 Gents, rydw i ddim yn gweld. Fy enw i, wrth gwrs, wrth gwrs y 14 yma i'r ddweud o'r Ffaintyn Cymru, gyda'r byw sydd i'r cymryd arall, i ddweud i'rном sawl cyffredinol o'r cyfryd cyffredinol. Rwy'n ddim yn darparu i ddweudio i ddisgrifennu ymddangosion of the Coffinance, Employment and Sustainable Growth and the Implementation of the Scotland Act 2012. Mr Swinney is accompanied today by Alasair Brown and Allison Calamig of the Scottish Government. Both the Scottish and UK Governments are required to bring forward reports under section 33 of the Act and members have copies of both reports. The committee will take evidence of the UK Government's report in the coming weeks. I would like to welcome our witnesses to the meeting in our very cabinet secretary to make a short introductory statement. The second annual report and the last report before the devolved tax and borrowing provisions in the Scotland Act 2012 are implemented in April 2015. Our report describes the progress that continues to be made by the Scottish Government on the arrangements for implementing those provisions. Significant work has taken place over the last year in line with programme plans. The legislation for land and buildings transaction tax and Scottish landfill tax have completed their parliamentary stages and have received royal assent. As I have already advised the committee, I will announce rates and bans for the devolved taxes this autumn when I present the 2015-16 draft budget to Parliament. That is also in line with agreed changes to the written agreement on the budget process. There continues to be good co-operation between HMRC and the Scottish Government as the implementation project proceeds on the Scottish rate of income tax. The Scottish Government is represented on the relevant boards with access to all project papers and background information. Significant achievements over the last year have included deciding how Scottish taxpayers will be advised of how much Scottish rate of income tax they have paid. Scottish taxpayers will find this information on the annual P60. They will also have access online to the HMRC tax calculator and to individual tax statements. HMRC has consulted the Scottish Government on Scottish rate options and decisions that have a potential impact on Scottish taxpayers and employers. Agreement has been reached on how to ensure that the appropriate level of tax relief is applied to contributions paid for after tax income by Scottish taxpayers to private pensions. HMRC has been undertaking consultation work with the pensions industry in developing and communicating a solution. The Public Audit Committee has done helpful work on audit arrangements for SRIT, culminating in the report on the issue on 10 March. The Government will respond shortly to that report. Audit Scotland is engaging with the task of settling. The audit framework is also important, as will be the scrutiny of the process that is once established. A significant development has been the preparation by HMRC of revised cost estimates for implementing SRIT. As the annual report says, estimated costs are now £35 million to £40 million to £45 million in HMRC's original estimate published in November 2010. Our aim continues to ensure that value for money is delivered in the project. In my letter to the committee on 7 January, I set out in detail how the block grant adjustment and reconciliation process in respect of the Scottish rate is expected to work. While some details remain to be settled, there is now a well-developed understanding of the processes. We need to agree soon the block grant adjustment mechanism for the devolved taxes, not least to ensure that the estimates can be factored into the preparation of the draft Scottish budget this autumn. The UK Government's report describes their proposals. As our report makes clear, those proposals move away from those set out in the command paper of November 2010, and I am currently in discussions with the UK Government on this matter. My task is to achieve an outcome from those discussions that the finance committee and the Parliament can agree is fair for Scotland. It has a key role in continuing to provide students and scrutiny in this process. I look forward to discussing those important issues with the committee. We also have material on the fiscal commission, which I assume we are coming to as a further item. That is a separate item on the agenda, so we won't be asking you about that at this point. I am going to ask you about the block grant adjustment looking at your second annual report. Interestingly, I think that the photograph of you in this report was taken when I was at school. I am not sure what to read into that remark, convener, but I shall think about it and worry about it for the whole remainder of this session, I think. OK, let's get to the meat of it then. You talked about agreement with the UK Government being reached soon in your opening statement. You say in paragraph 42 of the report that the block grant adjustment in respect to the devolved taxes remains under discussion between ministers. I wonder, though, if you can tell us what the bottlenecks actually are at this stage to full resolution of this issue. Essentially, we have been in two phases of a discussion here, convener. The first has been the examination of what was in the command paper, which was considered by Parliament and was the basis on which Parliament gave its consent to the proposals in the Scotland Act. In the command paper, the United Kingdom Government said that when the smaller taxes are devolved, there will be a one-off reduction that will then be deducted from the block grant for all future years. That was the reference in the command paper. What the UK Government has made clear is that, I suppose, what it is now saying that it really envisaged with those words was that there would be a one-off adjustment to an indexation to ensure that the Scottish public purse did not benefit disproportionately from the devolution of this tax. As you will imagine, I have contended strongly that that was not what was in the command paper. That has been my position in the early part of the discussions with the UK Government. The UK Government has advanced to us a proposal that also features in its proposals to the National Assembly for Wales on the Wales command paper that has recently been published, which involves what would be called a form of Barnett abatement. That would involve a form of indexation of a one-off adjustment of the block grant, which would involve influencing the Barnett formula. I have indicated to the UK Government that that is not acceptable to us and I have submitted to them alternative proposals in an attempt to resolve the difference of opinion that we have on this question. The Secretary of State for Treasury, Daniel Alexander MP, has made it clear that there is not the UK to be disadvantaged by this process. Clearly, the Scottish Government does not want to be disadvantaged either, but what is the potential disadvantage if the UK gets its way? What would be the implications to the Scottish budget? It is difficult for me to quantify any proposals, because I have not seen from the UK Government a proposition that would enable me to definitively answer that question. It depends on the comparison between the size of the block grant adjustment as a one-off, which there will be under any circumstance or any proposal. However, the indexation mechanism relates to the potential growth in public expenditure in the UK. That is a figure that I am unable to quantify. What I am trying to do is to ensure that we remain very clearly aligned to the contents of the command paper and that we have the opportunity to ensure that the growth of tax revenues as a consequence of the devolution of these tax instruments relates to the performance of the Scottish economy and not the performance of public expenditure in the whole of the United Kingdom. You have said in paragraph 44 that we have written to HM Treasury on a settlement that we should believe that addresses the concerns of the UK Government provide an equitable settlement for Scotland, unlike the UK Government proposal that does not amend the ratios that are used for the Barnett formula. What are your concerns on those ratios? I simply do not think that there is a relevant connection between the devolution of these tax powers and the operation of the Barnett formula. The devolution of these tax powers is to increase the accountability and the fiscal flexibility of the Scottish Parliament. Therefore, we should be able to establish a connection between the performance of the Scottish economy and the performance of the tax base in question. We should be able to retain the returns as a consequence of that connection. There should be no relationship to public expenditure as a consequence of no on-going relationship to public expenditure once we have made the one-off block grant adjustment, which was always envisaged. When you appeared before the committee in September 2013, the committee sought clarification as to where the Scottish Government and Scottish local authorities might be disadvantaged by not having access to the project rate, which is intended to take forward particular major infrastructure projects. The cabinet secretary has tried to indicate that he would be happy to look at that point. As yet, however, no clarification has been received. I wonder if you could possibly provide some for the committee. I think that I would have to come back to the committee with a definitive view on that in looking at all current statements and the contents of the budget document from earlier this year. However, I will give the committee a definitive response in writing on that question. Thank you very much. Can you tell us how you have managed to reduce the costs and how the costs have been reduced in terms of the implementation? It is quite a significant difference in terms of the reduction of the costs of implementation. I think that the best way to explain this is that HMRC has given some outline estimates of the likely costs in the original proposition that was in the command paper. Those are, by their nature, much more general estimates of the likely costs that would be involved and would not have benefitted from the type of detailed scrutiny and project planning work that will now have been going on in relation to the implementation of system changes and IT measures. As a consequence of that effort, convener, where the all-relevant parties and obviously Scottish Government officials have a very clear mandate from me in those discussions to be minimising the costs to the public person of Scotland given that we are meeting those costs and where the strongest possible scrutiny is being applied to all of those measures to ensure that they represent value for money. I think that the best way to explain it would be to say that the outline estimates of HMRC, which were produced some time earlier, have been subjected to the rigor of project planning and as a consequence we have a more robust estimate. Of course, the pressure and the approach that I have mandated that my officials to take forward will continue to try to ensure that we get to as strong a possible position as we can in that respect. Thank you. In terms of receipts for land rebellious transaction tax, we took evidence recently from the officer of budget responsibility and they have, as you probably know, since March 2013, upgraded their forecasts for receipts for this financial year, for SDLT, as it is present, from £372 million to £456 million, which is an increase of about 22 per cent. In questions that we have said, the reason for that is because of the pickup of house prices and there are more property transactions taking place in Scotland. I am just wondering if you are happy with those forecasts that are currently being put forward by the OBR on this particular issue? I certainly think that the factors that they cite are factors that are borne out by evidence of a general increase in house prices and a general increase in the number of transactions. Whether that represents a 22 per cent increase from the values that they were setting forward is a different question altogether. Obviously, part of the exercise that the Scottish Government will do in projecting future revenues is that we will look at all relevant data in that respect and put our modelling and methodology to the fiscal commission that I will establish in due course for them to be independently tested by the Scottish fiscal commission. Thank you for that. I am just going to touch on one further area, cabinet secretary, and then I will open out the session to committee members. That is the issue of the SRIT. The committee has previously pointed out that it is unclear how the UK will be at the risk of a deviation from the forecast receipts for SRIT during a transitional period. There will not be a reconciliation with actual forecasts. For example, if Parliament agrees to an 11 per cent rate as opposed to 10 and the forecast was pessimistic, it is a bit unclear as to why the Scottish budget would not be disadvantaged if the receipts for the 11 per cent rate were not higher than forecast. Essentially, the risk factor, the variation factor under the arrangements for the Scottish rate of income tax is carried by the Treasury in the transitional period. Essentially, as we work through the reconciliation of all the numbers to establish the comparison between actual receipts with projected receipts, the Treasury will essentially be providing the—we will be meeting the cost of any gap that will arise as a consequence of the deviation between the projections and the amount of receipts that are generated. That has been the nature of the proposal advanced by the UK Government. That reconciliation will not happen within each of the financial years that will happen at the end of the three-year period? That is correct, convener, but essentially we will be working to ensure that we have sufficient comfort in the budgeting arrangements to ensure that any particular deviation is accommodated within our management of the public finances. Okay. Thank you, Cabinet Secretary. There is a tsunami of members wanting to ask questions now. Jamie. Thank you. Can we just return to the issue of the block grant? I just want to think that you said something quite interesting there, Cabinet Secretary. The command paper that was presented was essentially formed by the basis on which this Parliament—presumably also the Westminster Parliament—considered the legislation, considered the Scotland policy. This is really changing the shift in the go-posts after the event. That is, you know, maybe Parliament would have considered matters. There may be they wouldn't have, but presumably any Parliament could have considered matters somewhat differently if information had been presented differently in the command paper. I think that the command paper, in my opinion, is absolutely crystal clear. I think that the reports of this committee—forgiving me, convener—the referendum, the Scotland Bill Committee, that considered those issues, was absolutely crystal clear that the block grant adjustment mechanism was based on a one-off adjustment, and that was what any reading of the Scotland Bill Committee report is very clear at that point. That is why such a long period has been taken in essentially pursuing that particular issue within this debate. I thought that it was very important that what had clearly been expressed to Parliament through the command paper and through the report of the Scotland Bill Committee was very clearly articulated to the United Kingdom Government as part of those discussions. On the OBR forecast, convener made an interesting point that the 22 per cent increase in the estimate in terms of receipts for stamp duty land tax in 2014-15 was an interesting point, except in the point that you made that clearly there has been an upturn activity, but surely it is not so much the 22 per cent increase in the 2014-15 estimate from March 2013 to March 2014. Surely it is the fact that under their estimate receipts from 12-13 to 14-15 would go from £283 million to £456 million, which I have acceptably calculated this in the paper here, but I made that out as a 60 per cent increase in receipts. That does not seem credible to me. That is the nature of my answer to the convener, that I think that the estimates of increased activity—well, I think that there is increased activity—there are higher property prices. I think that whether that translates into a 22 per cent difference on estimates or the scale of increase that Mr Hepburn refers to between 12-13 and 14-15 is a matter of significant debate. I think that that is why a Scottish Fiscal Commission is an important reassurance within Scotland to assess the validity of estimates that are put forward and will be the basis upon which we formulate estimates and will put them forward. Just one last question, convener, relating to the start-up costs for the Scottish rate of income. It is clearly welcome that the costs are now, because they are going to be less than the estimate in November 2010. Is there any explanation as to why they are quite significantly less? Is there any explanation as to why that might be the case? I do not think that I can say more than what I said to the convener on that the outlying estimates of £40 million to £45 million would have been made on a more general basis of project planning by HMRC. Obviously, with the rigor that we have been applying through the project board and with the mandate that my officials have to deliver value for money for the Scottish public purse, we have managed to get to a more refined and reliable estimate, and we will continue to press on that issue. A small question, cabinet secretary. You mentioned your desire for an increase in accountability, and I know that there are different ways in which you can hold people to account and judge decisions that are made, but one of them is the amount of tax that you are taking from them. It would appear that there has been some discussion between yourself and HMRC about whether the amount of SRIT that is taken should be on people's payslips. If people do not know how much they are being taxed, then the amount by which you can hold them accountable or that they can hold their Government to account might be seen as being diminished. That decision, while it might be in a practical sense because of costs and some technicalities. Who was consulted about whether we should know what the SRIT element is? Was the business community consulted? Was the trade unions consulted? It is important that we know why people do not know how much they are being taxed by the Scottish Government. People will know, because the information will be set out in their P60 on anio basis. The judgment that I took was that there would be a greater cost to employers if we required all periodic wage and salary slips to include information on how much SRIT had been paid on anio basis. I judged that people would get clarity about how much SRIT they were paying from their P60, which is an annual document available to all members of staff or all employees. That would be an appropriate way to minimise the cost to employers and ensure that members of the public were able to be clear about how much tax they were paying in that respect. They will very clearly be able to see on their annual P60 the amount of tax that has been paid in relation to the Scottish Rated of Income tax. In consultation, we discussed some of those issues with the Tax Consultation Forum, which has got a broad membership of employers and HMRC that has discussed it with employers. One or two people have already mentioned the whole question of forecasting the LBTT, or SDLT, as it currently is. One of the things that concerned me about OBR forecasts was when it said that they remain well below their long-run trend. Their assumption seems to be that the trend is just going to continue. I thought that the trend was a bit unhealthy and that people were paying well over the odds for houses, both here and elsewhere. I do not know whether that is because of OBR's methodology, but they have to assume that those trends continue. However, I had hoped that some people would have learned that they were paying well over the odds for houses and that, in the future, the prices would settle down at a more reasonable level. Have you got thoughts on that? I think that it would be a matter of concern if the housing market took the same course that it was taking for large parts