 Rhaid fawr i chi, a chyntafệt am roi i gweithio i'r 31nt saeth i'r Assemblyw 2017 ar gyfer y Cementand Gauras Unedig, byddwch i'n cytuno yw rydych chi gymryd i'ch ddifellwch i aim unig, neu bw Leadership Cymru. Yn y gweithfyrdd, mae'r ysgolwch sy'n gweithfyrdd i'r ysgolwch cymdeithas nhw, gan Ysgolwch cyrpoedd y Governmentyneginnol ddraf yn 2018-19. Fy fawr maes ystafell i'r item ym Lleidie Susan Rice, teniwiraethol ddraeth y Ffysgol Cym nettadau, a i fynd am y cymunedau ei gŵr wrth storlifwyr, ddweud yw yn Adolf Smyth, ddweud ddweud i'r cymysgwrs, ddweud ddweud i'r cydwyr. Felly, ddweud i'r gweithio i fynd i ddanais i fynd i fynd i ddweud i'r gychwyngrifol drafodaeth, Cymysgwrs, derbyn i gyd. Ar hyn arall, ddweud i'r cydwyr ardal, rydyn ni i'n gwrsios iawniaid i g 함 wrth ar hwnnw, a ddweud i'r gêm o gwasanaeth neu ddweud i'r cydwyr oherwydd. Ac ydw i'n clywed i'r gwian i weldferu, rydw i eidiw sy'n gwahanol. Roeddwch i chi gynllun i'n gwasanaeth y ddullffaen ei hen, iawn. Fel ty, hynny i chi'n gael eu cyffin iawn i'r iawn i'n gael eu cyffin iawn, dda'i'n gael eu cyffin iawn i'n gael eu cyffin iawn? Felly, rydw i chi'n ddweud i'ch ganddylineg hefyd. Rhyw fawr yn ni gynnig y teulu yddyl i'r iawn i'r iawn i'r iawn i'r iawn i'r iawn i'r iawn i'r iawn. Felly, dwygold hwn yn lleol, ac rwy'n cael ei ddwylliant a yn dodol i gael i gyfrifosedeoedd. Rwyddyn, mae yn cael ei ddweud o wedi'i gweithio ffasol, ac rwy'n f wraffi i ddweud i gael i ddy redeemau. Rwy'n fawr, David. Rwy'n fawr i ddweudio'r ffaith. Dwygold hwn, cynnig ydy. Rwy'n fawr i ddweudio i ddweudio'r ffaith a olaf am fawr i ddweudio'r ffaith i ddweudio'r ffaith, some introductory remarks before going into the session proper. Thank you for the opportunity for this session to discuss our report published last Thursday. This is an important milestone for us as the 분�iferygwysig commission. It is our first set of forecasts, as an independent and statutory body. We have been set up to provide the independent official forecast to informed Scottish budget following the devolution of powers to Scottish Parliament in the Scotland Acts 2012-2016. We are one of a growing number of independent fiscal institutions worldwide, most prominently in the UK as the Office of Budget Responsibility, with whom we work closely and who I believe you are seeing early in January. Our forecasts play an important role in the Scottish budget, which was published on Thursday, alongside our report. The OBR's forecasts are also an important part of that, and they make the official forecasts for UK Government tax receipts, which are important part of the calculation of the block grant adjustment. As part of our process of ways of working, of developing our report, we have been working collaboratively with the OBR and a number of other organisations, UK Government organisations and the Scottish Government, to develop our report. We have been doing that on the basis of our protocol with the Scottish Government and a number of memoranda of understanding that we have with other organisations, including the OBR, and we work with other bodies such as the HMRC. Over the past 10 weeks or so, we have been developing our forecasts and we provided, in good time, ahead of the Government finalising its budget. We provided the final assessment of our forecasts and we also provided, on the basis of information that the Government provided to us, our assessment of the costings of the new policy proposals that were announced by the Government last Thursday. All of the detail on both our forecasts and the policy costings are set out in our report. Broadly speaking, by now, you will have seen and digested the broad numbers that we set out. Perhaps the key points, just in summary, we made forecasts of around £16 billion worth of the devolved taxes, most prominent within that on income tax, and we also made, for the first time, a set of formal independent forecasts of the Scottish economy. We described the economy forecast as painting a picture of subdued growth going forward over the five-year period. We hope that we have set out a quite detailed level of information to understand and develop the wider discussion on those points. Prominent among the policy costings was the detailed costing about the income tax change that was announced by the Government, involving the proposed changes in income tax. We have provided detailed assessment of the costings and, importantly, the potential changes in the behavioural impact of those policies and how that might in turn impact on the collection of receipts. We have also set out our estimates of expenditure on the devolved social security expenditures that have already been devolved, and we are developing our capability to make further estimates of expenditure of the further powers that are likely to be devolved going forward. As the overall report, we are delighted to offer more detailed answers to any particular questions that you have. Thank you very much for that, David. There are a couple of areas that I want to ask myself to get some of the numbers on the record and some of the explanation on the record. One relates to tax revenues, the other is to growth figures and the fact that the Scottish budget seems to be £3.6 million better off. We will come to that one. First of all, table 39 in your report includes a forecast of a loss of £51 million in tax revenues for 2018-19 due to behavioural changes out of a total forecast of £215 million for the Scottish Government's proposed tax policy. Can you provide a breakdown please of how you arrive at that figure of £51 million? I know that it is probably available in your fuller report, but it would be useful for record purposes if we could provide that breakdown. I think that the main thing to say about the breakdown of the behavioural response is that almost all of the behavioural response happens up at the top end of the income scale. That is the... Don, maybe you have the table to hand. The main impact that is set out in Annex A, which is the more detailed assessment of the policy costing of the change in income tax. The way that we develop this is to produce what we call a static costing. This is the costing of the proposal without any behavioural impact. It assumes that people would... Basically, their tax liabilities would stay the same or the amount they work and the amount that is declared would be broadly similar and then the new tax rate would apply to that same amount. The detail of that is broken down by the new five-band approaches in table A6, which is on page 194 of the report. The following table, table A7 on the following page, sets out how that would break down, how the behavioural effect would be broken down by the tax rate. I think that, as Alasdair has said, the overwhelming majority of the impact of the behavioural impact would be in the top two groupings of the higher rate and the top rate. That is set out in table A7. Take the top rate example because the static rate, as you talked about, is set at 53 million potential improvement in terms of tax take, but then again reduced by minus 31 million as a result of behavioural issues. Can you explain how you came to those numbers? Yes, perhaps I could do that. What we have done here to calculate that 31 million reduction at the top rate is that we have developed some what we call taxable income elasticities, but basically a factor that allows us to look at the impact of the changing tax rates upon those top rate payers. That sort of factor is basically taken from a series of studies at the UK level, which were done by HMRC and have been looked at by the IFS. They have produced a range of factors. Our factors are very much towards the top end of that range. The reason for that is that the HMRC IFS numbers were calculated in response to the change of the UK wide change in what is in a sense the top rate, but we are very much conscious that if that change just happens in Scotland, the opportunity for people to rearrange their affairs between Scotland and the rest of the UK is much stronger. That is why we have gone for something at the top end of that sort of range. That would suggest from the numbers that if the I know you and you probably haven't done these numbers, for instance it was 47% rate that we would be getting close to a situation where if these numbers are correct, even at the top end, you would begin to be in a negative situation as far as the tax take on top rate tax players are concerned. We have only looked at the actual proposal that the Government has made, which is a one-peat change in that rate. In a sense, that is all that we are allowed to do by our remit, so that we cannot talk about those alternative policies. If there were a two-peat change in the top rate rather than a one-peat change in the top rate, would the behavioural change be likely to be double or would it be? We have no idea how those numbers are calculated. You would expect both numbers to grow. The static revenue raised from a two-peat rate rather than a one-peat rate would be higher, and the behavioural effects would be higher. As John said, we have not done any analysis, but there is no reason to suppose that the behavioural effect is going to grow faster than the direct revenue effect, so it would not necessarily turn negative. I think that one more thing to add here is that our modelling has allowed us to think about forstawling effects as well. We judged that for the rise that the Government has decided upon, that there were no real measurable forstawling effects, but obviously, for larger tax rate changes, there may well be those forstawling effects, which will have an effect upon the estimates as well. We will make that clear in the report. Does anyone else want to ask issues around the £51 million figure? I asked the juice of some on that, or have I used all your question up? I think that you have covered it, yes. Thank you very much. Good morning. You acknowledge at one paragraph just below the tables on this. The key uncertainty in the costing is the taxpayer behavioural response. We are looking at a guestimate. We are looking at something that is a significant area of uncertainty. Would you say that you have erred on the side of caution? You are right that this is an estimate. As John explained, it is based on quite a body of work that has been done by HMRC and others. Nevertheless, it is an estimate. No, we have not erred on—I do not think that we have aimed to erred on the side of caution. We have aimed to give our best estimate. That is our job. The consequences of—no-one would expect that you have a crystal ball and can predict with 100 per cent certainty. There is naturally going to be some uncertainty, but the consequences of a significant variation between this prediction and what actually happens are not just financial. They are political as well. They could profoundly affect the nature of the debate at the next Scottish Parliament election, for example, if the Scottish Government at that time has to deal with significantly less money available because the behavioural effects were underestimated or significantly more money available because the behavioural effects were overestimated. Have you thought about how to minimise the political risks of that kind of uncertainty? I think that our aim has been to try to develop the most robust estimate that we can, recognising the very significant uncertainty about this. There was a very important report that was undertaken by the HMRC evaluating the experience of the increase in the top tax rate in 2010 by the UK Government. On the basis of actual data and evidence of a real-life experience, it was still found that the uncertainty on the overall effects of behavioural change are still very difficult to assess. I repeat what my colleagues have said. We have tried to make an estimate that draws on the best available information and analysis that has been done, recognising that we are in a new territory here. We do not have accumulated experience of how differences may play out when people within a single nation state could potentially adjust their tax affairs between being a Scottish taxpayer and a UK taxpayer. We have made informed judgments and we have set out all the details in full on that. There are, of course, a number of other countries where there are different income tax rates and bans between different tax jurisdictions within those countries, both in Europe and the US. There should be some real-world objective information about how likely people are as a result of modest variations such as those or significant variations. Have you looked at that objective data? Do you have a clear basis for assuming what level of relocation would take place at the very high end of the income scale? We are not talking about people being very mobile at the start of their careers, but after they have put down routes, built up a network that is important to their career and invested in their home, how mobile are people? Surely we must know some kind of answer to that. We have looked at that evidence and that has been core to the work that HMRC and the Institute of Physical Studies have done in this area. They have looked at the experience within America and the difference in tax rates between states. There is a body of knowledge and understanding on that, but we should be very careful to think that that will give us the definitive answer. We have had to make judgments. The way that we have tried to address some of the points you made is that, broadly speaking, the recommendation that the Institute of Physical Studies has made is to use anelisticity of 0.48, which is slightly different from what we have done. We have deliberately put in place analysis such that the impact on the very highest tax payers is greater than those between 150,000 and 300,000. That is an element of judgment, but we think that it is a good judgment reflecting the circumstances where, particularly in the UK under the current structures, people can choose to declare their taxable income in different places if they have multiple household locations. We have made a best judgment based on the informed evidence. You are not making a prediction about the amount of relocation that there would be? We are not making a forecast on relocation. We are making an overall assessment of the impact. We are not setting out particular numbers on the impact of relocation or any other effect. Professor Smith, what did you do? Can I add just one point about relocation? When we are making a comparison like this, you need to think not just of the incentives of people who are currently in Scotland relocating so as to reduce their tax bill. You also have to think about when people in the future have got a choice about where to establish their main residence, then a significant tax difference might affect the decision to relocate rather than relocate. Clearly, that is a long-term consideration, not one for 2018-19, but we all have to take responsibility for thinking about what motivates people. Is it simply the amount of tax that they pay or is it something wider about the kind of society that they live in? The other main behavioural effect that you draw attention to is tax-motivated incorporation. People moving from being employed to self-employed for tax purposes. Have you taken a view about the extent to which that is a genuine move by people from an employed job that they are in into an area of self-employment and the extent to which it is bogus self-employment in terms of practices by employers to pay their employees as though they are self-employed for tax reasons? We haven't made any analysis of the labour market in that particular way. I think that that would be beyond our remit. What we have done is taking advice, particularly advice from HMRC on their expectations of tax-motivated incorporation, which is clearly something that is both a UK and a Scotland-wide effect. We have largely used their estimates for tax-motivated corporation, but we haven't done a more detailed assessment. What proportion of the behavioural effect is due to incorporation? We have two separate estimates in this. An overall tax-motivated