worry much more about debt interest spending as forecast in 3, 4, 5 years time which is after inflation drops back to normal levels at that point we still expect to be spending about 2% of GDP more than we were expecting pre-pandemic so we're spending more on debt increase in debt interest spending as I said earlier is about the size of the entirety of the defence budget that's a medium term challenge I worry about that a lot more than the huge spike in debt interest spending we had last year and this year which I think is largely temporary as inflation will work its way through the system inflation will drop back down to something like more normal levels okay thanks and I mean talking of inflation we have the GDP deflator and I mean I was somewhat surprised that looking back at 2022-23 they had said the OBR had said it was 5.7% and they're now saying it's 6.7% I mean that's a reasonably big difference and it's looking at the past I mean again is GDP deflator a pretty vague figure that we're not very clear of what it is at any point and is that actually having an impact on spending because the government uses it UK government uses it quite a lot as I understand it yeah I mean the obvious revision to the GDP deflator in both the last financial year and the current financial year is absolutely huge incredibly big up the revision from the OBR in their forecast I think what that's telling us is that at the moment we're not just experiencing high inflation we're experiencing quite a complicated mix of inflation a lot of which is clearly driven by increases in the price of imported goods energy food that has a very different effect on household inflation what it does in the GDP deflator but how it works through into the GDP deflator is very difficult to get right and that's what the OBR struggled with I think they're also not helped by the fact that if you you know my approach is saying what are other people saying and if you look at the OBR's forecast for growth or the OBR forecast for the CPI you can say what does the Bank of England think what do other city forecasters think as far as I can see no one else is trying to forecast the GDP deflator so the OBR hasn't got that kind of sense check that it can do by saying well what are others saying how do we compare do we agree do we disagree if we disagree are we happy with the reasons why we disagree this is that that external kind of view doesn't seem to be there for the GDP deflator which I think is probably making it harder for them as well with the Bank of England with CPI with growth at least they can look at those forecasts and say well yes we're more optimistic than the bank but maybe we're happy because we think of the following reasons or we disagree with them about the CPI for the following reasons they can't do that on the GDP deflator and I think one thing to note on the GDP deflator is is that unlike say CPI which is sort of like estimated and then you know it can be realised but it's more or less fixed GDP both in terms of the cash level and then what is real versus what is inflation is subject to revision sometimes three years after the initial figures so I think you know the change we saw for 2223 sort of about one percentage points one thing worth note there is actually we didn't have back in March the the kind of figures for the final quarter of that financial year and you know the first estimates I guess for kind of quarter three of that financial year also would have been pretty early soon so it can move around a lot and then the much bigger vision actually was not last year is the current financial year 2324 and that's why I said earlier when when we had this upward sort of vision to inflation that means that the money that's being spent on public services we know is going less far than was initially thought it would this year and one of the biggest areas for that is public sector pay which has been much going up much more to compensate households and workers for the higher consumer price inflation but that has been an additional pressure on budgets that was was not was not there back in March that wasn't expected to be so high back in March and it's not just the speaking government which uses the GDP deflator a lot it's actually used a lot in the Scottish government's own presentation of the the budget as well so a lot of the kind of figures from the Scottish government's budget last year for 2324 which said real terms increases of x and y different departments will be now known those are much less much smaller because of its higher inflation although of course Scottish government hasn't had the resources to top them up given the sort of fiscal value they're offering us within and is there any back dating happens with this or or does it is it purely arbitrary or what's what's the word it doesn't have any practical effect if they revise the GDP deflator if they revise the GDP deflator it will it will change our sort of assessments of how large the economy is now relative to how large was in the past and how high the price level is now compared to how high it was in the past it's a government choice about whether it then was would decide to revise its spending totals to to do that I've been a guest in the current financial year it doesn't make sense to really revise it based on what the GDP deflator is it may make sense to revise it based on what you think the actual cost pressures for the public sector have been so for example additional funding was found for the English NHS to pay for pay deals which generated consequentials there was no additional funding provided for other departments in the Auckland statement now going forwards they have revised slightly the sort of cash increases in spending from 24-5 onwards because they've revised the GDP deflator from 24-25 onwards but they didn't revise that 24-5 baseline despite the fact that they've increased forecast inflation last year by 1% this year by closer to 3% that's where that 19 billion cut in the real terms value of public spending going forwards comes from because they've not revised that that base year to