of the period running up to 2008. I think that that would be undesirable, because we can see what the implications of that clearly are and what it leads to within the wider decisions that people make within the economy and within their own economic activities and commitments. I very much agree that a more sustainable approach in the housing market would be desirable. The reason why I would be very cautious about the estimates that have been put forward by the OBR is that I do not think that those will be sufficiently refined to reflect the Scottish market. I think that they will be driven largely by an extrapolation of an assessment across the whole of the United Kingdom. The whole of the United Kingdom position will be skewed very significantly, one enormously, by what is happening in London and the south-east in relation to property prices, where, from a lot of the available information that looks at the market, it is coming back to some of the conditions that we are running up to 2008. So, I think that what is important for us is to take the responsible steps that we are taking of undertaking an assessment of those factors within Scotland and testing those with the independent fiscal commission. On borrowing in paragraph 20, it says that it is the view of the Scottish Government at the option of phasing borrowing, for example, over a spending review, which should be open to the Government. We wrote to the UK Government on 19 February about that. Can you just explain what the thinking is behind this and the idea of phasing the borrowing? It is essentially about giving us a bit more flexibility over the period of a spending review to perhaps, if there is to be an annual limit put in place over the duration of a spending review, raising the question, does it have to be that we borrow that if we were to use the maximum to borrowing flexibility available in three equal components? Or would there be an argument for borrowing a more significant amount at one particular period within the spending review to support the roll-out of a particular major capital project or element of our capital programme? It is simply to have that flexibility that would be in place. Would that necessarily mean that you would spend more in year one and less in years two and three, or would it, sometimes by the other way round, spend less in one and one? It would depend on the choice, essentially. It is to have the flexibility to make that choice to be driven by the contents of our capital programme rather than an annual obligation to borrow the same amount of money if we were using the maximum amount of borrowing capability involved in three annual instalments. For very good reasons, there may be a capital project that we wish to undertake for which we wish to borrow, for which our CDL allocation is not sufficient, but we do not need any of it in year one, but we need a lot of it in year two and less of it in year three. That is the type of setting. By the fourth replacement crossing, we knew that it was coming, so it is going to be a big bump in one or two years. That is great. On the report that we got from the UK Government, I was interested in the landfill tax. It says that draft legislation is setting out the necessary changes to existing legislation for the disaplication of landfill tax that will be published in autumn 2014. It sounded quite late to me that we are introducing a new tax, and it is only going to stop the old one, and it is only going to think about stopping the old one in the autumn. I would not, to be fair to the UK Government, I do not think that they are saying that they are thinking about stopping it. It is simply the technical thing. I find myself in a very unusual situation. I have been fair to the UK Government, but it is consistent with my reputation for fairness in all those questions. Those are quite simply the technical provisions to conclude the tax powers that have been held at Westminster. It is nothing more to be worried about than that. We can be relaxed about that. I was interested too in some of the comments that Mr Kerr-Michael had made in his covering letter. He talks about the two new Scottish taxes, land-buildings tax and landfill tax. He suggests that all of that is part of the United Kingdom with the strength and support of the UK's economy and resources. That is devolution in action, but I thought that those two taxes were totally under our control. I did not really see how the UK's economy and resources were having any impact on either land and building transaction tax or landfill tax. Is that your reading of it as well? That would be my reading of the situation as well. He also talks later on about the coalition Government made a commitment to the people of Scotland to deliver the recommendations of the Kalman commission. Admittedly, he does not say all the recommendations of the Kalman commission, but neither does he say some of the recommendations of the Kalman commission. I understood that it included things like air passenger duty, which have not been devolved. Could you comment on the statement that it is delivering the recommendations of the Kalman commission? I certainly think that it is a matter of fact that the United Kingdom Government is not delivering all of the recommendations of the Kalman commission. Finally, in that bit, he says, about people of Scotland making a choice, should Scotland remain part of a strong, successful United Kingdom? I just wonder if it was your opinion that the United Kingdom was strong and successful. I do not think that Kalman is much of a surprise to the committee that I am a supporter of the arguments for Scottish independence. I do not find myself in accord with the Secretary of State on that point. Thank you for that, Gavin, to be followed by Malcolm. If it is okay, I may return to asking questions about the Scotland Act 2012. The figure of the £35 million to £40 million, is that a shared estimate by the Scottish Government and the UK Government? Are you both saying that that is where it will end up? That is emerging from the project board in which the Scottish Government is a participant. We consider that estimate to be a robust estimate. I will come on to block grant adjustment in a second. Before I do that, there is one part in the UK Government's annual report, paragraph 75, through to paragraph 77, titled the cash reserve with the outline, the mechanism of the cash reserve. I just wonder if the Scottish Government has a position or a plan if it intends to do anything with that over either this financial year or the next financial year? The arrangements that are cited by the UK Government in those paragraphs are an accurate representation of the facility, but the Scottish Government has, at this stage, made no provision to contribute to that cash reserve, but there are budget statements yet to come. Is it under discussion? All those issues are always under discussion. If we come to the block grant adjustment first, I will deal with the Scottish rate of income tax. Is it fair to say that the overall mechanism then is broadly agreed between the Scottish Government and the UK Government? For the Scottish rate of income tax? I have one minor question that appears quite frequently saying that there would be two or three transitional years. I wonder if it is going to be two transitional years, is it going to be three transitional years or is it a case of we will see how things develop and a decision will be taken at a later date? That is correct. It is that there is still a discussion about what would be the appropriate transitional period. I think that it is fair to say that nobody is absolutely certain how all the reconciliation arrangements will work themselves out. There is some flexibility being retained to spread that over a longer period than a shorter period. Turning to the block grant adjustment for the devolved taxes, is there likely to be an agreement that rolls the two taxes together or will the mechanism for each tax be treated separately and on its own merits? That would be a product of what agreement we arrive at. I cannot predict whether that would be the case or not. I think that it would be desirable if the two were rolled together. You said to the convener that one of the bottlenecks was indexation. If you put that to one side, is there then broad agreement on what the one-off figure would be if you put indexation to one side or is there still some disagreement on what represents a fair one-off figure? I do not think that you can separate agreement about the one-off adjustment from the question of indexation. If I go back to the original starting point, which I think that I probably discussed with the committee when I was here a year ago in the earlier report about the section 33 report, I would have been concentrating on that provision within the command paper, which in my view is the clearest distillation of the position of which there should be a one-off adjustment and that is the end of the story. When you then add in an issue of indexation, which has now been added in by the United Kingdom Government, that colours my view about—certainly it makes it clear to me that you cannot come to a conclusion about the one-off adjustment without coming also to a conclusion about the indexation arrangements if you are going to have any of those in the first place. In terms of the proposal that you put to the UK Government—I mean, you senior people—we have written to them, suggested a proposal, and they have said in their report that we had a proposal considering it. What was the approximate date of the proposal being put to the UK Government? Tenth of April. Tenth of April. Under protocol, is there a sort of date by which you would expect an answer, or have you been given an indication of when that would be? Well, we have not been given an indication of when we expect an answer. I certainly am keen to ensure that the issue is resolved sooner rather than later. I think that it would be better for a good administration of budgeting processes, if that was the case. I will obviously be working to effect that. The final question that the UK Government made in their report at page 28, paragraph 65, they talk about an approach similar to when business rates were devolved to Scotland, and then, over a period of time, I have to talk about how that might operate. What would be the Scottish Government's primary objection to mirroring what happened when business rates were devolved, or are the two so different? The first thing is that I do not quite understand what the connection is there, to be honest. The devolution of business rates, I think, must be 15 years ago, so we are into the realms of... I was not intimately involved in discussions around that, but I do not have all the details to hand. There was a budget line within UK public expenditure on business rates, so I can understand how, when that was devolved, comparability went from 100 per cent to zero because there was a budget line associated with the devolution of that function. There is no budget line associated with the devolution of stamp duty land tax and landfill tax, so I just can't quite understand what point is being made here about the example of business rates being somehow a touchstone for how we might go about this. I just simply cannot understand the basis of that. Mark-on-to-Fall-by-Gene In a way that Gavin has dealt with, I think that you would agree that, if we get the result that you do not want and have further fiscal devolution, it is the income tax issue that will become crucial, particularly if there is even more devolution of income tax. You said to Gavin Brown in terms of the lock grant adjustment mechanism—the whole-term mechanism, I suppose, is what it is. Normally called, you said that you'd agreed that with the UK Government. Does that mean that you're entirely happy with that, or is it just something that you've agreed because that's the nature of negotiations? It's an infinitely preferable approach to the one that was proposed in the command paper. Do you happen to know, just taking the years of devolution for the sake of argument, how many years the non-savings, non-dividend tax base in Scotland has grown faster than the UK average? I don't have that to hand, but I'd certainly be interested in just for us to know that. Thank you, cabinet secretary. I got ticked off last week for asking too long and rambly questions, so I'll keep it short. I hope that there's no ticking off for people giving long rambly answers, although certainly we'll be in trouble. That was never discussed. What is the point of the Scottish rate of income tax? I think that the only point of it is to give the Parliament in Scotland more involvement in the setting of one element of the income tax piece of Scotland. But if you were to adjust it, it doesn't affect the income of Scotland, does it? That would then be compensated for in the adjustment in the block grant. It would have an effect, because potentially if the Parliament decided not to collect as much tax as was envisaged by the block of taxation that was being devolved, or decided to collect more of that tax, that would have a variation on the amount of money that the Parliament had available to deploy in public expenditure. There would be no effect on the, there would be no change to the Barnett formula or to the calculation of Scotland's block grant. The effect is more on the amount of money that the Parliament would have available to allocate to public expenditure, because there would clearly be a block grant adjustment. The decision that the Parliament took on either to raise the rate of taxation or to lower it would have an effect on the amount of money that we had available to spend. My other question is just about borrowing powers of the Scottish Government. I will try to keep it short. One of the biggest concerns in local government finance is the cost of continuing PPP and PFI repayments, which are extraordinarily harsh and continue, and are something about which they cannot do anything. If the Scottish Government is allowed to, with borrowing powers, would it be looking at that kind of investment that might save money in the long run if there was a possibility of paying off some of the 20 and 30-year arrangements to pay off school and other hospitals and other capital expenditure programmes? There would have to be an exploration undertaking of each of the particular projects that were involved, because in almost all of the PFI commitments that were entered into, they would be entered into on a specific contractual basis for the particular asset or group of assets that were involved. It is likely that there is probably a difference between almost every proposition, every project that is in place. I have looked previously at whether it was possible to renegotiate some of those terms of agreements. In almost all cases, the ability to renegotiate within term the contents of that agreement were so constrained that it was impossible to secure a better deal. In some circumstances, the contracts prevented any reopening of the contract during their 25-year life. In others, if that was to be the case, the public sector had no ability to insist on that happening. It had to be with the consent of the special purpose vehicle party. In many circumstances, if there was to be any gain, if there was to be a benefit that came out of renegotiation, a significant proportion of the proceeds had to go to the special purpose vehicle in the private sector as part of the contractual arrangements that had been entered into at the outset of the PFI contracts. The issue of reexamining PFI contracts has been very much a priority for me. I have reluctantly come to the conclusion that the room for being able to do that is limited, if nonexistent. It serves to illustrate the fact that we must take the greatest of care when we are entering through these negotiations at all times in the future. The wider question about the sustainability of borrowing is an important question, and the committee will be familiar with what I have put in place in relation to the wider fiscal framework within the devolved arrangements that we have that I have set a limit on the amount of borrowing or revenue-financed investment that we undertake of 5 per cent of our debt budget to provide a framework to discipline how many commitments we take on and what we envisage being utilised. Of course, the same principles apply to local authorities through the exercise of their conduct consistent with the prudential code. Thank you for that, convener. That has concluded questions from colleagues around the table. I will just get one further question from the cabinet secretary, which is in times of marching on in terms of the block grant adjustment. I wonder whether there is no agreement reached between the Scottish Government and the UK Government, where the UK Government just imposed its own view on this issue? I think that that would be utterly undesirable and a dreadful mistake by the UK Government if it decided to do so. Okay, colleagues. I am not going to call a break because we are only 48 minutes into today's deliberations and we have the same witnesses for agenda item 2 as for agenda item 1. Next item of business today is to take evidence on the Scottish Government's plans for a Scottish Fiscal Commission. The committee published its report on proposals for a Scottish Fiscal Commission in February and members have copies of the Scottish Government's response. Before moving to questions from members, I invite the cabinet secretary to make an opening statement. Thank you, convener. I am pleased to have this opportunity to provide the committee with further information on my proposals to establish a Scottish Fiscal Commission. Can I begin by thanking the committee for its report of 7 February, which was of substantial assistance to the Government in drawing together the views of a range of experts and the thoughtful contribution that was made to the issues by the Finance Committee. The Scottish Fiscal Commission will be established this summer to scrutinise Scottish Government forecasts of receipts from land and buildings transaction tax and Scottish landfill tax. The commission will also be asked to scrutinise the economic factors that underpin forecast receipts for non-domestic rates. The commission will provide reassurance over the reasonableness and integrity of our tax receipt forecasts ahead of the introduction of the 2015-16 draft Scottish budget in the autumn and will report its findings to Parliament and the public. This will enhance the strength and credibility of the Scottish Government's tax forecasts. The commission will initially be established on a non-statutory basis but with administrative safeguards in place to protect its independence. I fully recognise the need for the Scottish Fiscal Commission to be structurally and operationally independent of the Scottish Government and that, given the commission a basis and statute, it will be important in the future. If possible, I intend to bring forward legislation to underpin the Scottish Fiscal Commission within the current parliamentary term. The role and remit of the commission will continue to be reviewed and expanded as the fiscal powers of this Parliament are enhanced. I also intend to review the role of the commission in relation to the Scottish rate of income tax prior to its planned introduction in April 2016. The commission will have three part-time members, one of whom will act as chair. Commission members will bring independent minds and strong economic and analytical skills to bear on the Scottish Government's tax forecasts. In order to protect the independence of the commission, I will make appointments for a single term of office of between three and five years. That will allow for rotation of for the commission in line with good governance practice while managing their attention and transfer of skills and experience. Appointments to the commission will not be remunerated, but the Scottish Government will meet all reasonable expenses incurred in the course of the commission's business. In addition, we will make a modest budget available to the commission to cover analytical and other necessary work. I very much welcome the role that the Scottish Parliament will play in approving nominations for appointment to the Scottish Fiscal Commission. I will formally notify the committee of my nominations once candidates have agreed to be recommended to the Parliament for appointment. I believe that the scrutiny that this committee will bring to the appointment's