incorporation will be impacting on all groups that will be applying irrespective of any change in tax, and then we make a separate estimate of the elasticity of the change in tax. Changes to incorporation is happening across the UK for the circumstances of both labour market and overall tax policy, and that is happening in Scotland, too, but there are two separate things in our estimates. You cannot tell us what proportion of the 51 million that you are saying will be the behavioural effect is due to incorporation. We are making a single estimate of the overall elasticity and impact, which is making the 51 million. We are not decomposing that into an effect from incorporation, an effect from relocation or changing status. It is one single overall estimate, but there is a separate estimate of tax-motivated corporation affecting all taxpayers under the main report. I could add that the increasing number of tax-motivated incorporations reduces income tax revenues in Scotland by around £240 million in next financial year. You mentioned one of the answers about the elasticity rate that you used. The standard rate had been 0.48, but you used a higher rate. What was the figure that was actually used? F figures that we used, broadly speaking, would be negligible to low at the very low end of tax. So, certainly for starter rate and basic rate tax payers, we would expect an elasticity of around about zero. We used just above that. The main elasticity that we used for above £150,000, we used 0.35 for 150,000 to 300,000, 0.55 for 300,000 to 500,000 and 0.75 for above 500,000. The Scottish Government's latest estimates are what they call their medium responsiveness assessment. They use 0.48 throughout the case, which does not have the variability that we use. Right. In your answer to Patrick Harvie, you acknowledged that there were different sources of evidence in terms of behavioural changes. How did you weight the different evidence that you looked at in order to build the assumptions for your model? I think that that is a matter of pure judgment that we have, as both of my colleagues have explained, we have particularly evidence built into the HMRC model, but how we use that in the particular circumstances of Scotland where the reason to suppose that the upper rate tax payers might be relatively mobile between Scotland and the rest of the UK is a matter of judgment of what level of elasticity to apply to them. Thank you very much. I am looking at table 3.10, where you are laying out those numbers. First, what is the technical question? What is the difference between intensive elasticity and extensive elasticity? The intensive elasticity is concerned with the hours worked, and the extensive elasticity is concerned with the decision to participate in the labour market or to move residents. It comes about really that this work is based on HMRC modelling, as we have said earlier. HMRC were initially looking at changes in the UK additional rate, and that is intensive elasticity when there are lots of changes in the allowances, which also apply in Scotland, and they introduce the extensive elasticity. The intensive one is on your use, Neil. The number that you just quoted to James Kelly. David gave the intensive elasticity. There is an extensive elasticity of 0.25 throughout from 150 upwards. Do you know what the blended weighted average number is on those intensive elasticity when you take into account all the different income bands that you have talked about? Do you have a comparable number against the 0.48? I don't know that until my head. I think that we'd have to get back to you on that. That's fine if you come back. The last question, and this is probably the hardest question, is it your remit and how difficult is it going to be, and are you going to do it at all to come back after the fact and give us a number of what you think the outturn has been in terms of elasticity, of obviously taking into account the complexities round about counterfactuals and forestalling? It's a very important part of our remit that we review, that we look back at how our forecasts have performed and annually produce a forecast evaluation report, which a few months ago was an evaluation of the Scottish Government's forecasts. Our future evaluation reports will be evaluations of our own forecasts, and yes, we will then look at all of these as we've been discussing quite complex judgments and judge whether we got them right. So you'll give us a number to see if that 0.75 was high, low or right? Yes, although it has to be said that even looking back at what's happened to tax revenue and trying to extract from future Scottish tax revenue, how much of the tax revenue change was due to behavioural effects or for stalling effects, it's not a simple matter but we will certainly do our best to evaluate what we've done here. We certainly will need to do that work. We'd very much like to do the sort of analysis that HMRC undertook for the 2010 tax change, evaluating the impacts. I think that it's an important part of our remit. Just two notes, of course. One is that the data probably would be better at a UK level than it would be at a Scottish level. Even with better data, it was very difficult to draw out the detail of those effects, so a note of caution there. The second note of caution is that it will probably take us a bit longer to do that assessment because we won't get the sort of level of detail of information through the various sample surveys for two to three years, so it's not something that we will be able to do probably in the timetable that ideally we'd all want, so it might take a bit longer. It's also important to add that we don't get income tax revenue data for 18 months. You're talking about two years before we can have a real idea, but obviously next September we will start to have a look at this. Before we move on to another area, you've relied quite a bit on the HMRC model and to some extent the IFS work that's been done. Does that model contain only confine itself to issues to do with tax movement, or does it also explore wider issues about council tax, water rates, policy choices by different Governments and the effect that that would have on tax? My understanding is based upon income tax only, but we can again clarify that, but I think that that's my understanding. As we develop something, I'm sure that those are things that you're selling. If that's not a part of the model, it's something that perhaps should be for something later, for the fiscal commission, to be thinking about in terms of getting it out, which is not just a judgment on how much money is in somebody's pocket at that given moment, it's the other factors around about it. Can we move on just to growth forecasts? I know that there are a number of people interested in that area. Your growth forecasts for Scotland are more pessimistic than the OBR's forecasts for the UK, yet, according to the Scottish budget, and I think it's figure 212, the Scottish budget will be better off by £366 million in 2018-19 than it would have been the case without fiscal devolution. Is it possible that you could explain that for us? Are you asking to explain the growth between the OBR, our growth forecasts and the OBR growth forecasts? A bit of that, but more importantly, if that's the case, if we've got slower growth, how come we've got £366 million more to spend? I think the £366 million figure comes from the difference between our forecast of the income tax revenue and the block grant adjustment. That, in a sense, comes from a number of factors. It comes because our income tax forecast includes the draft budget, 17-18 higher-rate threshold, and that's roughly £60 million in 2018-19. Our income tax forecast also includes the impact of announced draft budget, 18-19 changes, expected to be around £160 million, and that leaves about £150 million. That's due to a number of other technical modelling differences between us and the OBR. One factor that is particularly important in that is the inclusion in our forecast, but not the OBR, of higher public sector pay growth. That's the three elements that make up that 366. That's useful. It gets it on the record. Neil, I think that you had something in this area. On public sector pay increases, I think that £60 million is the impact that you're forecasting on income tax as a result of public sector wages increasing. I understand that you've got an assumption that public sector wages will grow by 3 per cent. Obviously, in the budget last week, the finance secretary said that those on £30,000 or less would increase their wages by 3 per cent and those above by 2 per cent. I understand that there may be other factors that you've included in that assumption just to clarify how you got to the 3 per cent average. Yes, when you look at what happens to any pay bill, a public sector pay bill, it's not just the headline pay increase number that goes into it because there are other factors like paid rift that mean that the overall increase in the pay bill is different in this case, it's higher than the average increase in the headline pay increase. Is that factor that Alistair has pointed to? There's the factor, too, that the public sector policy that we were given by the Government, in its strictest sense, only applies to about half the public sector workers in Scotland. We made assumptions about the remaining of those and we stuck at a lower level. Could I clarify that our 18-19 assumption on the average public sector pay growth is 3.2 per cent? What assumptions have you made about the average pay? What assumptions have you made about the number of public sector jobs? There are around 470,000 workers in the public sector in Scotland. We estimate that this policy applies to approximately 260,000 full-time equivalent workers. Thanks, Neil. We'll move into areas of growth. There's a number of members interested in that and, Ash, I know that I've probably nicked some of your questions at the beginning of that session there. Do you want to just ask the first question on growth and then we'll come to Adam and Iver? Good morning. I wanted to ask you about your economic growth rate prediction. With regard to the UK-EU relationship, you say in your paper that the negotiation will impact negatively on the Scottish economy over the next few years due to things like trading arrangements and also due to reduced migration into Scotland, which will then have a slowing effect on the Scottish economy. I'm interested, is it possible to isolate the Brexit effects? Can you say what proportion of the lowering of the prediction in the Scottish economy can be attributed to Brexit effects, which obviously are not under the control of the Scottish Government? No, we haven't done a modelling exercise without Brexit and then a modelling exercise with Brexit to isolate a Brexit effect. The Brexit effect comes in. It's an important element in our overall judgment of what level of economic growth we're likely to see. You rightly identified that the things that have gone into that judgment about the effect of Brexit include uncertainty about what the policy regime is going to be, probable reductions in trade in both directions, reductions in migration, but that's part of our overall judgment of future growth rather than being an element that can be separated out and say, well, x is the Brexit effect. It's a net negative effect and we've made it clear that it's a significantly negative effect, but we haven't done it in a way that separates out a number for Brexit. Were you, within the three elements that you've mentioned, the migration and trade and so on, able to put figures on those three, or even what proportion within that negative effect or not? Only in respect of some of the migration effect in that our overall forecasts include a population projection, and we have chosen to use a population projection that has a 50% reduction in EU migration in both directions, so that element is separately identifiable, although I couldn't put a straight number on it for you, but the rest, no, it's all folded into our overall judgment about economic growth. The sort of gloominess of the prediction, do you think there's any possibility that that could become kind of a self-fulfilling prophecy? If you predict something is going to happen enough times and it is gloomy enough that it begins to have a dampening effect? People can look for themselves at the data that has influenced our judgment, and the things that have influenced our judgment are several years of subdued growth in the Scottish economy and, indeed, in the UK economy. That period of slow growth has now been so extended that we have taken a view that it's sensible to expect it, sadly, to continue. However, I don't think that our forecast itself will have a marketing negative effect on people's expectations, because, as I said, the things that have fed into our forecast are there for us all to see. Businesses thinking about their prospects for the future will be looking at how business has grown in the recent past, rather than, as I'd like them to do, reading our forecasts in great detail. It's their experience of slow growth over the last seven or eight years that will influence their expectations, rather than our forecast. We've talked a little bit about why your growth forecasts are more pessimistic for Scotland than they are for the UK. Even if we look just at Scotland, your forecasts seem to be more pessimistic than any other published forecast for growth in the Scottish economy—more pessimistic than Fraser of Allander, more pessimistic than EY, more pessimistic than PWC, if I've got that right. What causes you to be more pessimistic about Scottish economic growth than those other forecasts for the Scottish economy? I'll take two things to start with that. The key point that we try to draw out in the report is the subdued growth that we are forecasting over the next five years. It probably has two key factors that we wanted to draw out. The first is much more moderate growth in productivity than perhaps we have got used to over the last few years. I think that there is a particular table that is in the summary document on page 12 of figure 5, which very graphically sets out the very different world than the expectations that have formed in people's minds during the 1990s and early this century that we would get very significant productivity growth. There is an element about productivity and there is an element, as Alistair has said, about population. Perhaps the key thing that comes out of that is that, in looking forward, given the strength of the labour market in Scotland—the fact that both employment is very high and unemployment is very low—the potential sources of increase in growth will have to come from boost productivity. We are in a world environment—this is not a Scottish-specific environment where productivity improvement is increasingly hard to find and what we have tried to do in the forecast is to take that into account. Perhaps a crucial point that has not come through in so much commentary is that our forecasts of productivity going forward for Scotland are slightly less than the OBRs, but they are not significantly out of line with the OBRs. The overall difference between our projections and the OBR projections does not come from the productivity assessment but from the other factors that are going on as well. I would not say that we are, in any way, out of line with the OBRs assessment of productivity. However, what we face in Scotland is a number of factors that have helped to boost the economy over the past few years, and perhaps particularly pre-2014, on the gas sector. There are prospects for a number of those elements in the economy that have been in difficult circumstances, keeping the growth relatively strong. We are not convinced that they will continue, so we are facing both a world and UK set of challenges around productivity, but we are also facing some particular circumstances in Scotland that are pointing to the results that we have set out. Perhaps a reminder that those are our first forecasts. They are also the first time that there have been