account for the higher inflation we've seen over the last two years okay thanks again moving on to full expensing the OBR seemed to feel that it will have a bit of a hit in the short term because businesses will not bring forward a capital expenditure but in the longer term it'll be beneficial I mean I did wonder with them you know could it encourage companies to make bad investments or poor investments because they're going to get such a benefit from their tax point of view so I don't know if you have any thoughts around that I think you did say earlier David that you know they might a building a company should maybe be investing in buildings but this is going to push them to plant and machinery yes so I think overall we think that this is on net a positive thing because at the moment our tax system really quite strongly penalizes investment that is funded through your equity or through your cash as a bank and by moving to full expensing you can deduct the cost that fund it removes that sort of tax on these marginal investments these ones that are just profitable that you want to fund them through your your cash at hand or through equity but as I said it does then you know also open up or widen existing um sort of distortions in the system so it means that you know you can fully deduct the cost of eligible um a plant and machinery upfront but the treatment of buildings is staying a lot less generous so that that kind of issue you pointed out there if it's more profitable to invest in a in a bigger nicer building um and have a bit more space to do things um maybe you won't do that now you'll you'll you'll kind of buy them more kind of compact machine um even if that's economic or the best thing it's now the tax advantage thing to do and the other thing is is that the tax system already in many cases subsidizes um debt funded investments because you can deduct the cost and you can deduct the interest payments and by making you able to deduct all the cost at fund it further increases that subsidy for debt finance investments so that might mean you do things via debt rather than via equity and you become overly leveraged so it's distorting your decisions about how to finance your investments but you're also right that it may also just mean you invest in something which economically it doesn't pay itself back because you can get a pretty attack subsidy to it um you end up investing in things which are not generating an economic return that makes it worthwhile to do so um so that's why I said that ideally what you'd have seen here is that there would have been a broader package of reforms or at least a sort of roadmap of reforms to kind of fix all these issues with the corporate tax system rather than if you like fix one issue but have sort of you know the little issues pop up last week what we need is a strategy rather than sort of whack-a-mole and I guess you know what we know with the UK needs more good investment that's what we want this full expensing policy will lead to more investment um the the issue is it will lead to some more good investment but it might lead to some more bad investment and we don't need more bad investment in the UK that's not what we want and would there be any impact on research and development or has that written off pretty well as it happens anyway um so there were also some changes to the the treatment of research and development costs in the open statement as well I haven't got those to hand um but yes you know for research and development you may actually want a tax subsidy for that because you may think they'll widen the benefits of wide society of research you know the knowledge whilst initially might you know come under patents and so on it eventually will benefit others and and could spread new innovation so there can be a reason that have subsidies for for whether it's innovation or other things that have wide societal benefits what you don't want the taxes into do is to subsidize investments to have purely private benefits to the company in question because they should do this anyway if they're not doing them then they're not worth our investments okay on the question of the tax burden we now seem to be about 38 percent or 37.7 or thereabouts which I think they said is four and a half percent higher than it was pre pandemic but a lot lower than France which it was suggested was nearly 50 percent I mean should we we worried about that total figure or is it really more how it's broken down that matters um so so the UK tax burden is high by UK historical standards the government's pushing it up to a level that we haven't sustained ever in our history and indeed if you look at the parliament 2019 to 2024 it's the biggest tax-raising parliament in modern history so it's a tax-raising government that's pushing the UK tax burden up to levels we've not seen in the UK I think it's certainly worth noting that in Western Europe in Scandinavia there are many successful economies with bigger tax burdens so if the UK wants it can go down further down the path of being a higher tax economy and still be successful that's an option I think I would point out as David was saying earlier that if we're going to have bigger taxes it makes it even more important they're well designed if you've got a badly designed tax system it won't do as much harm if your tax burden's low it'll do a lot more harm when you've pushed those taxes up so the kind of you know if we want more growth if we want to be a successful economy if we're going for high taxes it makes it more and more important that we reform those taxes we make them well designed before we start pushing them up to get more revenue out of them so I think what I would urge is you know it's a choice about how big a state we want in the country what we shouldn't be doing though is pushing up unreformed taxes we want to get them right before we do that and again if you look at sort of what other countries do that have higher tax burdens than us in general it's in general not every case but in general you see that the sort of two areas of taxes that are that are higher