process will further strengthen the credibility and the authority of the commission. The creation of a Scottish Fiscal Commission is another important milestone in the journey to enhance Scotland's fiscal powers. I believe that the Scottish Fiscal Commission will play a key role in supporting the exercise of the tax powers devolved to this Parliament under the Scotland Act 2012. The proposed commission is proportionate to those powers but creates a basis for the commission to expand its functions over time, alongside the expansion of the fiscal powers of the Scottish Parliament. I am pleased to announce the creation of the fiscal commission to Parliament this morning and have the opportunity to answer any further questions that the committee has on those plans. Thank you very much, cabinet secretary, for that fairly short but comprehensive and very helpful opening statement to have answered some of the questions that I was going to ask you, so I will move on to one or two others. In our recommendations, we suggested that, as the OBR produces Scottish tax forecasts twice a year, the SFC should also be made a commentary twice a year to include the views of the SFC and the economic determinants underpinning tax revenue forecasts. However, you have suggested in your response that scrutiny and commentary should be in a, I quote, frequency that best suits the Scottish budgeting cycle and supports a lot of the Parliament holding ministers to account on fiscal issues. Therefore, you are suggesting a commentary alongside the draft budget document each autumn. However, will the SFC also comment on UK budgets as they impact on Scotland? That will not be part of the remit, no. The fiscal commission has a particular role in its foundation to provide us with a critique and a validation of the estimates that we are making in relation to landfill tax and the land and buildings transaction tax. The Scottish rate of income tax develops so that it will have a role in relation to questions around the estimating of the Scottish rate of income tax. I want to ensure that the fiscal commission is performing a very focused piece of work to enable Parliament to be able to come to reason and consider judgments about all of the questions that are involved in the judgment that is required on particular tax powers. Clearly, a commentary on the UK Government budget is given by the Office for Budget Responsibility and can be given by Parliament on any occasion that it sees fit to do so. In terms of rates, the NDRI modelling such as assumptions about bad debts and appeals losses are commercial assumptions based on experience and assessments made within the Scottish Government and by local authorities. It is less clear that the SFC will have expertise in those areas, but you can go on further to say that the SFC should comment annually on NDRI forecasts at the time of the publication of the draft budget document. If they do not have much expertise in that, why would you be keen on them to comment on that? What I'm seeking to make a distinction about, convener, is the difference between the factors where I think the fiscal commission will be able to add input, which will be around questions, for example, on buoyancy and on performance within the economy as to what that will have as a likely effect on the non-domestic rates income take. As part of the calculation of the non-domestic rates estimates for each year, we make an assessment about appeal losses, we make an assessment about bad debt that is made by local authorities across the country. Those are essentially operational decisions that are arrived at to determine the effect of those factors on the overall NDRI totals. I do not think that they are affected by economic performance, and I do not think that the fiscal commission will have the necessary capability to consider those issues. Of course, some of those are commercially sensitive in terms of the negotiation around appeals that are undertaken by the assessors with individual interested parties. I will discuss those questions with the fiscal commission once it is appointed, but that would be my judgment about the relevant areas of involvement and expertise that they would have. I will ask one more question and then colleagues from the committee can come in. In the submission on the next item on our agenda, Professor John Kay, who is sitting right behind you, said in paragraph 4 of that submission that, in his view, the OBR has been established too much as a body to give validation to what was formally the forecasting operations of the UK treasury and too little as a body exercising the functions described in its title, the promotion of budget responsibility. How would the Scottish Fiscal Commission differ in that regard? The fiscal commission, as we envisage it so far, and as I think we established in the evidence that I gave to the committee and what struck me from the committee's report on that question, was that what was envisaged in the establishment of the Scottish Fiscal Commission was that focused body looking at the particular elements of tax collection that were emerging into our responsibilities in here in Scotland and to provide, as I described a moment ago, the necessary critique and then validation of the estimates that have been put forward. There is nothing wrong with validation of the estimates as long as the critique has been done in the first place. We have arrived at a position through the evidence that the finance committee has taken and the report that the finance committee has produced to a very focused proposition around the role of the fiscal commission. I am certainly very happy to implement it on that basis. As I have indicated here, there will be a dynamism to the whole issue driven by the constitutional debate. We, of course, may well need to revisit some of the details around the role and focus of the commission in the light of the constitutional debate. Thank you very much, cabinet secretary. For the first time in three years in my convenership at this committee, there are no questions about—oh, there are! My God! I did drop a hint that this would be my final question and not one of you had put your names down to ask questions, so I will be a bit smarter next time. The last time I said there is a tsunami of questions is a hint, and that got a few. It looks like there are some questions after all, cabinet secretary, so I am afraid that I am not getting off as lightly as you may have suspected a minute ago. It will be Gavin to be followed by Malcolm. The legislation that you intend to bring forward, what is the rough timescale for that? The earliest I could see this coming forward as things stand just now would be in the final year of this parliamentary term. That would be 15-16, as I reckon. Just to be absolutely clear about that, that would be parliamentary year starting the autumn of 2015? Autumn 15, yes, as opposed to financial year. In terms of the interim remit for the fiscal commission, that would be, presumably, what to have that in place by the summer. I think that that was what you— What I would plan to do, convener, and obviously I am in the hands of the committee in this respect, because the committee has a significant role to play in this, that reasonably shortly I would be expecting to share with the committee the nominees that I would intend to put forward. I would appreciate it if the committee, in a reasonably short timescale, could consider the nominees that I was suggesting and thereafter make the appropriate reports that the committee sees fit to Parliament to secure parliamentary agreement for the nominations that I will make. Obviously, with that, I will clarify the remit and other working arrangements of the commission. I encourage you to cut costs and think carefully about expenditure. I think that I heard you right where you said that there would be no remuneration for any of the commissioners and then there would be a budget of about £20,000 for administration and resourcing and so on. Taking those two together, do you think that that is going to be enough to make this body robust and to do the third job that we all need it to do? Yes. The issue about remunerating members is connected with whether we have a statutory basis or not. That is a short term issue for 14-15 financial and parliamentary year. If there is a statutory basis, then that position can change. I will be guided by the commission on the nature of the resources and expertise that they require to fulfil the functions that they put in front of them, but I will have a very open discussion with the commission about that question. I am very clear that the commission has to be able to fulfil the role that the Parliament envisages for it and I will make sure that it is properly equipped with the necessary resources to enable that to be the case. In your response to the committee, one of our recommendations was that the Government should consider the option of inviting the SFC to produce official macroeconomic and fiscal forecasts. That was one that was not accepted by the Government. The Scottish Government said that the Scottish Government believes that responsibility for carrying out economic and fiscal forecasts, including tax receipt forecasts, should lie with the Scottish Government and that primary accountability should be of ministers to the Parliament. Just in that statement, can I take from that that the Scottish Government is planning to carry out economic forecasts and to publish them? We undertake that type of activity on an ongoing basis. As I understand it, you do not publish official Scottish Government economic forecasts. By that, I would describe the state of the economy report that the chief economist published just last week, if my mum said it, or maybe the week before. That has a forecast about the pattern and development of the Scottish economy within it, so that is what I would call a forecast. I suppose that my question is just that the way I read that, it sounded to me as if I know that you look at various forecasts, I know that you take views and I read the economic report, but I did not, as I understand it, believe that there were official Scottish Government economic forecasts. The way that I read that, I was wondering, is that what you are now going to be doing? The point that I am making in that response is to say that it is really in the context of the debate that the committee had, which was about what should be the role of the commission. Should the commission essentially tell me that we think that you are going to raise this amount of money from these taxes, and I should say that that is their view, so we will just put that into the budget, or should I, my officials, produce an estimate and test it for validation with the Fiscal Commission? That is where that point is trying to clarify that we see it as our responsibilities, Ministers, to be accountable for assessing the pattern and the development of the Scottish economy, and we are necessary to seek the critique and the validation of the Fiscal Commission about the contents of those estimates that we are making. Okay, thank you very much, and we will be taking evidence on the 28th of May or rather discussing with your appointees the role on that date. I have just got one question of a general nature, which follows on quite well from what Gavin Brown ended with there, because I think that it would be true to say that there is a little bit of disappointment in the committee that you have not gone quite as far as we were suggesting, but I suspect that there is even more disappointment among the economists because, while Professor Kay has already been quoted and another quote from his paper talks about the critical question, is the current level of public sector service provision sustainable at current levels of taxation, which I think also connects with the point that Professor David Bell made in evidence to us, but you will also have seen the very passionate article by Jeremy Pete and the Herald two days ago who must be very disappointed, because of course at the end he said that the body in Scotland should be not just an informed commentator on Government figures, but the actual provider of key forecasts, and earlier on he talked about importance of having a body considering the long-term health of the economy and so on. My question is of a general nature, but I am curious to know whether, in fact, your limited remit for this body is driven fundamentally by the fact that initially it will have a very small amount of taxation to deal with, or whether, in fact, which perhaps was suggested by your previous answer, that you actually have a fundamental objection in principle to such a body having a wider role. Clearly, the future is unknown, but if it is driven by the former, then I imagine that you would be open to a wider role in the future. However, again, I think that in a remark a few minutes ago you just talked about looking at the detail of this, so my sense is that perhaps you are actually quite, I was going to say hostile, but certainly not sympathetic to the idea of a body with wider powers, as has been proposed by so many distinguished economists and, in fact, has been supported at least to a certain extent by this committee. I think that the struggle with the explanation that Mr Chisholm provides there with the views of the committee in its report, because my reading of the committee's report—again, it is my reading of the committee's report—was that the committee was encouraging me to establish a body, and I got this very clear sense from the evidence that the committee led from me when I appeared before the committee, which was to undertake a proportionate task in relation to the taxes that we have to deal with now in relation to land and buildings, transaction tax and landfill tax. I remember clearly setting out to the committee my view, which I thought was a view that was broadly agreed within the committee, that we had a fairly extensive commentary network about the economic performance and economic futures of Scotland, and that there was no need to add to that an additional fiscal commission in exploring that territory. The proposals that I am bringing forward relate directly to the particular tax powers that we have indicated to the committee that will be enhanced when the Scottish rate of income tax emerges. It will also be the subject of review when we are clearer about what constitutional direction the country is going to take. I think that all those comments are designed by me to say that I see a dynamic about this whole process. We start off with a body focusing on what we have the statutory function to do and to consider at this particular time, but I remain open to considering how that can be expanded once a broader range of responsibilities come to the Scottish Parliament. Cabinet Secretary, do you expect to use the experiences of the interim Scottish Fiscal Commission to inform proposals to establish it on a statutory basis? Yes. I would also be looking to dwell very heavily on the material that we have discussed as part of the committee's inquiry and the Government's response to the committee's report in that respect to ensure that we establish the commission on the most appropriate footing to begin with. Okay, thank you very much. Cabinet Secretary, that ends our deliberations in terms of your own evidence for today. I would like to thank colleagues for their questions and, of course, yourself for the evidence that you have given today. I am now going to call a recess until 10.50 to enable members to get an actual break and to have a change of witnesses. Our final business today is to take evidence on Scotland's public finances post 2014 by Professor John Kay, Professor Gavin McCrone and Professor Peter McGregor. Members have copies of their written submissions provided by our witnesses, so we will go straight to questions from myself to be followed by the committee. Last week, I have to say that the equivalent session took some three and a quarter hours. I have to say that in our discussions afterwards, I was justised, should we say, by one or two members of the committee, for being a bit too liberal in allowing them to spend so much time on questions. I am not very keen on holding committee members back, but I would ask everyone to have a self-denying ordinance and myself will try and have that too, so I do not intend to hog the limelight, so to speak, for too long. When I ask questions, I might ask them initially to one individual. The first question, for example, would be to Professor McCrone, but I would be quite happy for colleagues on the panel to also give their comments if they so wish. It makes for a much more interesting discussion. So, without further ado, we shall kick off. In the first paragraph, Professor McCrone, you say in my quote, the position that I take is that Scotland could perfectly well manage as an independent country is even possible that it might eventually do better economically than the many as part of the UK, but this would depend on the wisdom or otherwise of the policies adopted by government. You then go on to name a number of caveats with regard to that. You talk about, in that paragraph, the last sentence as there could be a loss of some key industries falling independent. I take your point on board that it would depend on the wisdom or otherwise of the policies adopted by government, because all sorts of different countries through sound economic policy have been able to have very strong economies. Switzerland's economy is bigger than the Ukraine's, which is seven times the population. Singapore's has got per capita 15 times the GDP of neighbouring Indonesia. Obviously, the policies that are adopted by governments are key, but in terms of the Scottish context, I wonder if you can elaborate on what you have said there and also touch on the issue of the loss of some key industries such as? I take the view that Scotland could perfectly well function as an independent country. There is no reason why it should not do at least as well as Ireland, which is much, much poorer when it became independent. However, you cannot, in my opinion, come out of a union that has lasted for 300 years without all sorts of implications from that and some potential damage. I think that the two industries that I would be most worried about are finance, where a number of the institutions are wondering whether they should stay in Scotland or go south, and the defence industries. I haven't dealt with defence either in my book or in the paper. It's a difficult subject, but plainly some of the major defence orders might be at risk because governments on the whole tend to place their defence orders within their own countries. So those are the two areas that I'd be most worried about, I think. An awful lot depends on how it happens. If there's sweetness and light all round, and the damage can be minimised, if, on the other hand, the break-up was acrimonious, then things like the tourist industry could also be affected. Okay. Professor Kay, Professor McGregor, do you have anything that you wish to add to that? I don't have anything to add to the defence issues. On financial services, my experience is that you talk to people in the industry and they express unease. It's very hard to work out what the unease is actually about when you press them. That may mean that it doesn't matter. The way in which it does matter a bit is in relation to the customers of these businesses. Having said what I've just said and printed a couple of weeks ago, I now have an email box full of people saying, I have a policy from England with standard life and I would be very worried if Scotland became independent. What they would be worried about, I have no idea and nor do they really, but the fact that they would be worried is genuinely a problem for standard life, whether or not either standard life or they themselves have any basis for the worries. Professor McGregor, for your comment. Well, I don't think I would add anything to that. I had clearly the point about the importance of the policies pursued by the Scottish Government post-independence is crucial and that will determine the success or otherwise of independence in the longer term. I agree that in the short term there are likely to be costs associated with independence. Just to follow on, Professor McCrorn from your comments there. One of the points that the Scottish Government pointed out is that Scotland alone contributes 9.9 per cent of taxes to UK only about 5.6 per cent of defence expenditure is actually in Scotland