official forecasts over the time period, over the five-year period, and it is very positive for the face of Alunar Institute now doing forecasts out to 2020. However, as part of our remit, we have had to make some judgments over a long time period using the best modelling that we have available, and those are the numbers that come through that systematic assessment. That is helpful. Thank you. It is not just Scottish GDP growth that is forecast to be, where you say, subdued. That is putting it politely. It is Scottish GDP per capita as well, is it not? The per capita figures are, in all sorts of ways, just as important and even more stark than the overall growth figures. What is your account of the reason why GDP per capita growth in Scotland is forecast to be so poor? All of us looking at figures for long-term growth have to recognise that there is a bit of a puzzle about productivity. Low productivity levels are, as David said, something of a worldwide phenomenon. There are different views about why productivity has slowed down. The Fiscal Commission is not going to resolve a great debate about the origins of productivity slowdown, but our judgment is based on observing what has happened in the past. Productivity in the Scottish economy, which is the main driver of per capita income, has been, in our words, subdued for a number of years now. While we are not offering a theory as to why that is, as realists we have to suppose that experience is going to continue into the future. Can I just add to this a sense of exactly what the differences are between per capita growth at the UK level and the GDP? If you look at figure 3 in the summary report, you will see there that basically GDP per capita growth and GDP in Scotland and in the UK do come together. There is a narrowing gap and they do come together by the end of our forecast period. The differences at the GDP level are primarily there for due to demographic differences. It is not as if you were using the word subdued. It is still true that our GDP per capita forecast is subdued, but it does close to the OBR's UK forecast at the end of the period. Final question for me on this. Other members want to ask about productivity, so I shall leave that important though it is. One of the budget documents that was published last week was the Scotland performance update. One of the measurements that caught my eye in that document, which does not appear in the budget document itself or in your document, is a comparison of Scotland's GDP growth rate with what it described as small EU countries. This is a performance measurement that is in the Scottish Government's own analysis worsening under the current Government's watch. We have lower GDP growth rate than small EU countries and have had ever since the third quarter of 2015. Have you got any reflections on that either as a valuable performance measurement for us to take more seriously than perhaps we have done hitherto or the reasons why that might be? It has been an interesting comparison, and I am not sure that I have seen the exact comparison to which you were referring, but there have been comparisons between growth in the UK and growth in the rest of the EU, and it is not that Scotland is not alone in having subdued growth performance relative to other small EU countries. The UK's growth performance in recent years has been low compared with most of the rest of the EU. The Scottish comparison is relevant, but it may be that it is driven largely by a UK comparison with the rest of Europe. I hate to say it, but surely one of the reasons that Scotland's performance is perhaps compared with other small independent European countries is that we do not have control of all the levers to manage the economy? That is a political judgment that is not within our remit to pronounce on. You will all have your own views on that, and I doubt that anything but fiscal... If we were to step outside a remit and pronounce on those matters, I doubt that we would shift any views around this table. It is a fairly obvious conclusion, and I won't waste everybody's time by listing all the levers that we don't have control of, that we would have control of, where we are independent. One of the comments that you made was round about your assessment of the Scottish economy's overcapacity at the moment. I suppose that I just want to explore that. We have touched on population, two things that I just wanted to touch on. One is that your population models, the ONS models that you have used, are different from the OBR. You are using a 50 per cent projection model. What is the model that the OBR is using? How different is it? How much different would it make to your forecast had you used the same assumptions on Scotland's population growth, driven by Brexit, that the OBR is using for UK population growth vis-à-vis Brexit? I can answer that in two stages, just on the first point about output gap, just to draw the people dimension of all of this. I think that it is quite striking that people have noticed and looked at the overall growth numbers in a report and seen that as a sort of downgrading in some sense. It is quite important to look at if you compare our forecasts with the Scottish Government's forecasts at the start of the year. We are forecasting unemployment significantly lower going forward than the Government had done and employment I would not say significant but quite a bit higher than it had done. It is telling you something both about the nature of the economy and the fact that the labour market is particular circumstances and we are facing a tighter labour market than I think people were expecting. On population specifically, the overall UK forecast, the OBR, has used the principal projections that are set out by the Office of National Statistics on how to make the projections. It is quite important to emphasise the projections rather than the forecasts, and there is a fine detail on that that we could go into if needed. They used the principal projections. We could have used the principal projections for Scotland in our modelling. We chose to use a lower forecast than that because I think that we are both concerned about the potential impacts of Brexit and just an overall assessment I think that we have that. Issues about migration are a key element of the forecast and it is a native concern. We used the forecast in terms of the overall numbers. It probably doesn't make a significant impact at an early stage because the effect of this assumption is just to draw out the detail on it. The key element of the population projections is not so much births and deaths, which are fairly straightforward to project. The key element is net migration. In Scotland, we have gone from a situation 20 years ago or so, there was net out migration. More recently, there has been a fairly significant net in migration. The expert view in advising on the forecasts is that the in migration is around about 15,000 a year. It is a bit higher than that over the past couple of years, but that is the benchmark. The implication of the assumption that we used is the difference between 15,000 and 12,000. It is not a significant difference in terms of the overall numbers, but I think that it is moving in that direction given the circumstances that we are in and it is something that we are very committed to monitoring going forward. We have done some sensitivity analysis of our macro forecast. The results are in the full report. Table 2.8. Just to back up what David was saying, there is a migration variant in which we use the O&S principle projection. That produces a growth rate of 0.9 per cent on average over the five-year forecast for GDP compared to our forecast, which is an average of 0.8. As David said, it is quite small. To go back to the point about the output gap, I appreciate that many of you may not have the full report in front of you, but figure 2.12 on page 67 of the report looks at the relationship between actual GDP and potential output and shows a big negative output gap in the years immediately following 2008. The output gap in the current number is so small that it is not visible in the graph. When we talk about the fact that our focus is based on there being a positive output gap, it is a very small positive output gap. The OBR has a very small negative output gap, but we and the OBR are forecasting that the labour market is in quite a tight situation, but the gap between potential output and actual output is in both our modelling efforts very small. In a way, it is more accurate to say that we are forecasting an output gap that is very small rather than to focus on whether it is positive or negative. That is clear, thank you, but not standing at still says that that is a constraint on economic growth. In that scenario, any policy measures that boost the labour supply are clearly quite critical. How much cognisance have you taken of measures that are focused there, for example childcare, skills and training, employability programmes? How have you taken into account and taken a step further? Given the focus that there is in those areas, is that something that would increase labour supply and help to increase the growth numbers? It certainly has contributed to growth in the past. The figure that David referred to a little while ago about the components of growth over time show that increased labour force participation has played a significant role in past growth. We are not forecasting that there are going to be significant effects on labour force participation in the immediate future. Obviously, if there were, that would be a factor that would push us towards higher growth. For example, if a childcare policy steps up a gear, as it is planning to do, that frees up a lot of people who are staying at home at the moment to join the labour market, that could have a significant impact. It could, and it is important to emphasise that when we, in our forecasts, do not seem to be taking explicit account of policies like that that might have an effect, for example, of pro-business policies in the area of non-domestic rates, it is not that we think that these policies have no effect. It is rather that in the timescale that we are looking at, where we are looking for pretty firm evidence of what the effect of the overall economy is, one wants to get some evidence of what the concrete effect might be before you have the confidence to feed them into the actual focus. The fact that we are not focusing on an increase in participation does not mean that we do not think that a successful childcare policy might have a significant effect on growth. Thank you. Thank you. Alexander. Thank you convener, and still on productivity and still on the subject of labour supply and migration, which you just started on. Can I ask what impact does the expanding the economy by attracting low-paid and low-skill workers have on the productivity measures? I think that that is into a wider set of questions about, as Alistair described earlier, trying to understand and explain the nature of the economy at the moment, where perhaps even more pronounced at UK level, you have seen a very strong performance in terms of overall employment, in terms of creation of jobs, but you have seen an opposite effect in terms of overall productivity. What we have tried to do in this assessment is draw out the implications of that. I think that, as you rightly say, if the labour supply were to significantly increase, or were we to have more people working, or the hours worked of people already in the living market, that may in one sense boost GDP, but you would expect that probably to lead to a reduction in productivity, which might counteract that. So, those are the sort of issues that we would be looking to model going forward. I think that it's an important point here. If we're operating at overcapacity, as you're alluding to, it's not just about creating jobs, it's about creating the right level of jobs. Absolutely. And I'm just wondering, is there a salary point where the creation of a job has a positive effect on productivity as opposed to otherwise? I don't think that it's a matter of looking at a salary point, but it is, as David said, the general pattern in the UK in recent years has been that there has been very healthy growth of overall employment numbers, but it has been the more flexible labour market has led to the growth of low productivity employment. That would still work in the rest of the UK, which is operating in undercapacity, but in Scotland we're in overcapacity, it's not just about jobs. As I said a moment ago, the difference in being over and undercapacity in Scotland and the rest of the UK is really small. It's better to think that on best estimates of where we are across the whole of the UK, unemployment is historically at low standards, and therefore the whole UK economy might be judged to be at or about capacity. Okay, thank you. And just finally, we're hopefully seeing an increase in pay in the public sector, but without any improvement in outputs, how does that contribute to declining productivity? That's—looking at productivity in public services and, indeed, to some extended services generally is quite a difficult thing to do, and it's not something that we've addressed here. Okay, moving to slightly different areas now. Willie, I think that you've got a question on LBTT. Yeah, thanks very much, Bruce. Just a couple of questions in land and buildings, transaction tax in your paper, your forecasts are actually quite buoyant, I think, compared to last year. Could you give us a little bit of a background as to why you think that that is and what are the main factors driving that? Is it something to do with the change in the first time buyer policy, or are there other factors that are giving rise to this more buoyant estimate from you? One estimate, like many of our other estimates, is based on recent experience, the recent experience in the residential market has been, by recent historical standards, quite a high level of transactions and price increases, and we're projecting that to continue. I don't think it's particularly a fact of both, compared to the pre-financial crash that we've not returned to those levels, but certainly there's been a very substantial recovery in both the level of transactions and overall house prices. I think that the emerging evidence that, I think, particularly this year, there has been perhaps particularly an increase in prices, which I don't think had been fully anticipated. We expect that to continue certainly for the rest of this year, perhaps into the start of next year, before we then estimate more of a reversion to what we're describing, not quite as a new normal, which is a term that's been kicked around at the moment, so it's certainly not going back to previous pre-2008 levels. The housing market is doing well at the moment, as price is increasing, perhaps particularly at the upper ends of the market, and that's set to continue at the near term. That's the principal factor that explains the increase in overall, as we describe it. The pre-measures forecast has quite significantly increased on what was anticipated last year. The first-time buyer's relief that the Government has announced is separately modelled, and that will later be a reduction on what our forecast would otherwise have been of the order of £5 million or £6 million. You're predicting that there will be up to 200 extra transactions as a result of the first time buyer policy. How do you arrive at that figure, if you don't mind me asking? How do you get that? Is there some kind of secret calculation? No, it's another of those elasticities. From that in line with work that the OBR has done on the effects of changes in stamp duty land tax in the UK, in England and Wales, rather. It's based on, as I say, one of those elasticities that have been established in the model general sphere. The six million that cost the policy costs six million to deliver, but they still think that overall the revenue raised through the LBT will increase. Yes, the increase is substantially greater than that six million. That's right, of course, of