are general consumption taxes so VAT that's because the UK has quite a wide range of reduced rates and exemptions for VAT we try to use VAT to be distributed whereas you know from an economic perspective it's better to get revenue in from a sort of a border simpler VAT under the redistribution through the direct tax system or the benefit system which is better able to target lower income households and you see that happening more in other countries and the other thing is sort of social security contributions or income tax on middle earners so it really stands out it's not so much low taxes on top earners but relatively low taxes on on middle levels of earnings so that doesn't mean that if you want to debate our taxes we can we'd have to follow that strategy there could be different ways of doing it but that is the sort of sort of key differences between us say and say France and Scandinavia we tax consumption less and we tax middle earners through social security contributions less okay thank you and my final point was be that I mean the UK government's aiming support at the retail hospitality and leisure sector through non-domestic rates is that because that sector is particularly struggling at the moment well I think it's it's clear that there there have been difficulties for parts of this sector we're seeing I guess a structural change in the retail environment in particular with sales moving online and we're seeing a decline particularly in sort of secondary retail centers you know high streets in towns and you know um you know but what's called a sort of flight to quality in the form of industry so you're seeing these big out of town centers and these these very strong city centers doing well you're seeing a decline in in particularly comparison retail in the smaller towns across the country so it's clear that there are structural changes going on in retail hospitality and leisure has been affected I think quite recently by the the rising energy costs and by potentially recruitment difficulties in certain parts of the country so you can see why there's a concern about this there's a question though about what is the right way to tackle this so um it might sort of sort of almost quote what I said in the sort of response to the open statement um while we think that benefits will flow largely to businesses in the short term in the longer term the biggest beneficiaries of cuts to business rates are to be land laws as rents rise and uncertainty about whether reliefs really are temporary or likely to be permanent makes it difficult for both businesses and property owners and values to plan in particular there's a risk some businesses in the retail hospitality's leisure sectors may be made worse off in the future if the reliefs have believed to be permanent banks are likely to be bid up even under increase in overall property costs if the reliefs are in fact allowed to expire as planned so I think you know that's when I kind of point out the kind of key thing here in the short term the evidence does suggest that the biggest beneficiaries of cuts to business rates are those who pay them the business occupiers but there's very very good evidence that over time and actually sometimes quite rapidly rents do adjust as it's more valuable to be in the properties people are able and willing to pay more the rents go up and then the risk arises that if you think that is going to be permanent but it's not you're paying that high rent but the rates of relief goes away and you're made worse off so I think what we need to do is rather than you know a series of rolling one-off beliefs if this was to become a permanent part of the tax system it needs to make clear that's what it is but be aware that means that what you're really doing is subsidising landlords of commercial property rather than the businesses in question right that's great thanks so much thanks again thank you Michelle good morning I've just got one question really and it's related to inflation and therefore debt payments on PPI type models I haven't really heard a lot of talk about this I mean obviously various public sector bodies have seen massive increases in the repayments and whilst we can take a view on what the OBR predicts in terms of inflation in the future I imagine they will need to be considered more cautious and actually when inflation goes down inflation goes down because there's a clear link can you give me some more guidance on this and also how you think or what if any behavioural impacts for finance executives in public sector organisations managing these greatly increased PPI payments um so yeah this is an issue that I've looked at I don't think cars looked at either I'm afraid in terms of the sort of wider sort of decisions I know about English local government and I've been speaking to people in English local government and what they've said is that so far their debt interest costs haven't really risen that much because they locked in the lower interest rates who's sort of borrowing from the public works loans board so for the existing stock of debt much of that is is sort of like locked in at the relatively lower interest rates but what they are doing is that they're being much more cautious about future investment which would be funded at these higher interest rates and you have seen a reduction in the capital borrowing by local authorities in England part of that is a response to the kind of concerns about investing in commercial property um and that being tightened up but I think part of that is just they they now know that rather than paying two to three percent to the public works loans boards the the interest rates are now going to be higher and that just makes it you know less viable to borrow and fund fund the the the repayments either through the return on the investment or through your general day-to-day capital budget so that's certainly happening in English local government it wouldn't surprise me if it's happening in Scottish local government as well and hence more the investment by local government in Scotland or be funded through the central