and they would be looking for a policy of joint procurement whereby Scotland would buy equipment from south of the border and they would buy equipment from here and that would be in balance, but because of a reduced budget on defence, £2.5 billion is being suggested then that would free up resources to spend on other areas of Scottish life such as for example schools, roads, hospitals, whatever it happens to be. What would be your comment on that? Well, that's fine, but joint procurement is something, of course, that would have to be negotiated and I'm just not sure how those negotiations would go. There isn't much history of countries engaging in joint procurement with other countries and when we bought quite a lot of Britain, there's bought quite a lot of stuff from the Americans, I suppose, but it's just a potential risk, that's all. As for the other things, I mean the only point I would add is that a fair bit in the financial sector may depend on whether Scotland succeeds in maintaining a currency union with the rest of the UK or whether it has to adopt its own currency and you would see from my paper that I think the latter is more likely in the end even though it may start with an attempt to keep the same currency and this is not something that actually governments can entirely decide for themselves. The break-up of the Czech and Slovak monetary union ensure that the markets can enforce that quite easily. Okay, I mean what the fiscal commission said on the issue of currency was that it would provide clear governance arrangements, assured currency, a framework for financial stability and a consistent regulatory strategy. It would ensure no transaction costs, enhanced trade, competition, efficiency and flexibility in the interests of both Scotland and the UK and that the risk of an asymmetric shock would be remote and therefore shouldn't inhibit a currency union. Professor Cable, what do you think of that statement? I think from the point of view of Scotland, a currency union with England would be the best outcome if it could be negotiated. I was sceptical about whether it could be negotiated even before the various announcements that have been made from Westminster this year. I don't think that the announcements that have been made from Westminster this year rule out the possibility of having a currency union if Scotland did indeed vote for independence, but they clearly make it more difficult. The other options are, as Professor McCrone has said, the independent currency or, as I thought about it more, the unilateral option may have more to commend it than it seems at first sight that Scotland would simply go on using the pound anyway in those circumstances. What would you consider the advantages of that scenario? The advantages really would be the kind of stability and low transactions costs that were described in the Fiscal Commission report that you described. The disadvantage would be, I think, who you'd lose some policy flexibility as a result of not being able to change your exchange rate vis-à-vis sterling or vis-à-vis the English pound, and you would effectively not have any freedom in monetary policy, but I think the practical reality is that independent Scotland would not really have any freedom in monetary policy anyway. I basically agree with what's just been said and find about monetary union. I think probably the best outcome for Scotland would be maintenance of a monetary union with the rest of the UK. Just to re-emphasise the points, this is not a costless option, however, it is probably the best option, but it's not costless because within a monetary union you, of course, give up all right to an independent monetary policy, and that's significant. You also, almost certainly, will have a severe constraints on the overall fiscal stance that you can adopt. Experience of the Eurozone suggests that this is even more of an issue now than previously, and so it seems likely that, in these circumstances, you would be giving up those two significant personal, not going to be that Scotland hasn't had them for many years. There are costs associated with monetary union. There's no question about this. In terms of the limitations on the macroeconomic policy stance, however, as has been emphasised, there are major benefits as well. These are particularly in terms of transactions costs, and this is really important. Why I think this dominates the arguments is because of the extent of interdependence between Scotland and the rest of the UK, particularly in terms of trade flows. This is asymmetric, and Scotland has a much higher dependence in that sense on the rest of the UK's and export market, and so in my judgment as well I would think that monetary union net would be probably the best outcome for Scotland, but it's not costless. You've talked about the Eurozone, but that comprises 17 countries where productivity ranges in Greece from 40 per cent of Germany's. Given the fact that the countries from Netherlands, Finland and so on still seem to be able to exert their own fiscal policies, why would it be difficult for Scotland, as part of our country, with only two countries where productivity is not too different to be able to exert their own policies just the way that, you know, certainly the most successful countries in the European, the Eurozone can? I think that one of the problems is that the degree of integration of the rest of the UK and Scotland makes that more challenging. I think that that means that the constraints are probably more severe, if anything, and there is a question mark in these circumstances about what you have to ensure is that the fiscal policy stance that, say, an independence column in this case pursues does not threaten the choice of the permanently fixed exchange rate, and its markets and market forces will have a major influence on that, so I'm not saying that it's not possible to have a degree of independence in the fiscal policy stance, but what I'm saying is that it's going to be much more constrained under a permanently fixed exchange rate, given that you're committed to maintaining the value of the exchange rate and maintaining the monetary union than it would be in the absence of a monetary union. Of course, I think that the problem that I see is that I can't imagine a chance of this check-up for the remainder of the United Kingdom with no responsibility electorally for Scotland being prepared to put taxpayers at risk in the rest of the country for the sake of Scottish debt or bank debt in Scotland. I just don't think that they would do that, and I think that that's probably the main reason why we've been hearing that from George Osborne and the others that they weren't contemplated currency union. But of course, negotiations will take place and we'll see what happens if in the event of independence. Would I give my first answer about standard life, or one of the points behind that, is that people believe something is true. That matters, even if it's not true. And we have a similar problem here in that it is now conventional wisdom within the eurozone that you can only have currency union unless you're on a path towards fiscal union and banking union. Personally, I don't think that's true, but there's almost not much point in our debating whether it's true or not, because people in markets and in political circles today believe it's true. The result of that, I think, is that if Scotland voted for independence and we were to negotiations of a monetary union, you would be getting conditions laid down by the rest of the UK treasury in these negotiations, which I think would be very difficult for a Scottish Government to accept, because the rest of the UK would be demanding controls over the banking system in Scotland and over the fiscal policy in Scotland, which would not be willing to concede to a Scottish Government vis-à-vis the rest of the UK. And I think that's the almost intractable problem on which these negotiations would fail. That is, there would be a demand for supervision of Scotland's fiscal policy, which either Scotland would concede, in which case you would be conceding most of the economic policy levers that you'd hoped to gain by independence, or else Scotland would refuse, in which case the monetary union couldn't go ahead in this form. Professor Macaroni also said that banking might leave Scotland. I had a private meeting with some senior bankers who said that the likelihood of, for example, the Royal Bank moving its 3,000 staff to London, whether it will have to find new houses—probably not—of the same qualities that it has in Edinburgh, or that it surrounds schools for its children and has to commute further. The cost of living is actually higher, and the cost of the bank having to find premises for all those people to work in is, frankly, probably zero. In actual fact, if it did move, it would be more about the registration rather than the actual physical presence of the banks and of staff. What's your view on that? Well, if that's so, that's good news. Of course, living in London is much less agreeable than living in Edinburgh. I mean, I've been aware of that for a long time. I'm aware of it too. There are a number of points here, which perhaps need to be disentangled. If you look at what happened in Iceland, Iceland had banks, one of which had a branch in the UK and the other of which had a subsidiary company in the UK. When Iceland got into real trouble, the British Government were looking to the Icelandic Government to protect the depositors in the branch, but not in the subsidiary because that was, if the other bank, because that was separately regulated and therefore guaranteed by the UK deposit insurance scheme. Now, I think that it would be terribly important for the banks in Scotland to ensure that whatever they were doing in England was separately regulated by the Government down there and protected by the bank insurance scheme deposit insurance scheme down there. Otherwise, if something goes wrong, they could find themselves with having to bail out depositors down south who could effectively bankrupt Scotland really. So, I think that that's important and it's not just a question of the depositors, it's also a question of the debt. I mean, what happened in Ireland was that the Government there decided to honour the debt of the banks, the bonds and all the rest of it, and that itself nearly bankrupted the Irish economy. So, there are a lot of difficulties here. If the banks moved south, they would presumably trade in Scotland through subsidiaries, which would be the Bank of Scotland in the case of Lloyds and the Royal Bank in the case of the Royal Bank, and they would be said that a subsidiary company is regulated in Scotland. Now, they might do a great deal of the work for the whole group, but that would be a safer situation than having Scotland with major banks located here at risk if something goes wrong with them. Coming up against this issue of people believing things are true, even if they're not or shouldn't be true. I think that in this discussion we've yet another one, which is that we've created the idea that if a bank erects a brass plate in some location saying this is our headquarters, then the taxpayers of the country where that brass plate is located become liable for all the debts of that bank. That seems to me a very strange idea, and the Scottish Government should be at great haste to say that, as far as Scotland is concerned, it's not true. As far as Ireland was concerned, it was true as a result of a rather foolish commitment given overnight by the Irish finance ministers. It does seem that currently the UK Government and American Government believe that it is true, and the German Government certainly acts as if it's true. I think that they'll discover that it's going to cost them a lot of money one day. Dr McCrone is right that RBS would move its brass plate from Scotland to London. I don't think that matters at all. For the reasons that you've described, I don't think that RBS is going to move 3,000 or other numbers of gogaburn staff from Scotland to London. I can't see why it should. However, I think that the subsidisation point is extremely important, so long as the EU rules remain as they are, this is true in both banking and insurance. A Scottish Government should make sure that, to the extent that when Scottish insurance companies or banks operate outside Scotland, they operate outside Scotland through subsidiaries in the country's concern, rather than as branches, so that Scottish depositors, policy holders and taxpayers are not on the hook for those activities that take place outside Scotland. I'm keen to move on and ensure that I have my own self-denying ordinance, as I mentioned earlier. I can't cover every topic, but I'm going to move on to another one, which is in your own paper by Professor McCrone, before we move on to an issue by Professor McGregor. That's the issue of quantitative easing. We had quite an interesting debate last week, I don't know if you saw any of it. However, on the issue of quantitative easing and the issue of whether that matters in terms of overall debt because of the Treasury not charging its self-interest, Dr Jim Cuthbert was trying to make the point and very persuasively, for some of us at least, that this shouldn't be included in Scotland's debt figures. Indeed, it's currently impacting on GERS figures, and it shouldn't. What's your own view of the quantitative easing issue? You've talked about it in some detail in your report. Sorry, you said that, and I quote, How does Smith affect Scotland's inherited share of the debt is far from clear, but needs to be taken into account in any negotiations? Well, it was Jim Cuthbert's original paper that drew my attention to this, and I think it's a very important issue. It's not one that many people understand, and certainly few people have ever talked about it. But 30 per cent of the UK's debt is now held by the Bank of England, roughly. The interest that's paid on that is simply returned to the Treasury. So, in effect, George Osborne is borrowing all that money for nothing at all in the way of cost. So, actually, the burden of UK debt is nothing like as bad as is often made out. If Scotland was going to take a share of UK debt, then the negotiators need to be aware of this because it's an issue for the negotiation. It would be wrong, it seems to me, if Scotland took a GDP share or a population share of UK debt and left the remainder of the UK with all the stuff that the Bank of England has on which they're paying nothing. So, you know, that's an important issue, it seems to me. Now, what will happen to this in the end? I don't know. Nobody knows. I mean, the notion was that originally the Bank of England would simply sell that debt on the market. If they do that, then, of course, the Government has to start paying the interest on it, so it won't be very enthusiastic about that. If, on the other hand, it just sits there for a long time, you could imagine a situation in which an incoming Government some years hence might say, well, what the hell is all this debt doing sitting at the Bank of England? We're not paying any interest on it. Why don't we just cancel it? And that would reduce the UK debt overnight by 30%. So, it's an important issue, but I don't know how it would be resolved. Professor Kay? I mean, this goes back to the monetary union. If there were a monetary union, then I would think that the Bank of England would continue exactly as it is, and there wouldn't be the issue of dividing up the assets and liabilities of the Bank of England between the two independent countries. If, on the other hand, the Bank of England were not to continue as the monetary authority for the entire British Isles, then the Bank of England would have to be divided up in some sense, and that raises the question of what happens to the various assets and liabilities of the Bank of England, including these. This is a real wet-tile issue. I can imagine, you know, months of discussion and negotiation as to how you actually resolve this particular question, because to determine what the assets and liabilities of a central bank, which has this capacity to print money and can only have the kind of balance sheets it does because it has that power, is very complicated. I think that the key point is right that the national debt is not quite what it seems, because the Bank of England owns almost 40 per cent of it, and that this is part of any negotiation has to be taken into account, and it's part of the total negotiations over the monetary arrangements for independent Scotland. Professor MacGregor, you were nodding vigorously there at the time. Yes, I basically have nothing to add. I agree with that position. It needs to be taken into account in negotiations. Does that mean that Scotland's actual share of the debt should be less as on money? Monastery at some, if that's quantitative easing? Yes, I think that that probably is the implication. Okay, thank you for that. I think that I'm right in saying, and others will correct me if I'm wrong, that under the European Union rules, if Scotland is in the European Union, it would have to have its own central bank in the same way as all the other countries in the European Union have central banks, although the European central bank is the one with the money creation powers. That's right, but the Scottish central bank could just be a man in an office in George Street with it. I hope that he's remunerated better than members of the Scottish Fiscal Commission. Professor MacGregor, I'm moving on to your own paper. You looked at it, because of course this committee isn't just talking about the post-independence scenario. We've got to look at the other side of the coin, if Scotland votes no. On the second page of your submission, of all the independence and pro-union proposals for further fiscal powers that are in the public domain, the common core is in fact the Labour Party's plans, since these are the most modest to date. All other party's proposed plans are more radical in terms of controlling the income tax system as a whole and the set of taxes that is under Scottish control. You go on to discuss what would happen if that was implemented. For example, you say that the preliminary analysis of the long-run output and employment effects of setting SRIT at 15 per cent under conventional bargaining, if that happens—which, of course, it might not—would result in a 3 per cent fall in GDP, with a slightly smaller fallen employment. You give a graph indicating that now, given that Scotland's employment is about 2.575 million, GDP is about £140 billion. You're talking about, potentially, 75,000 job losses and a loss of £4.5 billion in GDP. However, you've went on to say that, if there was a willingness of workers to accept a lower take-home wage, the opposite might be true in that GDP could increase by 1.5 per cent, an employment by about 2 per cent of 50,000. I'm just wondering if you can talk to us a wee bit through your thinking on this particular issue, which I found quite fascinating. If there is to be a level of wage decline as a result of this policy, what would be the kind of equilibrium decline that would provide the additional employment in GDP that you suggested in your figures? Thanks, convener. Firstly, just to mention that when I said that the Labour Party plans were the most modest in Aberdecoma, it was of those in the public domain, so we don't know what they've been into right now. What I try to do here is look at a common core of proposals that would be shared, tax powers that are common across a number of different parties, pro-union parties and, of course, independence, and look at what the impact of actually using those powers might be. Now, it has to be said that, as far as I'm aware, no party in Scotland has yet committed itself to any radical change in tax. I'm not aware of any commitment to do anything other than maintain parity in tax rates with the rest of the UK, but nonetheless, given that all of the powers being proposed are really quite significant, one may be modest relative to the others, but they're all quite significant, it seems worth exploring what the exercise of those powers would be. I emphasise in the paper that clearly having the power and then using the power are two quite different things, and when using the power, presumably, the Scottish Government wishes to anticipate what the likely impact of those changes might be. What we've done here is explore a simple illustrative case to make a couple of points. When we have a tax rise and