course. And there will be a significant number that will be affected by this change. Broadly, we estimate that around 12,000 transactions will be affected by the changes that are put in place. Our estimate is more about how it impacts on the first-time buyers compared to other buyers that are in the market. There will be a reduction, but what that leads to, in effect, is the risk that, rather than the first-time buyers seeing that as a personal saving, it's a further contribution that can go out with my push-up house prices. There will be beneficiaries, but whether or not it's the first-time buyers themselves is a factor that's coming into account. It may well be the seller rather than the buyer that gains the benefit. Okay, thank you. I'm moving to another area. What got the adjustment Mordo? Thank you, convener. I just want to explore a little bit more of this issue around the connections between your projections on economic growth, your projections on productivity and the impact that that has on the tax revenue and the Scottish block grant. Your forecast assumes that productivity growth will be much lower in Scotland than across the UK as a whole, and you're obviously projecting much lower economic growth in Scotland compared to the rest of the UK, but you seem to be suggesting that earnings growth and therefore income tax revenues in Scotland will be roughly equivalent to our UK levels. So why do you draw that conclusion from the input data? Why do we conclude that the Scottish income tax will be growing more than the block grant adjustment? Well, the block grant adjustment is based on a calculation of per capita of what's happening at the per capita level to tax receipts, and as we've already discussed, at a per capita level, the gap between our projections and the OBR projections is positive, but it's not as big a gap as the gap in actual GDP growth. The effect of a small difference in our growth rate assumption is basically overridden by the fact that Scotland last year, and now again this year, is introducing revenue-raising income tax changes that raise income tax above the level that it would have been had Scotland stuck with the UK income tax rate. That's the factor that's primarily driving the difference between our income tax projections and the block grant adjustment figure. Okay, thank you. If I look at figure nine on the summary paper that you've given us, which is comparisons of income tax forecasts with your previous forecast from February 2017, clearly there's quite a large gap. I think it amounts to £2.1 billion over the next four years between what you previously forecast and what you are now forecasting. What impact is that gap likely to have on the level of the Scottish block grant, or is it not possible to say it at this stage? The block grant adjustment depends on OBR projections of UK growth, and those projections are being revised down as well. Looking at my colleagues, I don't think that there aren't any significant implications from this change on the block grant because it's a change that the OBR is making as well. To me, that's an important point. To clarify, the difference that you identified is between the Fiscal Commission, our forecasts now, compared with the Scottish Government's forecasts in the year. The broad magnitude of the change in that forecast is very similar, it's a bit less than the change in the OBR's forecasts from last year to this year. That's part of the overall picture of the way that forecasts have changed. In terms of the block grant adjustment, the critical numbers are the baseline number, which is the 2015-16 estimate of income tax revenue. That is uprated by the growth in UK taxes, the two key numbers, if you like. For the assessment of the calculation of block grant adjustment that has been put in place for this budget, it's using our forecast of the 2015-16 budget. To clarify, it's still a forecast for 2015-16 because we won't get the outturn, the actual numbers of that until summer next year. In future, the block grant adjustment will be calculated based on those actual outturns. Those are the critical numbers going forward rather than the difference between the Scottish Government and our forecast. Ivan, do you have a supplementary question to that? Yes, absolutely. To clarify on that, is it fair to say that it's not sensible to compare those two numbers because they're both starting from different baselines? Could the Scottish Government and our number of numbers? It's part of developing an overall picture and overall understanding how things have changed, but in terms of the calculation of block grant adjustment, I think that they tell you other things. They don't advise you too much about the actual calculation of block grant adjustment. So it's not saying something about the impact of the policies or anything like that? What it's saying is that because you've taken a view on the baseline for 2015-16, it's different. The arithmetic is calculated these numbers in this way, they're not a consequence of policy decisions as such. I think that table 3.6 sets out a very detailed assessment that decomposes how we have got to our numbers compared to the Scottish Government forecast. To clarify, comparing current forecasts with what was done a year ago is a valuable exercise of comparison, but just to repeat the numbers mentioned about £2 billion of cumulative difference based on the comparison between our forecasts and the Scottish Government forecasts. That's a slightly greater difference between the two OBR forecasts and even if you look at UK estimates in terms of the difference between OBR's estimates of forecasts now compared to what they said a year ago, it's about a £20 billion difference. That's just how far we have moved in terms of our overall assessment of forecasts, income tax in Scotland but also in the UK. That's clear, so that's not something specifically Scottish about that difference. I wouldn't say that. There are Scottish elements to it in terms of the detail, but the broad picture of the impact of downgrading of productivity assumptions is relevant to the UK as well, Scotland. Emma, I think that you want to cover some areas on pay. Thank you, convener. Good morning, everybody. I'm interested in the information about carers allowance and the fact that the carers allowance is forecast to increase over, I guess, over the next few years with caseload and weekly rate increasing in line with CPI inflation. I'm interested in your views about the significant numbers of women that are carers, more women or nurses. There's about 89 per cent of women that are nurses and the mid-range salary band five level will benefit from the budget proposals, so I'm interested in your thoughts or your views about the 70,000-odd women who are carers and nurses who will actually benefit? Our focus has been on forecasting the likely cost of the carers allowance and we haven't gone into detail on the breakdown of the people who will be receiving it. We're not making an analysis of the policy as such. I should remind everybody that I'm a nurse myself. 18 months ago, I was one of those band sixies who would benefit if the draft budget is approved. So you're talking about the Government's pay policy and the benefit from that and the impact of the Government's pay policy upon our forecast of carers allowance. We didn't make that connection. We received the Government's pay policy information very late in our forecasting round, so we haven't taken that specific account of that particular policy change upon our carers allowance forecast. The carers allowance is set to, it's going to be increased to the rate of job seekers allowance, so ultimately we're going to have challenges with, we've spoke about our labour workforce and others have mentioned the 3 per cent and the 2 per cent as well, so will there likely be an increase in the input required to support the needs for further carers allowance as our population grows older? That's something you would look at in your remit, is it? No. That's a matter for the Government, not for us. Okay. I think your initial point, and as John said, I think it's very valuable one of trying to identify if the pay policy has an impact on the modelling that we develop. We didn't take that into account and it may well be that we need to look at those numbers and try to make the assessment that you've suggested and that's perhaps something we can come back to you with, but to be clear, evaluating different policies and different needs and making recommendations to the Government on how they might change carers allowance, that's clearly not for us, but understanding the implications of the pay policy for the detail of the numbers, that's something that we're very keen to monitor and perhaps we can come back to you on. Okay. That's pulled out because that's quite interesting actually, because you've said because you got too late, you got the information about pay to build it into your assumptions. Is that something you could let us know about a bit more detail? Is it possible you can do that in the same skills involved? What we can do here is that we can be very clear about how the information on the public sector pay policy fed into our forecasts and in summary, it fed very much into our income tax forecast because we had the time to do that, it didn't feed in anywhere else. We're certainly intending to talk to the Government about when we get details on pay policy, so the earlier we get those in the forecasting round or a sense of those, the more work we can do, the more account we can look at the question that you've raised. I think that for this time we've done our forecast on the best information that we had available at the time. Okay, Patrick. Thank you convener, it was just on that last point that John Island mentioned, you said that you have had time to look at the impact that the pay policy as proposed will have on income tax. Is that significant? It is, and I think that we have a breakdown of the impact of pay policy on income tax, so I can't put why. But we can certainly let you know about that. If it's in the full document, I'll dig it out, but I hadn't seen that when I was looking at it. I'm pretty sure that it's in the full document. Okay, thank you. That's a very brief point on that. I think that when John Island said, I think I also said about receiving the information too late. I think it was probably too late for us to do a proper assessment of rather than too late in the sense that the Government didn't give us the information broadly in the times of the protocol, so it wasn't a sort of lateness in that sense, but I think as the budget process is going through, during January in terms of further consideration of this, we're happy to make a further assessment if that would be useful. Okay, I think that the last question is from Neil on APD, I think. Yeah, it was just to ask in your forecast, your forecast on revenues of £306 million for APD in 1819. In the forecast in the financial memorandum of the Scottish Government for the APD bill, it was forecast in revenues of £326 million in 1819 and in your own forecast, rising to £336 million by 2122 and then the financial memorandum by £378 million by 2122. You've rightly pointed out in your summary document that there's been an increase in Scottish passenger numbers and you're expecting revenues to increase over the five-year period. I just wanted to understand why there was the difference, however, between what was forecast in the financial memorandum by the Scottish Government and by the SFC. I don't have the answer to that, so we can certainly have a look at that. Okay, well, thank you very much. I'm very grateful for you being here today, I just remind me to thank you very much for being here. I wish you a good festive period and can you pass on the same to Leader Ice, who unfortunately couldn't be with us to complete the evidence session, but I now suspend this meeting for about five minutes to change your witnesses. Thank you. The second item on agenda today is to continue your evidence gathering on the Scottish Government's draft budget for 2018-19, and we're joined for this item by Neil Amdarr, who is the director and chair of the economic advisory group in the Scottish Chambers of Commerce, Russell Gunson, the director of IPPR Scotland and Dave Mockson, the deputy general secretary from the STUC. I'd like to thank you all very much for the contributions that you've already provided in the written format. It's probably fair to ask you, just for each for a couple of minutes at the beginning, to lay out what you think are your priorities for the budget, where you see the advantages and disadvantages, just to give us an overview for a couple of minutes, that would be helpful. I don't know who would like to go first. Neil, you want to kick off? That's fine, yeah. I suppose, from a chamber of commerce perspective, nobody likes—it's out every quite likes—getting something for free, something extra cash in their pocket, something that you run after Christmas, nobody quite likes paying extra for something they don't giving back. That said, the business community—people's perspective—is broad, and their take on the budget will be different. None of the numbers in the budget are particularly decisive in terms of people's spending patterns or the investment programmes, but there are a number of points to come out of it. One is the potential impact of a new structure on discretionary spend. For a number of pressures on people's disposable income, we know there's a mismatch between take-home pay and the cost of inflation in recent years, price rises, and a number of other fiscal measures that are impacting on that—auto enrolment, council tax, apprenticeship levy, et cetera—coming to business. At the current percentage of differentials, there's—I say it's not particularly crucial—a positive for those who are winning out of it or negative for those who are paying a bit more tax. People's perception of that will vary according to their own personal perceptions. A lot of people will say, well, actually, I don't mind paying a little bit more if we get better public services, if there's better support for business coming out of it. However, if, having set that new structure, the percentages across the bans, if the differentials increase, there could be an incremental effect on discretionary spend, less money in people's pockets means they will be less able to go out more frequently. At individual level—maybe at the top end here—a few hundred pounds worse off won't make a difference at that level, but if it goes up to a couple of thousand pounds, when you can see the impact that comes through on people's spending habits, that will also end links into economic resilience. We know that people's—there was an article in the press every day about people being concerned about being only a couple of pay packets away from concerns about keeping their roof over their heads. If, as budgets are already tight, some people are having more constrained—this is very individual circumstances across the different income bans—but if people's natural inclination will be to put less money into their pension, less money into their savings, whatever is that, it will impact on that. All of that leads to potential pay pressure across both public and private sectors and affordability issues. I think that we appreciate that the cabinet secretary is having to strike a fine balance, and the union committee and the other and the rest of Parliament will have to find a balance across number of competing pressures on this. However, our biggest concern with the budget proposals is one of perception, one that putting in a new structure creates the impression—this page is only an impression, really—that Scotland is a higher tax jurisdiction than the rest of the UK. That could incrementally have an effect on people's decision whether or not to relocate or to work in Scotland or stay in Scotland. We know already that there are pressures on recruitment and skills shortages already, and we also know that there are pressures from Fiscal Commission—I think that you heard