government support for investment rather than the potential borrowing by local authorities yeah I'm just I mean it sounds as though collectively we we don't know a great deal about the data and the impact of it just strikes me as something that's that's quite interesting that if we're looking at this longer term trajectory even though we all assume and I think that that's correct that inflation will come down we all also agree it's not going to come down to the historically low levels and therefore working through the impact on a variety of public sector organisations strikes me as something that's quite interesting and I'm realizable I don't know about it but so perhaps it's heartening that you don't either I don't know anyway thank you there are two bits there are two bits of data you can look at this so again certainly in England there are the capital accounts that come out of councils and they publish us each quarter in England you can see what they invest in quarter by quarter and also in the reserves in England they have to say what share the reserves are being held for PP private public partnership servicing costs I'm not sure if that data is held in the Scottish government in the Scottish government's local government financial terms if it's not ask for it because that data was asked for in England precisely because people like myself actually said we couldn't tell what's happening to local governments capital spending what was what why they were holding 30 billion pounds of reserves once they labeled it we could see a bit more what's going on so ask for that data if it's not already there yeah and I mean fairness it may be and it's my ignorance but I suppose that as I say I mean if you've got the data then you can start to interrogate what the potential impact could be which also plays into the real economy which is why I'm asking okay thank you thank you very much Michelle and just one for the question for myself I mean we're obviously in the middle of it I'm sorry towards the end of COP 28 and one of the things OBR said was and I quote there's a little sign in the UK of significant new investment in low carbon energy and heating technologies in response to the rising gas prices and they explain their view as to why that was I'm just wondering what the IFS's view of that is yeah and I'm afraid I don't think it's something we've looked at and take a view on I'm not hoping this is one I could help people with bread yet it's not one that I would either I'm sorry sorry to be a helpful there no it's okay it's just because net zero is obviously a key issue here in scotland and indeed elsewhere okay well thanks very much I'm just wanting to ask if either of you have any further points that you wish to make before we wind up this session I think just on that very fun last point one thing I would add is clearly the labour opposition have a varied by profile pledge to deliver 28 billion pounds a year public sector capital spending four net zero purposes we've looked a bit at that I mean it's worth noting that the 28 billion a year compares to about 8 billion a year that the government's currently doing so probably better described as a 20 billion pound increase still substantially huge increase I think it raises two issues one is challenges around doing that spending and doing it well because we're going from 8 billion a year up to 28 under their plans all the over a parliament and I think the second issue it raises is of course how about how it's being funded we talked earlier about the current government's cash spending plans on investment being frozen being cut back as a share of GDP so I think there's open question about what if you're doing so much government investment on things to do with net zero for good reasons what happens to government investment that aren't related to net zero what about other investments that are perhaps around growth for public service delivery that don't have consequences for net zero it might be pretty challenging to say the least to try and keep within the government spending plans and carve out 28 billion for our investment in net zero friendly investments and yes actually Carl mentioned that maybe kind of realize this very quickly like one thing that one thing that sort of I think is key here that when thinking about kind of net zero policy there might be kind of policy trade-offs between the different objectives that seem to be underlying a lot of net zero policy so on the one hand and I think you can think of this as a triangle and can you have all sides of the triangle on the one side you've got um you know decarbonisation on the other side you've got a desire to reduce our alliance on for example China and on the third side you've got desire to have you know good industrial jobs and when you kind of think about you know if we're going to substantially increase spending on um green technologies and the green transition there'll be choices between which of these we we are prioritizing because it may be the case that that what gets you the most in terms of decarbonisation is not the most in terms of jobs in the UK or in terms of decoupling from China so I think there are real kind of questions about what what are we trying to do with green investment but then is this really green investment versus for example is this industrial strategy they can be you know integrated but they're not you know perfectly lined up to be some trade-offs yeah I think it's interesting to see what would be included in that 28 billion if it's going to be linked to inflation because 28 billion when the policy was announced is going to be 28 worth the same in real terms in year five and you know and what was the third point I was going to make about that I just to pace actually which that I will will will will progress yeah yeah okay so thanks very much gentlemen that's been really really helpful as always so thank you very much for your evidence today we're now going to call a two-minute break to allow yourselves and the official report and the public to leave then we're going to private session thank you very much