an equal increase in Government expenditure, there are two main, countervailing effects that are set in motion on the one hand that tends to be a stimulus to demand because Government expenditure increases private consumption declines, but net that stimulus demand. On the other hand, you tend to have an adverse competitiveness effect because the normal view is that workers bargain for a net of tax real wage. If that's the case, as taxes rise, they push for an increase in nominal wages to compensate them and move them back to a position in which the real wage is constant. You cannot in general predict which of those forces will predominate, but the more open the economy, the more important the adverse competitiveness effects. Scotland is highly open. In our default model, we find that net, there is a negative impact that the adverse competitiveness effects outweigh the other effects. When bargaining takes place over a net of tax real wage, but if workers are persuaded that what they ought to be considering is the notion of a social wage, that is to say, if unions, for example, were to value the services provided by the enhanced Government expenditure, you have a countervailing effect that can moderate the extent of the competitiveness effect. The case that we've chosen to illustrate here, just to make the point very empathically, is to say, well, suppose it were the case that workers felt as well off after the change, that is to say they valued the Government services as much as they valued the loss of disposable income, and they reflected that in their wage bargains. That would mean that the adverse competitiveness impact would be negated, and in fact there would be no adverse competitiveness effect in that particular case. In that case, what you get is a conventional kind of Keynesian response to a net stimulus to demand and the economy expands. In that case, how you are right, in that case, however, and it happens because, and there's a greatest proportion of stimulus to employment in that case, because the real wage declines in this case. People are accepting a reduction in the real take-home pay because they value the quality of the public services that have been provided in exchange for that, and that's the mechanism. Now, the strength of these forces are very difficult to tie down. We have some evidence on attitudes that might suggest that people are a little skeptical about the traditional view that Scots prefer the high-tax, high-expenditure, Scandinavian end of the spectrum to the low-tax, low-expending Baltic states end of the spectrum, but it matters. It seems to matter a great deal in determining the net impact of the fiscal change. What would be the impact of people's wages in terms of percentages? A very good point. I can't remember the precise number. I think it's of the order of 2%, but I check that and get back to you. I'm sorry I didn't bring the full results with the simulations with me, but I cut in the real wage, the real take-home pay. The point being, though, under the hypothesis, workers feel compensated for this in terms of the quality of the public services that have been provided as a consequence, and that's why they're not pushing for a higher wage. Professor Macroon or Chris Gage, do you want to comment on that? The only point that I would make, because I haven't done the kind of study that Peter McGregor has done, because Scotland has been so integrated with the rest of the United Kingdom, that reduces the scope, it seems to me, for differences in tax without some sort of adverse effects. They will constantly be compared across the border in a way in which between Scandinavia and Greece, they probably are not, at least not to the same extent. That would mean big differences in tax might result in some people shifting, for example, and people you didn't want to lose, entrepreneurs, people like that. But small differences, I don't think, would be any more significant in that respect than differences in council tax or non-domestic rates. I really agree with the thrust of both of these observations. Firstly, because the UK is integrated whatever the constitutional arrangements, Scotland couldn't have tax rates that were 15% different. It could maybe have tax rates that were 3% or 5% different, but there are clearly limits to that. If it did, and we imagine, as I suspect we mostly do, that an independent Scotland would have a somewhat higher tax, higher expenditure base than it does at the moment, then a corollary of that, assuming that money doesn't grow on trees from somewhere, and I don't think it does, is that Scots would have rather lower real-take-home wages than they do now, whether they bargain for it or not, in fact, that that's just an inescapable arithmetic outcome, and that's the reality of the kind of world we're describing. I think it's worth saying that a lot of the people who comment on all this in the newspapers argue for a more, a less unequal society, a better provision of social services and all the rest of it, and I favour that too. The only thing is that these people never actually say much about the tax implications of that, and you can't have more generous benefits and better social security and a better health service and all the other things unless you have more tax. So, you know, Scandinavian taxis are actually a lot higher than ours at the moment, and the question is whether people will accept that or not, and we don't know the answer to that. Surely that issue, if you look at purchasing power parity in Scandinavia, is that even though they've got greater taxes, they also have significantly higher wages, so therefore their purchasing power is at least as high as the UK, if not higher, with additional services? Well, that's true, of course, and the Norwegians will tell you that they don't mind paying higher taxes because they have very good public services, but because they've said that to me, we don't know what the Scottish Electric would actually think about this, and that's the crucial issue, I think. Surely because of the higher disposal income, as I've just said, as well as better services, it's about the size of the economy and economic growth as well, it has to come into play. Economic growth is key to all of this, actually. If you can make the Scottish economy grow faster, you can solve all sorts of problems, but we don't actually quite know how we can do that at the moment, at least I don't. Right, I'm going to let the members of the committee in who are all champion at the bit. The first person to ask questions will be Jamie to be followed by Malcolm. Thank you very much, convener, on the focusing on your paper, Professor Macron. I thought it was interesting that you referred to the work by the Institute of Fiscal Studies suggesting that there could be challenges ahead for Scotland, but I thought it was an interesting point to make because previously, at this committee, we have had an array of witnesses suggest that the paper that you referred to in the Institute of Fiscal Studies was misunderstood. Professor David Bell told us that he thought the IFS was well misunderstood and that it was a projection. In other words, it was based on things not changing in policy terms. Angus Armstrong is almost inevitable at projection on what would be correct as they predict the outcome on the basis of current policies. Indeed, Professor McGregor was at that session and suggested something similar in relation to the IFS's population projection. Do you accept that the IFS is essentially their work of predicating nothing changing? The IFS said that their paper was just arithmetic. It was working out what would happen. The two points that are important in this are that North Sea oil appears to be declining in terms of revenues. We are certainly well past the peak of production. We do not really know what future revenues will be because it all depends on a whole lot of things such as the price of oil and the cost of getting the oil out of the ground and one thing and another. However, the general expectation is that North Sea oil revenues will decline. They have already declined quite a bit, which is why the Scottish GER thing shows that Scotland will be in bigger deficit this year than the rest of the UK as a whole, which is the first time that has appeared for several years. That is one thing, North Sea oil. The other one is the aging of the Scottish population, which is at a faster rate than for the UK as a whole, mainly because we have not had so much immigration as the rest of the UK has had or other parts of the UK have had. You have to take account of these two things and that is why I think there would be a challenging situation for an independent Scotland after independence. The question is more, do you accept, though, that the IFS work goes based on nothing particularly changing? They weren't making forecasts. They were just doing arithmetic, as they said, so you cannot treat it really as a forecast, but it does illustrate that there are these two key issues. If you can somehow greatly improve Scotland's economic growth, then that could resolve those questions, but we don't quite know how that's going to be done. As for the North Sea oil, there is a good deal of difference between the OBR estimates for North Sea oil in the next few years, compared with the Scottish Government's own estimates. The Scottish Government's own estimates are now fairly old, so we need new ones. I don't know if the other witnesses want to comment in relation to Professor McGregor said something about the past of the IFS. Firstly, I think the IFS deserve their excellent reputation, but I think it is the case that these are projections and they are mechanistic comparatively mechanically. They make quite a number of assumptions, and if you change those assumptions you get different results. One of those assumptions is an unchanged policy stance in some sense. I think that's potentially significant. The ageing one is particularly difficult because migration is dependent on migration. I mean, these population projections typically are based on very mechanical projections forward of the current population. These are very sensitive, particularly people of working age. They are very sensitive to what happens to migration. Now, of course, IFS are aware of that, but the assumptions that you make about these issues are important and they can alter the conclusions of the analysis. None of this is to deny that the North Sea oil revenue issue is a real issue and that ageing is a real issue. It's just that the precise combination of these and other things that might be done is difficult to predict. Professor McClellan, you've provided a very useful submission for today, but you're also the author of a fairly well-known report now, back in the 1970s, for the UK Government. In that report, you said that Scotland would tend to be in chronic surplus to quite a quite embarrassing degree. Dennis Healy, who was the chancellor at the time of that report, was circulating Whitehall, told Hollywood magazine recently that the UK Government did underplay the value of the oil to the country. Jim Cuthbert just last week highlighted Cabinet Minutes from 15 December 1977, where an oil fund was discounted for somebody's very reasons. Given that the value was underplayed in the past, and given that people weren't told that an independent Scotland would tend to be in chronic surplus to an embarrassing degree by the UK Government, what might the people of Scotland not be getting to now? I was being, when I thought I was honest in 1974, various people have said that the paper was hushed up and should have been published. It's quite interesting in that connection that Nicholas McPherson has recently been getting into trouble for publishing his paper. The fact is that you don't normally publish briefing for ministers. If I'd published it, I'd have been kicked out of the civil service, I suspect, pretty sharply, because civil servants don't publish their submissions to ministers. Ministers in the Scottish Government will find exactly the same thing. So that's the first point. The second one is, of course, there was an enormous expectation of huge oil revenues in the early 1980s. I wrote that in 1974. I'd forgotten I'd written it at all until somebody unearthed it through the usual method of getting stuff out of secret information. But when I read it again, I didn't think there was anything wrong with it. In fact, the oil revenues that I predicted were slightly lower than the ones that actually took place. I said about £3 billion, I thought, in 1980, and it was £3.7 billion in 1981. The figures for output were the ones that everybody knew at the time. They were actually already published by the Department of Trade and Industry. It was simply a matter of trying to make a calculation of what the revenues ought to be based on that output. That was actually quite difficult because the Conservative Government had not put appropriate tax measures in place by that time, by the time they left office. It remained for the Labour Government to introduce petroleum revenue tax to set up the British National Oil Corporation to do all the other things that they did in order to ensure that the country got a decent share of the revenue. It didn't all just go to private shareholders sitting in America or wherever they were. It was a fairly uncertain thing. I'm rather pleased that I managed to calculate the revenue as accurately as I did for 1980. However, the situation now is completely different. At that time, the equivalent, if you go back in present-day sort of prices, you get up to about £30 billion of oil revenues at that time. In fact, it was £12 billion in the prices of the day, but if you put it into real terms, it's about £30 billion. They were huge. Of course, if Scotland had been independent, it would have had a profound effect on the whole situation here. In fact, one of the problems would have been what the hell to do with them, because they would have pushed up the exchange rate and put the rest of industry out of business if you weren't careful. That's why the Norwegians set up their oil fund and why their oil fund invests abroad, so as to try and help to control the pressure on the exchange rate. There are a lot of issues here, but this paper has become rather notorious because it was got under freedom of information. However, it was the situation then. It's not the situation now. I'm not saying that there was anything wrong with your report, but I'm not suggesting that it was your responsibility as a civil servant at the time to release that information. I suppose the point I'm making is that it informed the UK Government of the actual position, and the UK Government did not impart that information. They took the decision not to impart that information, and it begets the question—I suppose, to be fair, it might not be a question that you can answer with any certainty, but it almost certainly isn't one. Is that happening now? The only way we'll find out is if that information is released 30 years hence, and you just referred to an opportunity missed back then. That could be an opportunity missed. I mean, I obviously don't know, but I don't believe anything is being hushed up now. I don't think that things were actually hushed up then. It just wasn't that paper wasn't published. I'm not sure I'll agree with that in terms of it. Okay. Turning to Professor—I might say if I just add, actually, that I wrote a second paper, which has not been on earth so far, in which I recommended another fund, amongst other things. Well, we'll get looking for that one then. Thanks for the heads up, Professor McGregor. You're submission. I thought it was interesting. Of course, the first part of your statement is a matter of fact. The outcome of the referendum was, of course, uncertain. You're then going to say that it seems clear that future Scottish Governments will possess substantial enhanced tax powers relative to the current position, and then you referred to Scotland. You're also then going to say that all of the pro-union bodies' proposals for further devolution of the event of a no vote and the public domain imply significant additional powers, but you would accept, would you not? There is no guarantee that those will actually be delivered. We know if we get a yes vote in the 18th of September 2014, Scotland will go on to become an independent sovereign state. If we vote no, there's no guarantee that these powers will actually come to us here in Scotland. Indeed, there's precedent here, isn't there? I can think of Alec Dill's shumeternas to vote no in 1979 for enhanced evolution, which didn't happen, or more recently, the Kalman commission, proposing the most significant powers that were actually delivered by the Scotland Act 2012. Would you accept that? There's no guarantee if we vote no? What I'd say is that the only absolute guarantee is that there will be additional fiscal powers because of the Scotland Act 2012. That's the only decision that seems to me to be absolutely certain and going to be implemented, and that's why I've considered that as illustrative of the Common Core. The Labour Party's proposals go rather further than that, but that's, if you like, the irreducible Common Core because it's already been decided. Everything else is uncertain, I would say, but what this analysis does is give a flavour of the types of impacts that could arise if the powers are actually used. As far as I'm aware, nobody's committed yet to varying the Scottish rate of income tax from the rest of the UK income tax. In which case... I understand that point, obviously, that's manifestly correct. The only thing we know is, as far as the Scotland Act 2012 has been passed and the powers set out there in, but looking at the referendum itself, we know that if we vote yes, we move on to become an independent state if we do not know that these powers will actually come to Scotland. There's no guarantee. I think there's no guarantee, no, that's correct. Okay, and also you're fair to the situation I did all of these pro-Unia plans at the point that they mean. The Scottish Parliament would have comparatively limited influence on the overall fiscal policy stance. I'm just wondering what the consequences of this limited influence might be from your perspective. Well, it's simply... I believe that that's actually true now, okay, to different degrees, let me emphasise, but this has came up earlier. I believe that that's true actually of any of the proposals for constitutional change, including independence. Of course, it's less true of independence than it is of the other, but if we're talking about independence under a monetary union with the rest of the UK, and we've been through these arguments earlier on, and Professor Kaye reminded us of the importance of the Bank of England, and it's a doubted attempt to influence the fiscal policy stance in Scotland. I would say that all of the current proposals for constitutional change, including independence, imply a degree of restriction on the overall fiscal policy stance, but, of course, I would accept that the extent of restriction will vary among the different proposals and would be greatest in the case of independence. I'm not sure how great that would depend. So, can you talk in the context of the other proposals about what the restrictions might be? Well, what I'm thinking up here is that, as far as I'm aware, of course, there are borrowing proposals in the Scotland Act and these are important, but focused on capital spending, which is important as well, but I don't think that the other proposals, pro-union proposals, imply any great measure of control over the aggregate fiscal stance in terms of the difference between Government expenditure and taxation and the ability to run deficit-financed expansions, for example. I think that that's right. I think that the big difference is that an independent Scotland would have to have regard to what its budget was and what the deficit was and keep that under control. The general rule that the European Union has is that they should be under the deficit to be less than 3 per cent of GDP. There is no requirement in the case of regions in a country, which is what Scotland would be if the no-vote prevails economically anyhow, to have any particular sort of balance in your budget. I mean, the idea is that expenditure should in some way be related to needs and taxation should be related to taxable capacity. For example, in Northern Ireland, there is a lower taxable capacity and a higher level of public expenditure. In