them before we came in—about the prospects for the economy. At a perception level, if someone is deciding to accept a post in Scotland or to locate their business in Scotland or retain their business in Scotland, the differential tax rates, the difference across the UK, even the simple thought will hang on a minute. Scotland is different. How is it different? It could become a barrier. I am not saying that at 1 per cent here or there—it is a barrier—but the structure, particularly if it is amplified with higher percentages across the bands and the differentials between the rest of the UK could get worse through time. That is a concern that we have, is to setting the precedent of where that would then lead to as in, say, three or four years time. There are also a few anomalies with the tax system that we would have liked to see in address. We welcome the implementation of the Barclay review, but there are a couple of things there. For example, in the staircase tax, where you have a business having several floors in the one building, disconnected, they get two separate rates bills proportionally higher than if they are treated as one property. There are some anomalies in LBTT, for example, a comparative STLT south of the border, where there is group relief south of the border. If you have a property from one company and a group from another company, you do not be STLT, whereas you do pay LBTT in Scotland. Those are indications of a bit like the income tax perception issue. Creeping incrementally elements that build up the cost of doing business in Scotland compared with the rest of the UK, which, at an individual itemised level, are not necessarily significant, but are taken together, and particularly the perception that it creates could be problematic. All of that then leads to hidden costs about additional overheads, both for individuals, for businesses that are already here and for those who are thinking of locating or investing in Scotland. What is the tax difference between checking that and making sure that, particularly for those on low incomes, where a number of benefits and other tax calculations are driven by the UK basic rate, people checking that they are paying the right amount of tax could become an issue for them individually. I am sure that they will get some different perspectives from the panel, but Russell Dave would like to go to the next question. Thank you very much and thanks for the invitation to give evidence today. Overall, we think that there is a lot to welcome in the budget, but with, in the draft budget, as proposed, but with some important caveats. To us, the income tax rises are necessary and therefore welcome, and we will provide sufficient money, at least on the day-to-day spending side of things in terms of Ardell, to prevent real-terms cuts for most departments, and that is welcome. Clearly within that, local authorities and rural connectivity and the economy have faced harder settlements, but there is a lot to welcome in terms of NHS, college skills and universities in terms of real terms increases. The income tax cut element, though, is something that we think is not well targeted at the poorest households, and that is something that we can potentially get into in questions, and it will benefit a number, at least, of low earners and high-income households, so second earners, in essence. To us, the business tax allowances or the cuts in revenue are also problematic at a time when the grant is also facing a real-terms cut that is going to local authorities to, and even a maximum increase in council tax will not be enough to claw that money back. Where that leaves us is that, whilst that is welcome for this coming year, beyond this coming year, there are deep cuts stemming from UK Government decisions still to come, and so whilst the income tax rises are necessary and welcome, that will only bias one year. Our analysis shows that there is around £250 million worth of cuts to day-to-day spending in 1920, and if we include NHS increases and police protection, that increases to around £350 million for non-protected departments, so that is a significant cash terms cut, never mind real terms cut. That leads us to where some of our focus is on, which is beyond this next year. In the medium term, tax rises will not be sufficient to prevent cuts in Scotland, given the state of the UK wide economy and spending decisions from the UK Government. Therefore, what we need to do is, alongside scrutiny of this coming year, focus on how we can get Scotland's economy at tax revenue per heads, productivity rates increasing so that, in the medium term, tax revenue can increase through a stronger economy rather than only through tax increases. That is why looking beyond this year, whether that be through multi-year spending settlements, a tax framework that lasts beyond this coming year would be a very welcome thing for us, but also for the wider economy, too. Dave? Yeah, thanks very much. Three priorities, investment in public services, which for us involves investment in public service workers, pay as well. The tax policy that we need to meet that and the parts of business investment that we think are good and the parts of business investment that we think are unevidenced and need further work. On the first of those, you will not be surprised to hear that we believe that every public service worker in Scotland deserves at least an inflation-level pay rise, and we use our PI because most people have housing costs to calculate that, but that is part of a wider picture in terms of public service investment that we need. We do not believe that the tax proposals that have been brought forward are ambitious enough to meet that, either in terms of quantum or in terms of the way that it is structured. We would tend to concur, maybe counter-intuitively, but with IPPR, that tinkering about with the tax band at the lower level probably does not do what it says or what it proposes to say on the tin and that a simple approach would have been to hold tax rates for everybody on medium wages and above, but then to build a more progressive and, we would say, more ambitious scheme to follow that. In terms of business investments and really welcome stuff in terms of capital investment, the capitalisation of the investment bank, a range of things that we think can help to stimulate the economy, some welcome work to make up for what we think will be a shortfall otherwise in construction work over the next couple of years, but a real concern that is reflected in the fiscal commission's report that some of the business rate measures have never been proved to have any measurable effect on the economy. We can continue to argue that the small business bonus scheme is wrongly constructed and that if you are going to construct support for small business, you may need to be far more focused and far more outcome focused in terms of how you approach it. Thank you very much for that overview. I will begin with Neil. Thanks, good morning. According to Spice, there will be £135 million real-terms cuts in revenue funding to councils. Do you believe that councils have been allocated sufficient money to maintain and protect services and what will the impact be of such cuts on local services? Yes, there is a £185 million real-terms cut before you bring in the ring-fence specific grant, so £135 million real-terms once you do. The thing to note there is that, directly, clearly a real-terms cut risks real-terms diminution and quality of services, particularly when, as Dave mentioned, your cost side—this is all looking at the spending side, if you like—but the cost side facing local authorities is under big pressure from pay. We will see what happens with local authority pay settlement, but beyond that, in terms of pressures on services, for example, from benefits cuts from the UK Government, pressures on services due to the tough time that many individuals and households are having out there. In general terms, that is a risk. Specifically, there are some very big spending commitments in that budget. The attainment gap, the free childcare money is within that, so everything outside of those things is maybe facing a tougher time even than those. In short, it is one of the toughest. Having said that, it would be a lot tougher without the income tax changes that the Scottish Government has proposed. We were concerned last year, and obviously some remedial action was taken post the first draft budget, which we went on to welcome. It is important to note—obviously, you will expect me to talk a little bit about public service workers' pay today—that, as far as we can see, although the finance secretary argued that he wanted to see a public sector pay rise across the whole of the public sector, he did not ask the Scottish Fiscal Commission to model public sector pay rises as part of that. We are stuck in this slight situation where he said that he wants it, but he did not ask them to model it. Obviously, there is a significant cut that we have just talked about. We think that it will impact on those pay negotiations. We also think that it will impact on service delivery generally. I want to link that to, is Scotland a good place to do business and not just the welfare of the people of our towns and cities or the workers? If you have underfunded planning departments and core services that councils provide that allow businesses to operate, I am quite certain that the chambers of commerce will have plenty of complaints about the slow running of the planning service in various cities. If you do not have that and you do not have that investment, it is a real hit to business as well as a real hit to the livelihoods of the people that we represent. The chambers of commerce have long acknowledged them. I have never context acknowledged that the economy is, in essence, an organic thing. It has a number of components that need to all work together in an efficient manner. Business relies on the public sector, and local authorities in particular, for a great many of the support services and facilitation services that allow business to function in the same way as having a healthy private sector to employ staff, to have wages to pay tax, etc. It is important for the wider economy, too. As I said earlier, I appreciate that there is a balance to be struck by the committee and the Parliament more generally. We would have concerns about severe cuts to council services. Equally, on individual members of the public and for businesses, there will be concerns about how that is funded. A balance has to be struck. For example, significant rises in council tax will compound pressures already on households. The Barclay review took a considerable amount of time and effort and great many experts to come to its conclusions, because the non-domestic rate system has been shown not to be functioning in a manner that is fair or pragmatic. There is a balance to be struck by. There are some of the other proposals in the budget. Given the timescales that were announced today, we had time to reflect on them and consider them the potential impacts more deeply. However, the point about the effects on local authority budgets and spending is that that would be a concerned business, but we appreciate that a balance has to be struck. That tells us that between 2010-11 and 2017-18 that local government revenue funding has fallen by 8.5 per cent. Scottish Government revenue has fallen by 5.1 per cent in comparison. From what you are saying, do you believe that local government should get a fairer settlement? Coslove said that £545 million is needed just to stand still. Subsequently to that, how much more money do you think local authority should get in the budget? I certainly think that, at the very least, we would be looking at a reversal of what you describe in terms of the real terms cut, but you also rightly point out that that is part of a sequence of cuts that are unsustainable. It is important to say that Russell said that the Scottish Government raised some more money, or that these proposals raised some more money in respect of income tax. A large part of that just disappears straight away on business cuts, so we are not talking about that level of investment in public services far from it. So, yes, we have argued for more ambitious tax proposals, and we believe that that is probably the first port of call for that additional revenue that should be to local government. The point that you are making is that this comes on the back of a number of years of cuts in real terms to local authorities and that means that the opportunities for low-hanging fruit around efficiencies, as most likely, have already been used up. There may be others, but I think that getting to the point of real terms freeze, real terms protection, could be an aim over the course of the budget process. I think that Dave is absolutely right to point out that there is council tax that can go up by 3 per cent to help to mitigate some of those cuts facing local authorities. The business rates revenue will be dropped by about £100 million per year, whereas the Barclay review was the remit of that, which was to be cost-neutral. There are business tax-raising, revenue-raising proposals that were within the Barclay review that have not yet been implemented. We can see whether there is anything there that can happen in time for this year. The point that I would make is that, equally, whilst we might be able to fix this for this year or not, the deep spending cuts begin again next year unless we look to what we can do in the medium and long term. Some of that might be further tax rises, some of that might be further spending from the UK Government if it changes its plans, but most of all that has to come through a stronger economy. Testing every spend—we can look at those things almost on the spreadsheet—but every bit of penny that goes out the door probably needs to be tested against our twin priorities as a country of inclusive growth and of narrowing inequalities. That applies as much to local authorities wherever we end up, as it does to the other parts of the budget. I would broadly agree with that balance that Russell has spoken about. Accepting the pressure on local authorities, there are a number of areas where we need to be very careful about the law and any consequences. If we were to protect the council budgets in the way that Dave and Neil have referred to, the question is, how is that paid for? One option would be raising council tax, and another option could be to roll back on some of the concessions to rates. However, we have already heard both from the fiscal commission and from other evidence through business surveys, for example, about the fragile state of economy. We know, for example, that the retail sector has had significant difficulties, as has the hospitality sector, which led to the Barclay review. I do not have an answer for you, but I would urge caution as to how you proceed in the sense that it would be a perverse outcome that we compounded problems in the wider economy by not implementing the Barclay review concessions, which were proposed through Barclay on the basis of real difficulties that are being encountered by business. If the rates system is not reformed, but the way that it is being proposed to be reformed, there could be significant impacts on individual businesses, but on the wider economy in the back of that. Just on the issue of council tax, you said that 3 per cent increase in council tax would not be enough to avoid all the cuts, so it is fair to say that council taxpayers could be facing a 3 per cent increase in council tax and more service cuts, as well as things stand. For low-income taxpayers on the lowest council tax bands, we have heard that they are facing an income tax reduction. The Fraser Valence Institute works out about £20 a year. Have you looked at whether they would be better or worse off after that tax reduction, but also 3 per cent going up on their council tax? If councils choose to use the power available to increase by 3 per cent, that would roughly be keeping it in real terms static. Inflation is running at around 3 per cent, just nine. It depends. There has been talk about baselines and who is better off and who is worse off in terms of the income tax policy. It is similar for council tax. In terms of the specific point, if all councils across Scotland use that power to raise council tax by 3 per cent, it is estimated that it would bring in around £75 million, £77 million a year, which would bring cuts down to around £60 million in real terms. So, again, less significant than local authorities have faced in recent years, it would be a lot deeper without the tax changes that the Scottish Government are proposing, but it is still a real terms cut on very pressured services. Neil, are you okay? Yes. Right. Willie, you have a supplementary. Yes, thank you very much. It is in this area local government, the support for local government. Do you acknowledge and accept that the additional support for local government is clearly in there? If you look at the SPICE figures, you will see the baseline settlement for local government that is listed as £10.38 billion. However, when you add in the extra support for local government for things like discretionary housing payments, welfare fund and even support for the attainment challenge fund in schools of the future, that takes us up to about £11.3 billion. Do you acknowledge that that is there and that is additional support for local services? Yes. Once you include—the way that we have looked at this is around resource spending, so not including capital, not including financial transactions, not including lending, looking at day-to-day spending budgets. As I say on that, if you include all those things that you mentioned around attainment gap, it does bring the cuts down to around £135 million in real terms if councils use their council tax power to mitigate that further. It would bring it down to around £60 million. That is a lot less than we have seen, but it is still a real terms cut. On top of that, you have the support for health and social care integration that is going into support local services as well, plus reforms to the council tax system itself. Those are substantial additions, plus there is a £90 million extra capital going into local government plus the discretion to implement the 3 per cent that should councils choose to do. So there are levers and discretions there that councils can apply plus this additional support. I am just asking to acknowledge that that is there. With respect, I recognise what you say, but I do think that you are mix and matching different things. You are mix and matching capital spending. You are mix and matching things which have become Scottish Government priorities announced by the Scottish Government, such as the living, waging care and health and social care integration, and then allocating those budgets to local authorities as if it was always their responsibility to deliver on them. When the responsibility shifts to jurisdiction, you are still left with a set of services that local authorities previously would have had to deliver that they now have less money to deliver on. Some of those are statutory obligations and some of those are expected obligations, and on those obligations, local authorities have less money now than they did last year and sequentially over many years to deliver those. I do not think that we can get away from that fact, even though I accept that some of the programmes that you talk about with respect to local services are ones that we would welcome. The local councils are delivering those services. The services that they previously delivered before those announcements were made, they had less results to deliver than they previously did, and that is the base level. It is also an important point to make that we, certainly in the trade union movement, I hope that the Parliament generally should value local authority autonomy and therefore we tend to privatise in very clear terms the spending areas where local government actually has a discretion to act and act responsive to its own local citizens rather than in other ways. I was just getting very beefy. In the same way, so when we are looking at the Scottish Parliament's budget as a whole, you could look at the whole budget, including financial transactions, capital, lending powers, etc. That would tell you one story. We very much at the Scottish Parliament level focused on the resource day-to-day spending, and likewise that is what we have done at local authority level. However, you are right to suggest that there are capital investment going into local authorities, particularly for childcare, which is a really positive thing. There is additional money going on the attainment gap funding, which is absolutely the right priority. Although you can focus on the negative, there are positives there, but overall, in terms of that day-to-day spending, what we are seeing is that there will be a real terms cut, even if councils use their council tax power, albeit one that is much less than it has faced in recent years. On that point, on the health and social care money, it is £355 million. You said, David, that local councils do not have a role in delivering that? I am not saying that they do not have a role, but just to repeat my point, services that local authorities would previously have been expected to deliver under their statutory and other obligations received less money than they previously did. Many of those additional programmes are welcome. I think that health and social care is still working through. We are still having a look, for instance, to make sure that the ring-fencing of the living-waging care is going to be maintained and delivered. Those might be welcome programmes, but they do not change the reality that councils previously had more money to deliver on their core responsibilities than they do now in real-ter. I do not want to comment directly on the question, but I will make the point that, in considering the impact on individual households and for that matter, individual businesses, I would encourage Parliament to look at how households will regard their net income as a single till, so whether the money comes out via income tax, national insurance, council tax, VAT or whatever, people will, at the end of the day, look at how much money is left to spend, and that is the impact on the wider economy, but you should bear in mind. To some extent, whether you take the money through income tax or if a council takes it through council tax, for those who are affected, it is the bottom line that people will be more concerned about, rather than about how it is taken. Emma, you wanted to concentrate on the impact on the budget, particularly on women. I had a similar question to the last panel. I am interested in the impact of the budget as it seems to be more favourable towards women. Women are more carers, more nurses are women, and a lot of those nurses are in a salary band. That means that they will benefit, so they will have tax relief. When we are looking at nurses carers, those for childcare and providing the care at home for disabled people, the information that I have seems to be that women will benefit. Although Russell Gunson said that why the income tax is being cut is not going to benefit the poorest people, so what will be your suggestion for fixing that? You are right to highlight the gender aspects in terms of the spending. I am conscious that we are an all-male panel here talking about gender, so I will watch my step a little bit on it. However, the tax cut point that you mentioned, there are more women individuals that are lower earners and, therefore, as individuals, may benefit more from the tax cut element of the tax changes. However, there is an opportunity cost because that tax cut costs x-amount per year. What could be done to help women in this case, poor households, by using that money in a different way? The carers allowance is a really interesting way of using funding from the Scottish Government to help carers and predominantly women and other groups. We could look to that and use that same logic in a different way. Topping up benefits may be a much better way to use that money to help the poorest households and to help women. I mean, from our perspective—we haven't done the work on it yet—but some of the ticket items that you outline would probably have some beneficial effect for those in employment, as Russell says, women tend to predominate in lower income. However, if we return to public sector pay, the first thing to say is that this budget doesn't propose a real term for public sector pay rise for anybody. It provides a real term for public sector pay cut for everybody, if that's just a question of what proportion that is. We'd be particularly concerned if, returning to the local government issue, we'd be particularly concerned if the local government settlement constrained the ability of local authorities to offer a decent pay rise, because we know that, in particular, women are carers and women make up a large part of the lower salivate staff within local government. Our other concern would be that any cuts in services more generally tend to impact upon women worse. Again, we would make the case that a larger tax quantum, which would allow redistribution of services, not just to those in employment, but Russell's paper points to the 40 per cent of people who aren't in employment, with that a more ambitious redistributive programme, in respect of that, which has a more fundamentally rebalancing effect for women than what is currently proposed. Have you done an analysis on how the Scottish Government's draft budget compares to Westminster's budget when it compares to how does it benefit women and people who are disabled who are in work? We haven't done that analysis. However, you can be clear that there are tax cuts on the income side, income tax cuts should I say, proposed down south, because the rates are staying the same and the higher rate threshold is going up with inflation, so in cash terms. Equally, there are steeper spending cuts and, as Dave says, services, particularly those for the poorest, are much more likely to help women than men. Lastly, of course, the benefits cuts that we are seeing at the UK level are disproportionately likely to affect women rather than men. We haven't done the analysis, but you can see which way it is likely to point. Likewise, we have an analysis saying that we have some figures from Inci of Charter Council Scotland on salaries of earnings below £24,000. People taking into account both the draft Scottish budget and the draft UK budget will be £90 a year more in their pocket. It is a very modest amount, but it is still on the positive side of those pay bans. The real question is whether the structure that is being proposed in the draft budget, depending on where people are on the starter, the basic and intermediate banding, is how that triggers other benefits. Currently, it is the basic rate for the trigger point for a number of benefits, positively or negatively. Does that stay the same? How do you work that through north of the border when benefits remain in the UK system in that way? Equally, the calculation for those who are paying pensions and the auto enrolment now is there for everybody. Equally, for a third sector, the impact on gift aid of the new banding is something that we haven't really figured out yet, but our questions that come through as you put a new structure in place, how does that flow through on the consequentials? Patrick, I think that you've got a question related to that in almost a bit of P. I just wanted to follow up briefly on the tax points that have been made and then come back to pay. I think that it's better to say a lukewarm response from a couple of witnesses to the reduction in income tax for the introduction of the starter rate. Can I suggest that there's a couple of reasons why we shouldn't be too bothered about that? Partly that on targeting there is no income tax change that we can make in Scotland that would benefit the very lowest income households because they don't pay income tax at all, and that is probably a better targeting than what was previously expected, the idea of introducing an extra zero band effectively increasing the personal allowance. That would be far less well targeted than that because the bulk of that tax cut would go to higher income individuals and households. Secondly, just on quantum, the effect of it is £2 million a year, £3 million a year. It's really very modest and we should be much more focused on what's happening at the top three rates in terms of their much greater ability to affect the scale of the Scottish budget. In terms of the quantum of it, we haven't done the analysis. I'm not clear on that. I think that's the quote in the Scottish Fiscal Commission, isn't it? This is table A6 from the Fiscal Commission. I wasn't sure, personally, maybe you got that in the earlier session, whether that is just the effect. I think it's on the folks that are, so it's categorised by your top rate of tax that you pay, so I'm not sure that that is the quantum for the overall cost of cutting tax. I can come back to the committee more detail on that. It's hard to put it verbally. However, if there are opportunity costs, if there are better ways of targeting even a few million pounds, we should look to them, particularly when, as we've just been discussing, budgets are tight. However, you are correct to say that an even worse, less well-targeted proposal would be a zero rate or a personal allowance increase. I'm similarly on the figure. I would be surprised if that wasn't just a figure for those who are earning that sum of money, rather than the overall ripple effects within the whole system, a one-p tax cut for all-income over, is it, £19,000? Models right through the income scale is bound to be a lot more than a couple of million pounds. I think that must be about the impact on those people in particular, rather than the overall quantum. Of course, people just enter the intermediate rate, that saving lower down in their wage scale would be counterbalanced by the 21p rate. On that point, I made earlier on, you can give it the left hand and take away for right. If you give an income tax cut but then bump up council tax for those who pay council tax, then it's counterbalanced, so fair point. The structure, I think that you could bear in mind, we've heard a lot about recent years about simplification of various systems, tax simplification, the new structure that's flying in the face of that, and that's where, on my introductory remarks, I mentioned the issue of hidden costs and perception issues. Standing the objectives that we're trying to achieve in terms of fair settlement and inclusive settlement, I think that we just need to be careful about how we overcomplicate things by bringing in multiple bans. Equally, on the targeting issue, figure that out from my cast, is that for those who earn under 44,000, there's 2.1 million people in Scotland. For those who earn more than 44,000, it's 350,000 people, so there's a far smaller pool of people. Equally, I think that we've said it's been shown previously in tax systems that, if you target the top end, you create more incentive for people to take steps to avoid paying that higher-rate tax. Again, it's a balancing act to be struck here. We've certainly discussed the degree of uncertainty there is around those potential behavioural effects. Can I move on to pay? On that, just before we move that, Neil, if that was the case, if I were to have this standard situation across the whole UK, as you're suggesting, what would do with a point in changing any policies, as well? That would be exactly the same, and that would leave us the fundamental question, what's the point in the Scottish Parliament? I think that the point that I was trying to say is—let's give an example. We know that we have a shortage of a number of key skills going forward. Someone works in digital. They've got the opportunity of doing a cyber security job in Glasgow, and someone comes up in Newcastle or leads it somewhere like that. It's a relatively well-paid