Wales, there is a lower level of taxable capacity, but a smaller level of public expenditure than in Scotland. But the overall deficit in Wales is probably larger than it is in Scotland because the taxable capacity is less. You can go around in various regions. The figures are not very adequate now, but the Northern region is probably in much the same position as Wales. London has a higher level of public expenditure than any of the English regions and more similar to the level of public expenditure in Scotland, but it also has very high tax revenue. I was very interested in Professor Kay's comment that he did not think that there would be a monetary union because the very tight fiscal controls that would be required would not be acceptable to the Scottish Government, which did remind me of what I thought was a key point of Sir Nicholas MacPherson's note, because I think that he made that point that the fiscal controls would be too tight. Assuming for the purposes of this question, although I also assume it anyway, that there will not be a monetary union, I am really interested in what the consequences of that will be. Professor MacRown seems to be not sure whether he wants it because that is the best scenario or whether he says that it is going to happen anyway because of the markets, but anyway, for whatever reason, if it is going to happen, I am interested in what the consequences would be because that does not seem to me to get spelled out to any great extent in current debates. You mentioned transaction costs, which I think are well known, but I wonder what the effect on interest rates would be and on any other aspects of economic and financial matters. I think that whether there is a monetary union or not, there would be separate Scottish debt, and that would probably be at a slightly higher rate of interest than UK debt. For the simple reason that the UK has a long record of not defaulting on its debt, Scotland has no such record unless you go back to the Darian scheme and that is something that we all want to forget. It would have to establish itself as a credible borrower in the meantime, and also because it would be a much smaller participant in the market. For all these reasons, I would expect the interest rate on Scottish debt to be a bit higher than for the UK as a whole, and that is particularly the case if there is independence. With monetary union that would still happen, it seems to me, and that would probably be reflected in things like mortgage rates and various other things across the economy. How big would that difference be? We do not know. I think it is the National Institute that has suggested something between 0.6 and 1.8 or something of GDP, so it would be quite significant, but it would be copable with, I suppose, but it does mean that if you are having to pay more interest on your accumulated debt, that affects your budgetary situation, it means that your budgetary deficit is bigger than it would otherwise be. What would be the additional interest rates if there wasn't a monetary union assuming that there would be some? I am trying to... If there are no extra negatives, apart from the transaction costs to not having a monetary union, it is not quite clear to me why the Scottish Government is so adamant that there must be a monetary union. If there is a monetary union, then it makes all these things a bit easier. If there is no monetary union, then there is more of a risk that the exchange rate might be altered either by force or by design at some stage, and if the market thinks that there could be a change in the exchange rate, then that tends to be reflected in interest rates, so you tend to get a bigger difference in interest rates. On the whole, I think that a separate currency, but one pegged to Stirling is probably the long-run answer. That's what the Irish did for a long time, and then they unpegged it when they went into the European exchange rate mechanism. Small countries very often do that. The Danes, for example, have kept their own currency, but it's pegged to the euro, but that means that they can alter it if they really have to. The pressures on Scotland's balance of payments would be rather different from the UK as a whole because of the oil. If the oil price went up, then the pressure would tend to be to lift the Scottish exchange rate. If the oil price dropped dramatically, the tendency would be to push the balance of payments into deficit, and that would tend to be reflected in the exchange rate. Although the two economies are very similar in many respects, because of the oil, there is a big one big difference between them. Do the other two professors agree about the interest rates comments that Professor McClearn has made? No, I don't all together. I think that all of this is rather complicated, and we need to talk about what scenarios we're looking at. Professor McClearn has talked about pegs and mentioned Ireland and Denmark. Now, they're different. In the case of Denmark, there's a Danish Krona, which is, and always has been, which is now fixed pegged at, I think, a 7.5 Krona to the euro. In the Irish case, when Ireland became independent going back to 1921-22, Ireland didn't actually peg the Irish pound to the pound sterling. Ireland actually didn't do anything at all. Things continued just as if political independence in Ireland had never happened. And there were Irish private commercial bank-issued notes, which circulated in Ireland, did not circulate in Northern Ireland, but not in the UK, which were like Scottish bank notes, now backed by English pounds. And there wasn't even an Irish currency board until late 1920s, at which time Ireland, the Irish government did start issuing Irish bank notes, but these Irish bank notes were actually backed at that time by Bank of England notes. It wasn't until, I think, it was 1941 or 1942 that Ireland actually set up its own central bank. Now, we don't have quite the leisurely pace that characterised either Ireland then or global financial markets then today, but there are a lot of different variants on these options. Now, that isn't answering your question, but it's quite helpful. Jamie Hepburn referred to the Institute of Fiscal Studies looking way into the future, and clearly that has its difficulties. But just concentrating on it, the immediately post independence period, if there is a yes vote, I'm wondering what your assessment of the fiscal situation for an independent Scotland would be. I think our witnesses last week tended to say that it would be more ffiscally challenging than the rest of the UK would face. I wonder what your assessment of the fiscal situation facing an independent Scotland in 2016 would be, Professor Macroed? Well, I think it would be more challenging, because already the figures show that the deficit in Scotland is slightly larger than for the UK as a whole, 8.3 compared with 7.3% of GDP, and if our revenues go on declining, then that's a pressure which will make it worse. I think it wouldn't be ffiscally challenging because a lot of promises have been made, some of them quite expensive, and I don't see that the revenue is going to be there to match all these promises, so I think it's going to be, I think it would be quite a tough situation. Professor McGregor, have you got any comment on that? Well, just, I think broadly, I agree with that. I think it looks likely that the situation will be more challenging, but the public sector deficits are not oriously difficult to predict, accurately, because of the difference between two very big numbers, and they depend on a whole load of other things, what's happening in the rest of the economy. So difficult to predict, but I'd say it on the basis of President Evans that it's likely to be more challenging, I think, which is not to say that if policies were pursued that were successful by an independent Scottish Government, that generated more economic growth, but there's a puzzle as to exactly how you would generate that, but if you were successful in doing that, then you can grow your, grow your way out of a fiscal problem. Yeah, well, I said that in principle, but obviously that would take a year or two, so I was concentrating on the immediate page, so my final question is actually to Professor McCrewn, both in your book and in your paper, you talk about options for fiscal, further fiscal devolution, and I was interested in particular on why, while you're a supporter of further devolution of control over income tax, you are not in favour of that being completely devolved to the Scottish Parliament, so I was interested in what you're thinking about that, although, since I'm asking you about another of your proposals, there's also of interest, that's my primary question. I suppose my secondary one was why you're keen on the assignment of VAT revenues as well, but my main interest is in the income tax question. Well, on the income tax thing, I thought quite a lot about this, and there are of course a number of people who have suggested that the whole of income tax should be devolved. The trouble about that is it leaves the UK Government with taxes that are mainly regressive, so if the UK Government has to raise more money all of a sudden because of some disaster or because of a war or whatever reason, VAT would go up, and income tax would not, or at least they wouldn't be able to put it up. So I thought that there ought to be some tax still available to the UK Government which was not regressive but was progressive, which would mean that, you see, I think in the last, in this recession, personally I would have not put VAT up, I would have put something extra on income tax because it would have hit the poorer people less hard. So that's the main reason why I shied off advocating devolving the whole of income tax. As for VAT, I mean various people have said to me that this is simply pointless assigning their revenue from VAT. I don't think that's true for various reasons. I mean, obviously, you can't alter the rate of VAT within one country. That's against the European Union rules. But if you assign it, then if the Scottish Government is actually successful in generating more economic growth, then it'll get more taxation revenue, and that seems to me a lot of the people who have argued about giving Scotland more tax powers have said that the Government needs to have the ability to get additional tax revenues if it's successful in promoting growth, and so you would get that if you assigned a VAT, and that seems to be quite important. The other point about it is that in England there's a fair amount of pressure along the lines that Scotland gets more public expenditure than it deserves, whether the Barnett formulae is too generous and all that kind of thing, and while nobody has made a commitment to that, I think eventually somebody's got to look at this again. I don't know when, but sometime in the future. I think the pressure on this would be a bit reduced if Scotland was seen to be raising more of its own money from its own taxation so that the block grant would be considerably smaller. Those are the two main reasons why I recommended those things. It's very helpful, thank you. Thank you. Jeane to be followed by Michael. I've had so many questions in my head since we started this discussion, but I would quite like just to ask you about the current economy of the United Kingdom. There is a kind of inference that everything is okay the way it is, so don't upset the apple cart. There are many economists and a lot of people who feel that everything is not okay, and that actually we could make a much better stab at it, frankly. One of the earlier sessions today, we were looking at the forecast by the OBR, and I think one of the things that stood out for me was the, and I quote from their paper, firstly, the expected pickup in house prices in Scotland, although property transactions have picked up recently. They remain well below their long run trend, but all of that suggests a kind of getting back to normal after we've paid off a debt scenario, and that seems, I think, to a lot of people to be headlong straight into the kind of extraordinary economic mess that we are struggling to change. My question to you really is how do we affect change from a Scottish perspective without actually changing something? We'll probably get different answers from all three of us on this question. I'd rather agree with what you have said. Many people misunderstand the situation that we got into with the financial crash. It wasn't government debt that was the main problem. The levels of government debt were maybe a bit, should have been a bit lower than they were, and maybe the chances of the checkers and the labour government should have been budgeting for a surplus when they had something like a three or four percent deficit, but the deficit was not actually the problem. The problem was the private debt, which escalated more and more and more until eventually it could escalate no further, and then the thing collapsed. That turns into government debt because the government then finds that its tax revenues were used and that its expenditure on things like unemployment benefit have gone up, and so you then find that the government debt goes up. But that was a consequence of what happened rather than any adverse planning by the Government itself. Now, are we heading for the same situation again? I personally am worried about what's happening in the housing market. I think housing house prices in Britain are probably too high. Anyway, I think that countries like Germany, where there's a much smaller owner-occupied sector and a much better and bigger social rented sector are at an advantage because they don't get themselves into this kind of pickle, and so I think there is a danger that we fall into the same trap again. Usually after a session like this, if the exchange rate goes down and exports improve, as they did, for instance, in the early 90s, that's the best way out of it, but it's very difficult to get exports to improve even if the exchange rate were to go down at the moment because the markets to which we export are also depressed. That's the main difficulty. The eurozone is in quite as much trouble as we are. So, yes, I am a bit worried that we haven't learned the lessons and that we get back into the same pickle as we were in before. How would the Scottish Government deal with this? I don't know. I think it's very difficult to say, but I would like to see a policy that changed housing policy considerably. I think we have a global financial sector and system which is set up to generate endemic financial crises, and what we saw in 2008 was simply one of a series which I would expect to continue. I think the capacity of the UK Government unilaterally to do much about that is very limited. I think the capacity of a Scottish Government to do something about that is a good deal smaller. I think the best either a UK Government or a Scottish Government can do is see what small steps it can take to insulate either the UK or the Scottish economy from the consequences, but the capacity to do that is, I think, also quite limited. I think we need to accept that in any society, even the richest, the distribution of income is such that the poorer people in the society can't afford the full economic cost of their housing, and encouraging people to buy housing when they can't really afford it has been one of the problems that has arisen. That is why I like this Scandinavian situation and the German situation where there is a decent provision of social rented housing and less emphasis on encouraging people to buy houses when they can't really afford it. By implication that would be a good idea to for Scotland to govern itself. I mean, we moved away from any possibility. It's something that a Scottish Government could do certainly if it was independent, it could also move in this direction if it was simply given more devolution powers. That more should be spent on social housing, you can take the constitutional implications of that any way you like. I think it clearly depends on the extent to which you judge the concept problems that the UK is experiencing. To what extent these are a function of UK policy and to what extent they are a function of events in the rest of the world, and I think it's absolutely right there, that the rest of the world events are crucial here and these are basically exogenous to the UK as they are to Scotland. You can do your best to insulate yourself against them but I agree that there's not a fantastic amount you can do. If you judge that, in addition to the world forces that the UK Government has behaved in a matter that has made things worse, then clearly there's possibly an argument for, you might make an argument for greater Scottish fiscal powers and ultimately independence out of that, but I think it's rather difficult to do that, though I can see clearly the policies that the chancellor pursued are controversial. The UK economy is in recovery but it's a modest recovery and some would argue that the counterfactual is that the UK economy might have recovered rather more rapidly, had a different set of macroeconomic policies, so I think that it depends critically on the point on that spectrum that you yourself judge is appropriate. Thank you. On the question of standard life, which has had much publicity and other corporate companies threatening, in a very honest, to leave Scotland in the event of independence, it seems to me that in every incorporated company the annual report has to highlight their risks. So the risk, for example in standard life, seems very nominal in their annual report compared to the kind of publicity that is generated about that and I know that this came up a little bit before, but presumably there would be no rush from any company to leave until they better understood what was meant by independence, all of which would be down to the kind of negotiated settlement and the political philosophy of the nation and its relationship. Yes, I think that's right. I think that what companies will do will depend really on what their clients want them to do. If standard life felt that since the majority of its clients are not in Scotland, that it would do better to get more clients satisfied once it's gone by moving part of its operation to England, then that is what it would do. That's the kind of thing that would determine it. I'm less sure really whether there needs to be any action taken by the fund managers, people who run investment trusts and things of that kind, but again there might just be a feeling that in England why should we put our money with a company that's in a foreign country rather than our own. I mean that's the issue. Are you serious that everybody who has, is a customer of standard life, is really thinking on these terms? I think it could affect their ability to get new customers possibly. I think people who, when placed an insurance policy with a company, they just want to consider what the risks are and if they think there's a degree of risk because they're putting their insurance policy in a foreign country, in Germany or in France, then they won't do it. I mean that's why most of these people invest in their own country and the question really is whether this would be a significant effect with independence. Depends very much on what happens, I think, and we can't really predict that in advance. I think maybe one critical factor certainly would be the judgment about the likelihood of maintenance of monetary union because I think if there was a lack of confidence around that, I think it would be more likely that clearly the risk would increase and the incentive to move might be higher. I think that this argument is very strange because people actually do not know the specifics of what they're talking about. Everyone in this room has a bank account. You have bank accounts with various different banks. Some of them are ultimately UK banks, one of them is ultimately a Spanish bank, another one is ultimately an Australian bank. You go into any branch of these banks and ask the people behind the desk the questions, what is their regulated entity with which I am trading, under what law am I making a contract between you and the bank when I place a deposit and what provisions could either the Scottish Government or the UK Government make to change the terms of my contract with you and people would have not the slightest idea of how to answer these questions. Indeed, you could go to a top Scottish QC and he would struggle to give you answers to these questions and they would