job. Let's see that person and speak a number, earning £60,000, £100,000. The current draft settlement budget makes a relatively modest difference to that individual. We're paying £60,750 worse off in Scotland at £90,000 worse off, and the current 1 per cent band. If you're that individual thinking about, hang on a minute, it was a new structure coming in here. It's 1 per cent this year. What's to say it's not 5 per cent in two or three years' time? In accepting that job, that person's going to be going right. I'm going to stick out for another £10,000 just to make sure that I'm not out of pocket on this. The employer is going to say, no, Chum, that's my budget. You're not getting it. The net result of that is that we are not going to have that individual recruited. We're simply going to reinforce our skill shortage unless we can grow our own in the meantime, which, in the short term, at least we, patently, are not doing. The same people don't look at the fact that they've probably got some young kids that are going to university and they're going to go to university for no tuition fees. What I'm saying is that this is part of a perception issue. If the perception is that Scotland, and it already is in our legal system, it is different. If you are a business looking to relocate in Scotland or to expand in Scotland, we know that our property transaction costs are significantly more than they are just across the border. The current proposal is not enough. No one is going to move house, rush to buy a house in Carlyle in the back of the draft budget or draft structure, but over the peace we create a perception that it's more difficult, it's more expensive to do business in Scotland. Where do they get the evidence for that? I said earlier that this is an untested system, unlike the R&D time. Where's the evidence? We already know that there are European origin staff who are leaving Scotland, or staff who are not coming to Scotland, not because of, necessarily, Brexit such, but because of the effect of the exchange rate. People will look at it, because in the past people would come here to work and they'd got a bounce out of their salary here because of differential exchange rate in the euro. That's now reversed. People are no longer coming to Scotland on that basis. However, if those who are not directly affected think that you'll be fine, it's okay, don't worry about it, those who are affected by Brexit are, to varying degrees, concerned about their future and their family's future. The Chamber of Commerce does a lot of effort in trying to sell Scotland as a positive place to business. We sell Scotland in the round as a lifestyle place. The benefits of university education are easy access to the countryside, international connections, our cultural offering and all that, but we also need to be careful that we look at people get a balanced view. We seem to be focusing there on Europe, I'll give you some other risks in terms of European people coming to Scotland, which are greater than that. Most of these people come from countries where they have a higher general level of taxation, where that has been linked over a period of time to what I'll argue is a more socialised model wherein business and university education and the range of other things that make up a society are better interlinked. All of the evidence that does exist shows that people undertake a range of considerations before they decide whether to move somewhere or not. At this margin, that's not going to happen. I would argue that, at a considerably greater margin, that's still not going to be the major reason that people are going to use. They're looking at equality of education, they're looking at equality of life, they're looking at social infrastructure. This is kind of extreme lapic of economics, and I think it's not where we need to be just now. I'll let you make a comment before I come back to Patrick's. Just very briefly, it's unlikely, in our view, that at this level of tax rise, particularly as the personal allowance has been going up, particularly as you've seen income tax changes over the previous eight, nine years, it's very unlikely to lead to behavioural change of what we've seen as a risk in terms of increasing taxes for higher earners. The only caveat, I would say, is that if we come back to this every single year, and if uncertainty begins to creep in as to what our tax arrangements are likely to be in three or five years' time, that's something to keep an eye on, I think, but not through this decision. So, longer term decision making around tax, certainty is probably a good thing, even if that certainty is around increasing taxes. Just to be clear, I'm not saying that the current draft proposal is not to be anybody off-daying anything. It's very marginal numbers at best of its current proposal, but I entirely agree with Russell's point. If Virginia is out the bottle, this is setting out a new structure. It's how that structure evolves over time, but may create the effect. To answer Dave's point, our biggest trading partner is the rest of the UK. It's also our biggest source of talent is the rest of the UK. So we're not just talking of people coming from abroad, talking of people coming up from south of the border as well, or considering coming up from south of the border as well. I put the questions off track a bit, because I was getting a bit frustrated there, but Patrick, please, on pay, we'll need to, and because I've done that, we'll need to move on a bit quicker. So forgive me. Yeah, there's a lot in there that I'd like to respond to, but we are short of time. We haven't talked about pay, and I'm keen that we talk about that to some extent. Dave Moxham has very clearly criticised what was published alongside the budget in the pay settlement, the pay policy, saying that it's clearly below inflation for all public sector workers. Notwithstanding, there's a separate debate about whether the rest of the public sector, including local government, also needs to be funded to meet something similar. The Scottish Government has clearly gone farther than the UK Government in trying to move away from a pay freeze and trying to provide something more than the UK Government has. If we were to try and achieve all of what's in the STUC's paper, so we're talking not just about current inflation but projected future inflation, the CPI might be trying to get to 3.2, 3.4, or moving to RPI, which again is higher, or ensuring that everybody in the public sector gets the same rather than a different offer above or below a certain salary level, each of those would be another big step for the Scottish Government to make. Can you place an order of priorities on those kind of arguments? Are you more concerned that we take account of future inflation or RPI? Are you less concerned about the equality issues in terms of making sure that lower earners get a decent pay increase? Where do the priorities lie? I'm going to do this without trying to step on the toes of my various affiliated unions who all have their bargaining units and those bargaining units with specific employers, and obviously there's a range of interests within that, which I think need to be respected because they're autonomous. What I can say, if you like, on your last point, is that public sector unions have habitually made paid claims that include waiting for lower paid workers. Now, I'm not going to comment specifically off whether the Government's 2% and 3% position is exactly the way that we would want to meet that. Obviously, we'd like it to be 3% and 4%, even if it were. But there's clearly evidence in terms of public service unions that an element of waiting for low paid people is important. What I would say is this, and you said the Scottish Government has made an additional commitment. Now, what that additional commitment is, in quantum terms, we've yet really to see. Obviously, our argument is that account hasn't been taken of that for local government. We know that local government down south has just made an offer of 2% in consecutive years to local government unions. That 2% and 2% isn't substantially different than the 2% and 3%, except that Mr Mackay doesn't need to be funding that for local government, which, as you know, is a large cohort. The biggest cohort of all is obviously health workers, and the 2% and 3% isn't an offer from Derek Mackay, but it seems to be that he would fund that if the pay review body UK level comes up short. We're not sure that the pay review body at UK level will necessarily come up short to that figure. Of course, Mr Mackay will get the consequentials for that when that is done. Were it the case, for instance, that a similar deal was agreed at a UK level than the one Mr Mackay announced in his budget, then that large cohort of workers wouldn't even be getting any additional funding. We've now taken out, if you like, the two largest cohorts of public service workers. His directly supported staff and those working in NDPs, one would expect, obviously, are covered by the pay policy, but a number of those NDPs haven't received additional funding that would be consumable with matching that. Sorry, a rather long way round of saying, we haven't yet been able to quantify what the difference in this commitment really is from what's happening at a UK level. Therefore, as the budget develops, we'll be arguing that Mr Mackay needs to make additional commitment such that all public service workers receive RPI plus, and that if there's any element of waiting that's within that context. But you're not able to quantify yet what that would involve? We know that RPA inflation is predicted to run out, I think, 3.6 per cent. Someone will correct me if I'm wrong there. We know that there are pay claims in from all the cohorts of workers who've currently made a claim that exceed that. There's other ones still to come. We haven't had local government negotiation yet, and the next year's teachers' negotiation is outstanding too. What we do know is that 3.6 is RPI inflation, and what we do know is that every public service union so far has put in a claim above that. Anybody else? Just to say, the new powers, since the 2016 Scotland Act, and you can see it in the Scottish Refuge School commission's projections for the economy, public sector pay now brings an income side, not just a spend side. There are projections within the fiscal commission for public sector pay that begins to drive tax revenue per heads, which comes back into the budget. There isn't a zero sum game in the sense that increasing public sector pay may well increase tax revenue, which may well come back in to some extent to offset that cost. We've done a bit of work on that in the past. However, having said that, it would increase cost pressures, which I'm sure we both agree need to be found from somewhere, either through additional tax or through cuts from elsewhere. A very similar view, the additional pay to public sector workers means that more in a pocket, more to spend, is better for the wider economy as well as all the social justice aspects that come along with that. The one concern, obviously, would be that, one, how is that funded, and two, the comparisons on the cost side for business in terms of pressures on private sector pay would follow through from that. However, the sort of rises that you're talking about are more about keeping pace with the cost of living rather than anything else. It's a question of how you fund it. I think that we've lost sight a little bit in this conversation of the context within which this conversation needs to take place, which is a context of historically subdued growth, subdued being a very polite term. We heard a lot of evidence from the Scottish Physical Commission earlier today that one of the principal drivers of that subdued growth was very poor productivity. We need to tie in this conversation about pay with that context, with that essential context within which this budget must be understood. Let me ask you the question of whether increasing pay in the public sector without any improvement in outputs is simply going to contribute to even more quickly declining productivity, which is going to make things even worse. We have clear and developing skill shortages in the public sector that are now being recognised by most people. Reducing the quality of work that you do reduce if you reduce pay, and particularly if you can't feel vacancies, is intensely unproductive. Losing the public service framework that is provided for business in terms of city infrastructure, in terms of support services, is very bad for business, too. There isn't a particular problem of productivity in the public sector. What we have got is a problem of productivity more generally, and that productivity problem is based on the creation of poor jobs, frankly, poor and insecure jobs in the wrong sectors of the economy. There's a limited amount of things that the Scottish Government can do about that in the private sector, and we've, broadly speaking, applauded, with the exception of some of the, we think, badly targeted business rate activity, are broadly to be applauded. At the end of the day, we're partly stuck in a position—the Scottish Government's partly stuck in a position not of its own making because it's about UK Government policy, year-on-year UK Government policy that hasn't helped productivity, that is fetishised about getting very, very low levels of unemployment, but not really concerned itself about the quality of that employment. By common consent, that is one of the biggest problems with productivity growth across the UK. Absolutely. This productivity problem is not a public sector, just productivity problem. Actually, more importantly, it's the productivity problem that exists in part to the private sector that we need to crack. There's a big long tail of companies across the UK that sit in retail, in hospitality, in care that are much lower in productivity terms than there are equivalents outside of the UK, and that's where a big amount of that productivity gap rests. I absolutely agree that a huge—firstly, the economic context that this budget is taking place is bleak, and it's bleak across the UK and a little bleaker in Scotland. However, the way out of that is productivity, as the Scottish Fiscal Commission would suggest. Whilst the Scottish Parliament's powers are limited on that, there's a lot more that the UK Government could be doing on that in our view. Within the context of the powers, the places to look would be around, for example, the national investment bank, which I think we can welcome and the capitalisation of it is really welcome and interesting. The more general, the capital and infrastructure investment is again positive, but within the resource spending, looking at, for example, the £2.5 billion that goes out on skills, colleges, universities and testing that a bit more tightly against productivity improvements, against inclusive growth, against our inequalities, I think would be a really interesting and useful exercise, potentially for the new strategic board of skills and enterprise. Productivity absolutely has to be the priority, particularly in the private sector, in those parts that I've mentioned, and, although a lot of the powers rest in the UK, within the Scottish context, there's some good things to welcome, but we can push it a bit further in parts of the spending departments. I think you're right to raise the challenging, fragile, pick-and-adjective state of the economy and the prospects for the economy. I think that we too would welcome the budget and look forward to seeing the outcome of the new enterprise and skills board and its budget. We'd also welcome the proposed spend on broadband, national investment bank, the national manufacturing institute and the money being allocated for research and development. Productivity is a challenge across both public and private sectors, but, as I said earlier on, I think that the concern is when there are significant difficulties, and you touched on retail earlier on Russell, with revenue, cash flow and profitability and business sustainability of