be very long. These are the questions that are actually relevant to what the risks you're taking and how these risks would change if there were to be an independent Scottish Government. It depends on what the regulated entity is, it depends on where the contract is made and the answers to all these questions are rather obscure. Now, actually, if Scotland became independent, those things would be sorted out in ways that would be sensible for all parties and everyone who thinks about it actually knows that that is the answer to that question. I think that these fears are essentially imaginary. To investigate what they are is almost impractical, but that doesn't mean that people may not genuinely hold these vagal formulated concerns. It's plain talking to people that they do. It's just the issue that any kind of threatened change raises the unease and uncertainty that is created. I can't see that there's any material specific basis for it. Finally, just a very short question. When we look at the economic scenario that's painted in various reports in your opinion, it's one side of a balance sheet or it's based on what is the status quo across the UK. Percentages for defence and so on are roughly what's being done, but that's only one side of the balance sheet, really. You have to look at the other. Is it not the case that in an independent Scotland, with its own set of priorities, some of these balances would change quite dramatically? Are you suggesting here that because of independence, economic growth will be at a different rate, a higher rate or something of that kind? Well, I think it could be, but I think that it's the expenditure, really, that we're... I mean, mostly we're talking about the collection of tax, the ability of the country to pay its tax and so on, but the other side of that, apart from the kind of public services that everybody expects, whether it's the health service or education or so on, there are other expenditures that are made with the British Government that Scotland might choose not to make in defence, of course, is the obvious one, but there are many other sections of a balance sheet of UK PLC that Scotland PLC might choose to change? Well, at the moment, of course, there are some things on which there is... I mean, the Treasury produces its identifiable expenditure thing, and that leaves out of account things like foreign embassies and defence and interest on the national debt, since these are not, at the moment, capable of being allocated to the particular parts of the United Kingdom. They're much the smaller part of the budget, actually, but it would be possible for Scotland to decide different things on these things, obviously, on defence. On foreign embassies, I mean, I would expect the cost might go up rather than down, because Scotland would want foreign embassies all over the place, not as many as the UK has, but maybe comparable with what Ireland has, something of that kind. And then the other area, which is not really devolved at the moment very much, is social security and welfare. I suggested in my paper that there would be scope for devolving quite a lot of what the Department of Work and Pensions presently does, not all of it with devolution, because I thought if we have devolution, we would want to retain the same level of old age pension throughout the UK, which is the main one, and that's nearly half of their expenditure. But there are a lot of other benefits that could perfectly well be devolved. If Scotland was independent, it might take a different view on all of these things, and its rate of old age pension might be either higher or lower, and a way in which it deals with the benefits might be quite different. I would expect that, with time, both the tax system and the expenditure side would both change dramatically. I mean, there is a need, I think, to reform the tax system. It's pretty anomalous at the moment, and so James Merleys, who's a Scott and a Nobel Prize winner in Economics, has produced an enormous report making recommendations about the future of the tax system, which, incidentally, I haven't read because it's so long, but clearly an independent Scotland would want to look at this sort of thing and try and come up with more practical and less anomalous system. All that would take time, but it might result in quite a lot of differences in the long run. I think, you know, one of the big arguments in favour of devolution or decentralisation, fiscal decentralisation, fiscal devolution, is the idea that you bring decisions closer to the people who are affected by these, and there are undoubted benefits in doing that. Traditionally, though, there's recognised to be areas in which perhaps the costs of doing so might be rather more significant, and I think we've just had an example. Their defence and form affairs are the kind of areas that typically are emphasised in this connection, and so there may be some loss of efficiency as a consequence of that, but nonetheless, it undoubtedly would bring decisions closer to the people who are directly affected by them. Okay. Michael, to be followed by Gavin. Thank you, convener. Going back to some discussion we had earlier about the capacity to grow the economy and how we would grow the economy. I don't think any of you suggested that you knew how it was going to be possible to do that, but if we look to the Scottish Government white paper, which I'm reliably informed has the answers to everything, they suggest that a 3 per cent incorporation tax would grow the economy. Some people have analysed this, and Professor Stiglitz, I think, is amongst a number of people who have suggested that that's not quite as straightforward a suggestion as would appear in the white paper. I'm just wondering if you had any comments, because we've had Professor Hughes-Hallard and Crawford Beverage in front of us suggesting that the margin of difference would have to be much more radical than 3 per cent to have any differences. Is that the type of analysis that you agree with? Well, I think it's rather difficult to say. At the moment, as far as I can see, the two measures which come out of the white paper on how you would grow the economy more are, first of all, a lower rate of corporation tax, and second, childcare to free up more of the labour market to take jobs. The latter one depends, of course, on the jobs actually being there, and getting more jobs would... I mean, if Scotland was able to generate more jobs, people would come in from outside just as they did in the case of Ireland, so that would happen automatically. Now, Ireland... I think Ireland has given people the idea that a lower rate of corporation tax would be the answer to all of this. I think there are various problems about this. When Ireland joined the European Union, it was the poorest member state by quite a long way, and nobody raised much objection to the fact that its rate of corporation tax was very low. At that time, as far as I recall, they didn't have any corporation tax on a business that dealt only in exports, only in their own territory, and they were obliged to change that, but they brought in a corporation tax of 12.5%, which was about half of what most other countries had in their corporation tax. Now, that did result in a lot of companies looking at Ireland that wouldn't otherwise have done so. Incidentally, it's also resulted in a lot of people declaring their tax in Ireland. We love to actually employ many people there, just as we've had the same problem throughout the world with people like Google and Starbucks and the rest of them trying to declare their profits in the area where taxes are lowest, and that's affected the UK adversely and various other countries adversely. So, if you reduced the level of corporation tax, you would probably generate more economic activity. You'd also result in people wanting to declare their taxes in Scotland rather than in the rest of the UK. I think that that would mean that the rest of the UK, if there was a negotiation for monetary union, would insist that there wasn't a discriminatory tax which could attract business to Scotland, which might otherwise, for instance, have gone to the north of England. I think that the north England would really be up in arms if this happened. So I think that it would be very difficult for an independent Scotland in monetary union, in currency union anyway, let's say, with the rest of the UK to have a different rate of corporation tax. I may be wrong about that, but I think that's what I think about it. There's also the question of the European Union. I mean the European Union had been trying like anything to get the Irish to raise their corporation tax. The Irish have so far managed to resist that, but it's possible that if the Eurozone develops that taxes will be much more harmonised within the countries that are in the Eurozone and the Irish may have to give up their lower rate of corporation tax eventually. So it's a difficult issue this, but it seems to me fraught with all sorts of problems if Scotland wants to remain in monetary union with the rest of the UK or to join the European Union. I very completely agree with Professor McCrogan on that, that the strategy of having a much lower rate of corporation tax, and we're not talking about 3%, we're talking about a much bigger difference, was successful for Ireland, both in attracting economic activity and in attracting tax revenue in both of these things, almost entirely at the expense of other European countries. A very success of that means that other countries are not going to be allowed to do it, and that's the practical reality, I think, of any negotiation we have, and we'd have to have extended negotiation with both the rest of the UK and the EU over independence. So I think believing that that's where we're going to get economic growth from in Scotland is shimmerical. Can I say that it's now 20 years since I left the Scottish office, more than 20 years in fact, but while I was there and I was there for 22 years, I spent most of my time trying to encourage economic growth in Scotland, that was my main objective, and I was one of the architects, I suppose, of the regional policy that was introduced in the 1980s, and I regretted greatly the fact that in the years of the Conservative Government, many of the regional policy measures were removed, and it's been greatly weakened. We got the SDA set up, now a Scottish Enterprise, and we managed to preserve that during the 1980s, but only just, and I think that there's a problem now in the whole of the United Kingdom of increasing imbalance between the south-east of England and the rest of the UK economy, and that is badly needing to be addressed with some sort of measures. Now whether that means bringing back a stronger regional policy or what, I don't know, but these are the kind of measures that I think need to be pursued, and in the case of Scotland, Scotland has actually done much better than other parts of the UK for a variety of reasons, partly in North Sea oil, partly in the financial sector, and we have actually caught up for the rest of the UK in terms of GDP per head, more or less, so it's only about 2 per cent below the UK average, whereas places like the north of England and Wales and other parts of England have done much less well. So the priority is not quite so great in Scotland as it is elsewhere, but I think that we badly need to think of how the balance of the economy within these islands, whether or not Scotland is a part of the UK or becomes independent, we badly need to think of how we deal with that, because the south-east of England and London in particular will go on being a magnet unless something's done about it. Well, just to say that I agree with this point about regional policy and regional policy activism, but setting that aside on the point about co-operation tax, together with colleagues in the Fraser Walden Institute, we actually explored the impact of a 3 per cent cut in co-operation tax, and that basically reaffirmed Professor McCrone's intuition that this would stimulate economic activity in Scotland, ultimately. So we found that eventually this had a small stimulating effect on the Scottish economy. However, there might be two qualifications. Firstly, what we did was we explored this on the assumption of no reaction whatsoever on co-operation tax rates set elsewhere in the UK, and in effect it was around the time that there was negotiations with Northern Ireland about possibly an agreed negotiated reduction in co-operation tax. So we took that kind of scenario and looked at that kind of implication, so there was no gaming around the setting of taxes, and that makes the analysis a great deal simpler in practice. That would be a major issue, as has already been said. Whilst in this particular case we did not seek to analyse and didn't analyse explicitly the impacts on the rest of the UK, I think that the point is correct again that there would be almost certainly negative spillover effects to the rest of the UK, although we did not seek to capture them. Under those circumstances it looked as if co-operation tax cuts could be effective in stimulating activity eventually, but they were rather restrictive circumstances. The other aspect that Professor McCrone mentioned was the childcare initiative. We have since discovered that the Scottish Government has not modelled any projections on that. The figures that it views are speculative at best. Have you done any gaming or modelling of the figures that have been put forward in the white paper in that regard? No, we haven't yet. It's an area where we would like to turn our attention but we haven't been able to do so yet. Such supply side policies are known to be able to generate significant effects, but I think that you need to be very careful about the specification of the transmission mechanisms and the link to the wider economy. That's a challenge in itself, but it's certainly something that we would be interested in looking at in more detail. Just another question in terms of how we analysed those figures. A report yesterday in the newspaper suggested that a German bank had looked at how the figures were being used in terms of Scotland's economic performance. When one of the things that they identified that too often we are comparing apples and oranges, the Scottish Government, for example, has used in terms of tax receipts, they have used it as a per capita figure, but in looking at public expenditure, they have used the figures as a share of GDP. When you look at the figures in proper comparison as a per capita, the figures that are used in Scottish Government's analysis would indicate that the spending is 10 per cent higher in Scotland than the figures produced by the Scottish Government. Again, is that the type of statistical manipulation that you are familiar with? Not directly. I think that it's undoubtedly the case that spending is undeniable that spending per capita in Scotland is significantly higher, but in general terms, I can't comment on that because I didn't read that particular piece of analysis, so I don't have the data of my fingertips. All I would say is that this kind of debate if it is that and concern about the accuracy of data provided by the Government is precisely why I think that there is a good case for establishing a fiscal commission and having that kind of independent analysis of these kind of statements, not just by that party, by any party, by the Government of the day, whoever they may be, and I think that's just indicative of the need for this kind of independent analysis, but I can't comment on the specifics of the case. I would agree with you on that point. It is the case that Scottish public expenditure per head is higher than the UK average by about 10%. It's also known that onshore tax revenue, excluding North Sea Oil, is about equal to the UK average, which creates a gap. The North Sea Oil revenues would be required to fill that gap at the moment. They wouldn't fill it completely, but they would go a long way to filling it. That's the essence of the budgetary problem. Somebody said earlier, would it be more challenging if Scotland was independent? You would have to deal with this. If Scotland's public expenditure was similar to the UK average, then the North Sea Oil would be a kind of bonus, and that would be all right, but it's higher than the UK average by about 10%. Nobody really knows whether that's justified at the moment. It's been like that for absolutely ages, and it was deliberately raised in the 1960s by the Macmillan Government, both in Scotland and the north of England, to try and deal with the higher levels of unemployment then prevailing, and we've tended to have a higher level of expenditure per head ever since then, but is it justified? There's no needs assessment that's been done, other than a rather scrappy one by the Treasury in the 1970s, so you can't really decide whether it's justified or not until you do that kind of analysis. In our previous session this morning, which you may have caught the tail end of, there was a discussion about the Scottish rate of income tax and the transition costs for that are estimated to be about £35 million. I just wonder if any of our panels have looked at the transition costs for Scotland, where Scotland to vote yes to independence in September. What sort of transition costs would we be talking about and are you aware of any analysis that has been done on that? Well I've certainly not looked at this, but it's pretty obvious that would be quite substantial transition costs in setting up an entirely new tax system and in setting up a lot of institutions which at the moment would be dealt with by the UK level, and so there would certainly be transition costs, but I can't really figure on it, I don't know if any of my colleagues can. I think there are a number of pieces of analyses that would be relevant to this, for example attempts to measure the scale of the risk premium that would be associated with Scottish Government debt and various other individual specific pieces of analysis, but I'm not aware of an analysis that covers the whole thing, so I really don't have any idea what the figure would be. I would also say no, I do not think there is any work on this, certainly none of which I'm aware, and emphasise one point that I think has emerged implicitly at various times this morning, which is the number of kind of complicated details that have to be sorted out is actually extremely large, and at the moment almost nobody knows how many of them there actually are. These are problems that only arise when you really get down to starting to think about it. Okay, thank you. Second question then, we've touched on the overall fiscal situation a couple of times during questions. At one end of the scale, you have the Institute for Fiscal Studies, who published, I think, 50-year projections. At the other end of the scale, the white paper has projections for one year, namely 2016-17. Do panellists have a view on what level of detail should be published for how many years so that people looking at this issue can get a reasonable sense? I know that there are many unknown questions, but so that people looking at the issue sensibly can get an indication of what the fiscal situation might be for Scotland to be independent. What would be a reasonable number of years and level of detail to be published, either by governments or independently? One of the things you have to know about economic statistics is that forecasts are always wrong. They're a bit better than the weather forecast, but not much. The further you go out, the more wrong they are usually. I would like to see forecasts for five years ahead, but they have to be treated with a lot of caution, because all kinds of things can happen. I mean, nobody saw this, or at least very few people saw this financial crisis arising, which hit us in 2008, which knocked everything skewed with. The UK government's forecasts of that time proved to be completely wrong, and it's nearly always the case that economic forecasts, whatever they are, are not quite right. But you do these kinds of exercises not because you believe the forecasts in them will come true, but to provide information that illuminates your policy decisions, so that, for example, the IFS work brings home that Scotland has two issues in relation to two particular issues in relation to declining North Sea oil revenues, and a particular, and a relatively unfavorable demographic situation. In looking at these for 50 years, when it isn't saying, this is what is going