the retail. In our context, we talk a lot about the challenges and the demise of the high street. We need to be very careful about where you place your bets on this one. Standing the concerns about the contribution and the inclusive and organic nature of the economy, as I mentioned earlier, and the concerns for public sector staff and public sector budgets, the concern is in paying for that and funding that. How is it funded? Where in the private sector does the burden fall on that? Is it affordable? I know that Adam wants to talk about skills and training, but James, you still have a supplementary point to Patrick's point, so I don't want to lose that. Just briefly, a direct question to Dave Moxham. You have criticised the level of settlement to local councils. You have expressed concern that the pay settlement announced by the cabinet secretary. There is not an adequate level of funding in the budget to cover that, and you have articulated a view that you would like to see the level of pay settlement be greater than that. As the budget progresses through the Parliament, what are the scale of the financial changes that you think are going to be required to the budget in order to address the concerns that you have outlined? I haven't exactly quantified that, but I'm going to throw a figure in anyway. The STUC was clear that the Scottish Government's tax changes should be in the region of twice or three times as ambitious as the most ambitious quantum that they proposed in their tax paper. I'm going to say significantly over £500 million should be found. The large proportion of that needs to be invested in local government, which would also cover a facial level pay claim, but it would also be usable for investment in other public services. I don't think that you wanted to see some of the skills. Thank you, Camino. We are jumping around from the topic a bit. It's probably my fault. Just to go back to the point that a number of you raised in response to my question a few minutes ago about growth and productivity. Surely one of the key infrastructure investments that we need to make is infrastructure in skills and training. We've heard a lot today from the variety of our witnesses, including from Neil, about how there are pressures on recruitment and skills. What is your reflection on the fact that this budget proposes to keep the skills and training budget flatlined at £232 million, exactly the same as it was last year? No additional investment, notwithstanding the pressures that we hear post Brexit, notwithstanding the pressures that we hear with regard to productivity, no additional investment at all in skills and training in this budget. Is that the right judgment in your view? If it isn't the right judgment in your view, what other line of the budget should be cut to increase the spending in skills and training? We've done a great deal of work on the skills system over the last year or so, particularly on how it links to improving our economy and productivity as part of that. It's real terms protection, so you're right to say that in real terms it's not going up across colleges, skills and universities. It is, but the pressures that we've heard in terms of public sector pay and others exist as much in those sectors as elsewhere, and there are potentially spending commitments from policy commitments, for example the independent student support review that I sat on chaired by Jane and Gadda that's there too. Where should it be higher? Of course, looking at the challenges that we're facing, whether they be from UK-wide Brexit and potentially immigration changes that follow and of mine that follow, we're already seeing an impact on immigration levels as things stand. Secondly, this shouldn't be, and this may be music to your ears, I'm not sure, but this shouldn't be a public sector problem only. Yes, public investment in skills is very important, but business investment in skills is equally, if not more so, and what we've been seeing in recent years in Scotland and across the UK due to no doubt a deteriorating economy and confidence is a reduction in business investment in skills. Secondly, the pattern of that investment isn't what you would like if you want to achieve inclusive growth and if you want to achieve a growth in low productivity areas. In that, you're much more likely to receive an investment from your employer in your skills if you're high-skilled than you are if you're low-skilled. There are things that we need to look at in the pattern of employer investment in skills that will help. Lastly, just on this point, it's not just increasing skill levels. Scotland has the highest level of qualifications in the whole of the UK in terms of HNC level or above. It's utilisation of those skills that's really important. Again, that can't be done from here in Holyrood. It can't be done from St Andrew's house. It has to be done in partnership with employers. How do we get employers better utilising the skills that we have already as much as improving skills? I've associated myself with everything that Russell said, so I'll not repeat it. He asked where money should come from. I think that looking at support for business and tying support for business more directly and organically to action taking on skills, provision of quality employment is where we need to go. It's why, for instance—I'm sorry to repeat myself—we think that if money is going to be provided to small business, it should be provided to small business on the basis of what they're going to create and how they're going to boost the economy, rather than just as a flat rebate being flanked. Some of that will be usefully used. Some of it will be funding second cars for people. Let's look at big lumps of money like that £200 billion. Let's look at the fact that that more or less equals the budget that you just spoke about and see how budgets like those can work together so that we get additional investment in the strategic areas of skills development, research and development that can see our economy prosper into the future. I think that that's a lot of terms. We're all in agreement. Something that the chamber's network has said consistently for several years now is a concern about skills issues, a concern about recruitment and retention. The chamber's network is heavily involved in the developing young workforce programme and business to business mentoring. We've got 1,000 mentoring opportunities up and running already. One specific thing I would flag is the fate of the apprenticeship levy. Across the UK, if you're down south, you pay the apprenticeship levy, then you can claim that back by your training spend. Up here, it goes to the college sector, which in itself is a policy decision. It's not necessarily bad, but it does create some perverse incentives. For example, larger companies are sending people down south for training programmes, which seems a bit nuts. Let's keep the skills in Scotland, let's grow the economy in Scotland, but more power to elbow on that one. Ash, you're a supplementary in this area around skills, but was it related to the labour market or the national investment bank? The national investment bank. Yes, thanks, convener. Good afternoon, it is now. I just wanted to pick up on a couple of points from the IPR paper. You mentioned it again just now because you noted that capitalisation of the national investment bank was, and you said, welcome and interesting. In the paper, you said that it's 5 per cent of the capital budget over two years, which is quite a high level, and that also in the future it will include financial transactions, which strikes me that might be quite a good use of financial transactions money compared to perhaps what the UK Government is using it for to do with the housing market down south. You said it could boost levels of investment in productivity. Could you expand on that a little? Yes, the national investment bank is something that we've called for across the UK for a long time. They exist in lots of other countries and do good jobs in lots of other countries, too. It's really welcome that the Scottish Government has set up the Scotland National Investment Bank, and the capitalisation over not this year but the next year onwards for two years is really welcome. The reason for that is almost related to what we're talking about just at the last question around business investment and skills. The more that we can use public funding to gear in or crowd in funding from outside of the public sector, the better, and partnership between public funding and business, in this case, or employer funding, is always going to maximise the impact that you can get from that funding. In Scotland, there's just like in the UK a real gap in terms of business investment, whether that be in R&D, whether that be in infrastructure, whether that be more generally including in skills. This is a really interesting innovation in the sense that it could begin to change employer behaviour, gear in, employer investment, and as long as it's focused on the long-term, which too little of the investment at the UK level is in our view, you can begin to see some of those long-term benefits around productivity growth, et cetera. On the financial transactions, I would absolutely agree. The way they're being used at the UK level is predominantly in housing, help to buy included. We've used some of that in Scotland in the past for that. A much greater impact for that funding could be investing in some of the things that we've talked about that will boost productivity. Investing in help to buy is very unlikely to or not likely to have large impacts on productivity. Investing in some of this long-term, patient capital style investment is much more likely to do it. I'm conscious of the fact that the chamber starts at quarter past one, just to remember members today, because the chamber's business starts at quarter past one. We've still got a report to complete in private after this session, so I'm afraid that we're going to have to speed on a bit and then say that. Murdo. Do you know what you're implying, convener? I'm implying that I know your questions are going to be short. My question is going to be very short, convener. I have just one question to Russell Gunson on the IPPPR reports. Going back to his question of taxes, there's a statement in your report. I'll just quote to you, it says this. Improving the performance of Scotland's economy and, more particularly, tax revenue per head in Scotland relative to the rest of the UK will be crucial to ending public spending cuts in Scotland in future years. I don't know if you caught the evidence that we got from the fiscal commission earlier, or you've probably seen their written report, but clearly their projections are for much slower economic growth in Scotland over the next four years. So what, in your view, does that mean for the trajectory of tax rates in Scotland between now and 2021? So first answer to the tax changes that have been announced, so it's important to get the context or the scale of them in perspective, so it's around 0.1 per cent of GDP. So we're not talking huge tax rises at this point, but they are welcome, as we said, because in our view they're necessary. Beyond that, we know the allocations to the Scottish Parliament for next year, we know the block grant adjustment and we know tax revenue projections from the fiscal commission, and with that we're likely to see deep cuts as things stand, restarting again. So around £250 million in real terms across all spending on the resource side, £350 million for non-protected, so that's about 3 per cent, so significant. And the IFS project beyond that deeper cuts at the UK level, which will impact on our budget. So something we'll have to give it will either be cuts restarting, it will either be additional spending through a change in policy at the UK level compared to what is currently planned, or it will have to be further tax rises of some sort, whether on income tax or others in Scotland. So that's the, you know, looking ahead beyond this year really, that's the prognosis. The key to it though, again, it links to Ash's question just a minute ago, improving the economy, strengthening tax revenue per head would allow us to escape cuts in future years without having to increase tax, just in essence to run to stand still. Okay, and just a very brief follow-up to that. If the economy grows in line with the fiscal commission projections, have you any figure as to what level of tax increases you would therefore need to fill the gap that you're talking about? So just for next year, so the tax rises or the tax, the net effect of the tax changes, should I say, for this year are around £164 million. As I say, cuts across the whole of the budget next year are around £250 million, so higher than the revenue raised through the tax changes proposed this year. You mean next year, the following financial? So for 2019-20, £250 million across all, spending on the resource side to compare that to the tax changes proposed for 2018-19, that's £164 million. So you'd have to do more than what has been done this year. Okay, and thank you. If I can just put that point then to Neil Amner, given what you've already told us about your member's view on tax rates, if that were to follow through, presumably you would be concerned about that. Yes, if you're time, short of time. Yes, and back to the earlier point about the investment bank, yes, we need to grow the economy, so we don't have that gap. Dave, you wanted to put that in before I move on? Nothing much will sum it up well, and I obviously disagree with Neil. I'm fine. You're fine. I've covered you up. Alexander. Very quick question, thank you convener. Can I note my register of interest around businesses and being an employer? It's obviously disappointing to hear a lot of the blame being put on businesses for productivity in face of the burdens and costs being imposed on it. In reference to one particular cost, very briefly, HMRC, when they were here, described the additional rates being created as costing them an extra up to £5 million in administering. I wonder is there any assessment done on how much the additional rates come as a cost to businesses in regards to payroll, software, that kind of aspect? I haven't got figures for it. I have a national audit office, I think, talked about effectively trebel the cost of administering a tax system when you put multiple layers in. I guess it's something along those lines, but if you are an employer who has employees north and south of the border, you effectively have to run double payroll systems. Even at an individual level, you're going to spend more time and concern checking and rechecking, and actually the tax system is going to spend time going back and refixing and redoing calculations. It's not just for tax, but for benefit as well, potentially, because of that uncertainty or confusion that we're relying on because of it. The cuts to staff in the HMRC and future office closures are going to be to the detriment of business and to the public. Unfortunately, that's not in the hands of the Scottish Government just now. On the more general point, it isn't our biggest concern, but given our general view that the advantages of a small, very small tax cut for people or wages at the lower end are moot, it does become significant to us that the extra complications and the extra cost may not be worth it, given that we're not particularly convinced of the benefits. I'm just very, very briefly here. Not to blame businesses in terms of productivity. It's quite the opposite to say that they're part of the solution alongside government. Secondly, whilst additional rates may increase the burden or additional bans, other countries that have much better productivity than us have similar numbers of tax bans, so they can cope with the higher productivity level than your concerns. I thank you very much for a panel for coming along and giving us evidence prior to Christmas. I hope that I wish you a good festive break. I now move this into private session and I'm going to crack on with our report. Thank you very much.