to happen for 50 years, it's simply an arithmetic way of identifying these issues in ways that should illuminate the debate and the policy decisions we make. I completely agree with that. I think in terms of forecasts, I think we should think, at least in terms of the lifetime of the government, and I think a five-year period seems perfectly reasonable, and I think that people should understand, of course, forecasts are wrong because we cannot foresee the future, but that's not the point. They are conditional and understood to be conditional, but they inform us about a likely future, and they also provide us with a modelling framework that would allow us to explore what the potential impact of policies were, and it seems to me that that should be an essential part of the policy formation process. In terms of longer term and the kind of projections that IFS produce, they are understood in a rather different way, and they are for a different purpose, and they are valuable, provided they are interpreted with caution, and so I think they are very useful in drawing our attention to potential problem areas, but then that's a challenge for policy to respond to and see if there's a way of resolving any problematic issues. I think that the whole panoply of short-term forecasts and of longer-term projections are a useful input into the information set that the public and the government can use in order to assess the quality of the policy decisions that are being made. Just in passing, Professor McCrone said that nobody saw the banking crisis and so on happened, but it's amazing the number of people today that said they saw it coming. They don't quite match up, but that's merely a detail. Professor McCrone, you talked about in one answer the rate of interest that you thought the Scottish Government would have to pay in relation to borrowing. I wonder if you can just expand on what you think the difference in the rate of interest might be between the Scottish Government and what the UK Government currently pays. You also said that something to do with that would transfer in some way to mortgages in Scotland. I wonder if you can expand on that point on how it would transfer and what that effect might be. I think that it's now fairly widely accepted that if Scotland becomes independent, that the rate of interest on its debt would be likely to be a bit higher than the rate of interest on UK debt, because it's a new borrower. It doesn't have a track record of no defaults since the reign of Charles II, which is what the UK had. For that reason and also because it would be a fairly small borrower, the rate of interest would be likely to be a bit higher. The National Institute has put a range of figures on this and I can't remember exactly what it is, but it's something between 0.6 per cent higher or 1.8 per cent higher, something of that kind. I don't know. I mean, I think you have to assume that it might be anything around 1 per cent higher probably on Scottish debt, which has quite a big effect actually on the costs of the debt. Now, why does that affect mortgages and things? Well, if the rate of which the Government is borrowing is higher, that just tends to be reflected right through the financial system, and so you would probably get higher interest on mortgages as well. Of course, there's a bit of a problem with mortgages because it would be if Scotland had a separate currency or was at all likely to have a separate currency, it would be rather foolish for people to have mortgages from a mortgage company in the rest of the UK rather than Scotland, because they might find themselves, if the Scottish currency had depreciated in a position where it was very difficult to afford to repay their mortgage, more difficult than it even is at the moment for many people. That would be a potential problem, and it likewise can affect pensions and all sorts of other things, so it just tends to feed through the market. We have to be careful about this question, I think, because we have to say, first of all, what is the currency in Scotland and secondly, which is a different question, what is the currency in which people borrow, because even if it was an independent Scottish currency, the Scottish Government could and probably would borrow in pounds rather than its Scottish currency. That's also true for private firms in Scotland, and it's also indeed true for people who take out mortgages in Scotland. There are two questions. What is the currency that is used in Scotland? Another question is, what is the currency that people in Scotland borrow in? For people borrowing and sterling, I can't see why it should make a difference to a Scottish company or a Scottish home buyer, whether they're located, whether they're Scottish or whether they're not Scottish. So there's a discussion in the Weir Group report, for example, of why it would raise their borrowing costs. I can't see why it would, yet any more than Novo's borrowing costs are raised on global capital markets by the fact that Novo is located in a small country of Denmark, etc., etc. Equally, if Scots chose to borrow in sterling, they would be able to borrow in similar terms. I would anticipate the terms on which a similar person would be able to borrow in England in sterling. If they chose to borrow in a Scots currency, if there was one, then the interest rate would clearly be determined by what the interest rates in the Scots currency were, which would in turn be determined by what the monetary policy of a Scottish central bank turned out to be in that situation. But again, we have to be careful about talking about what the actual legal position is and what the contractual position is, what the regulatory position is and what the nature of the contracts people make are. I think it depends a lot on whether there's any exchange risk in this. I can remember when I was in the Scottish office, there was a company which more or less went bankrupt because it had borrowed in Deutschmarks and the pound had depreciated substantially over the period of its loan and it suddenly couldn't repay the loan at Deutschmarks. So if there's a currency risk, there is that danger. If there's no currency risk because there's a currency union and everybody's happy with it and there's no chance it's going to be disrupted, then of course there won't be much difference in the rates. But it's because there might be a different currency that I think people on the whole would be sensible if they had their mortgages from Scottish mortgage providers. I think just to agree with that, I think that monetary union makes things easier in that sense since it does eliminate, if provided people have confidence in the monetary union that is, it eliminates the exchange risk part of the equation. However, if there was an independent Scottish government within that union, then you would still expect, I think, a premium on the debt and that would certainly be reflected on government debt but depending on where people were borrowing it might not have an impact that's widespread throughout the Scottish economy. I think the one near certainty in this is that a Scottish government would pay a bit more for borrowing in Stirling than the UK government does for borrowing in Stirling and that would happen because Scotland is a new borrower and Scottish debt would be illiquid relative to UK debt. Everything else is pretty much up for grabs. Last question, if I may. One or two other members talked about economic growth earlier as well, so if we could put corporation tax to one side and the childcare idea to one side, could you give an answer on those? Within the white paper are there other ideas that you think would lead to significantly improved economic growth relative to the UK? I'm not aware of any, actually, but then maybe I've missed it, but I thought that the corporation tax and the childcare were really the two concrete proposals that were in it. I would very much like to see a faster rate of economic growth in Scotland, and we've been trying for ages to bring it about, and that's why I regretted so much the downgrading of regional policy in the 1980s, but where we go from here and how we increase the rate of economic growth, I think we're all still waiting to hear. I haven't got a solution to this problem. The largest issue is whether you would have a more vibrant entrepreneurial business community in an independent Scotland or not, and depending on the nature of the society that was established after independence, that could go in one direction or another, but that's the key issue we ought to be talking about in thinking about economic growth, indeed in thinking about the economic issues generally. The bit of the Scottish economy that has been disappointing over the years is the growth of the small business sector. We've done very well in attracting investment from abroad, particularly well during the 1980s. The Scottish Development Agency and following them Scottish Enterprise have done quite a lot to try and promote the small business sector. That still remains the bit on which we need to do rather more, and I have a number of suggestions in my book about this. I think there is some advantage in trying to study what the Germans do with their middle stand, which is a very important part of their economy, and the fact that the banking sector operates in a much more supportive way of business than it does here. To my mind, too much of the bank lending goes into housing and not enough into other things in this country. I think that I would just echo many of these comments. I think that the corporation tax and the child care seem to be the two main ideas for economic growth, which is not to say, however, that the Scottish Government doesn't have control of other levers that might have an impact on growth in this very difficult area, but they have control over a large part of the spend. There may be opportunities there, and I know that someone claimed that they have already been taken, but there may be other opportunities there for directing expenditures in a way that might stimulate economic growth, i.e. innovation and so on. If there is independence, even greater fiscal autonomy, there may be the opportunity to revisit the kind of policies that the Government has raised, but on a self-funding basis, and that might be worth exploring. I mean, one of the areas that needs to be looked at, I think, is training, vocational training. We have had a lot of emphasis on increasing the number of people that go through universities, but not the same emphasis, really, on trying to equip people to take with vocational skills to go into business, and that, I think, has been a weak spot, much better in Germany than here. Again, it's another aspect of the success of the German economy, and I think that needs to be looked at. I also think, actually, that I would like to see the UK Government look more critically at the whole business of takeovers. There are occasions when a takeover is necessary, and indeed helpful, because a company is in difficulty and will collapse if it's not taken over. But there are many cases where companies are just taken over because of the aggrandisement of the management or because the shareholders get a short-term gain and so on. In the UK, of course, the Cadbury case was a well-known example, and in Scotland, Scottish Newcastle seemed to be a similar case. I would like to see a bit more grit in the system so that these takeovers are not so easily carried out unless it can be shown very clearly that it's really to the advantage of the company and the country in which it is. I think that the present hullabaloo about Pfizer and AstraZeneca is another example of the same thing. It's an example of how people have not got the significance of this issue, and the drain of corporate headquarters out of Scotland as a result of acquisitions over the last 20, 30 years is one of the serious issues, I think, raised in this hullabaloo. I'm sure that the witnesses are glad that I'm the last committee member to be asking questions. To go back, if I can, to the interest rates. A couple of folks said that when Scotland becomes independent, because we don't have a history, we'd be paying a little bit more of a premium to start with at least. Presumably that's something that wouldn't last. We have had some evidence that smaller countries overall are actually paying lower interest rates, some smaller countries than some bigger countries. Presumably we would have that potential if not on day one at least later on. It depends really how we run the country, to a large extent, I think. If there's any kind of anxiety about the exchange rate, then interest rates will be higher. I mean, I haven't looked at this in detail, but I think it's usually the case that small countries pay rather more in interest than large companies, but general perhaps know more about this than I do. Yes, small countries tend to pay higher interest rates in the same currency as it were in the global currency, so nobody pays better dollar interest rates than the US Government, although the German Government pays a similar one. Denmark pays low interest rates, but that is because there's a one-sided exchange rate risk there that the Danish corona might rise against the euro, but it's very unlikely to fall. Hong Kong is in a similar position vis-à-vis the dollar. If Scotland borrowed in sterling, which I think we should presume primarily would, then I think we should and could expect it to pay a small premium to the rest of the UK Government for that, and probably to do that on a permanent basis. Just because more carefully than the UK was? Yes, because the default risk in both cases is extremely small. It's really a familiarity and liquidity risk that is at issue. One of the difficulties here is that interest rates are the outcome of a number of complex influences, one of which is country size, but the one that was referred to earlier in the national institute conducted by my colleague Angus Armstrong and his colleagues attempts to control for all other factors, so they do models in which they attempt to control for everything else, including size of country, so debt to GDP ratios and other things that might influence perceived country risk. The estimates that they have come up with, therefore, are taking account of those other factors, at least in principle. The 1 per cent premium that has been referred to on a number of occasions is that part of the interest rate level that they attribute to the small country effect, so the 1 per cent premium is the impact of the size of the country trying to control as best they can for all the other determinants of interest rates, so just to clarify. I think it's important to say that because this is a small country effect, we should not assume that that would go through to private borrowers. Yes, that would affect the Government more than it might affect individuals or companies. That's my view. Fair enough. That maybe links me on to my next point, because we've talked about the possibility of, would the financial sector suffer and would some of the companies move south if we were independent? It struck me that Switzerland as a small country has got a lot of people of faith in Swiss banks, probably for historical reasons, probably more than their own country. Although it might be normal that an American trusts an American bank more than a Chinese one, a lot of people throughout Europe would trust a Swiss bank. Is there a potential there for Scotland to do it the other way around and have a reputation for really good financial skills? Yes, you would have to build that reputation up. When I've asked this question, people have said to me, well, the Swiss financial sector is not the same kind of financial sector as the one in Scotland, because the one in Scotland is a kind of offshoot of the London financial sector. Similarly, there's a huge financial sector in Luxembourg, and it does perfectly well. It would be perfectly possible for Scotland to have a very strong financial sector, but I suspect it would probably have to change quite a bit from what it is at the moment. Where would we rank at the moment in people's view around the world, do you think? Very high, despite what we've done in terms of our banks and in asset management at the moment, we have precisely the kind of reputation you are describing. I think the concerns in relation to the financial sector are largely the kind of vague unease which I've described earlier. That's real, even if there isn't any basis for it, and I don't think there is much basis for it. The other is that there is a fear, I think also rather ill-founded, that Scotland might have particularly inept regulation. Those are no particular reason to think it would be more inept than any other regulation, but other regulation people are familiar with, they're not familiar with ours. I'm sure that ours will be better. Different subject, the Barnett formula has been mentioned, and I think we've not spent a lot of time on it this morning. Suggestions have been made, for example, that £4 billion could be taken off the Scottish block grant if Barnett was revised. Would that have a big impact on Scotland and the Scottish economy? It would have, if that happened. No party has said that it wants to revise the Barnett formula, and they've all shied off it. There's a lot of pressure in England and indeed Wales for it to be revised. The Holtam Committee for Wales came to the conclusion that Scotland got too much and Wales got too little, which is perhaps not very surprising, since it was a Welsh commission. The problem really is this, that if you're going to defend a level of public expenditure that's different from the rest of the United Kingdom and remain within the UK, then you have to have some justification for it. At the moment, nobody knows what a needs assessment would throw up. The methodology of a needs assessment is actually quite difficult. There would have to be agreement between the Scottish Government and the UK Government on the methodology before you carried it out. The only needs assessment that's been done is the one that the Treasury did in the 1970s, which showed that, yes, Scotland deserved a higher level of public expenditure than the rest of the UK, partly because of the scattered nature of many of its communities and partly because of the deprivation in the west of Scotland. That was in the 70s, and Scottish GDP per head at that time was much lower in relation to the UK than it is now. What Joel Barnett himself keeps saying is that the whole situation has completely changed because Scottish GDP is now more or less at the UK average, whereas it wasn't then. I actually wrote to Lord Barnett at one point saying that, but that wasn't the only consideration. It's things like deprivation and scattered population that are important. I was very struck when I was on the national health service review thing that the cost of providing comparable services in health in places like the outer aisles and the northern aisles and even the borders is much higher than it is, for instance, in Lothian. All of that needs to be taken into account in any proper needs assessment, but my guess is that, if there were a needs assessment, it would still show that Scotland should have a higher level of public expenditure than the UK average for all these reasons, but it probably wouldn't justify it being as high as it now is, and certainly that was the conclusion of the wealth study, that if you applied the sort of formula that was used for determining public expenditure in the various parts of England that Scotland would not be able to justify 10% higher, which is what it approximately is at the moment, but it would be able to justify something that was a bit higher. So we just don't know. Governments have shied off this, and that's all very well, but it does mean that trying to defend the present system is very difficult. On the political side to that as well. Professor McGregor, you'd mentioned social wage and the whole concept of sitting down in more of a partnership approach, I think, if I understood that correctly, so that the unions and government, presumably employers as well, talking about together do we want a bit more tax so that we get better education etc? Do other countries do that better than we do, and do you think there's the potential for us to do that better than we do at the moment? I've got to be honest, I'm not an expert on wage bargaining systems in other countries, but my understanding is from people who know how these things work that in the Nordic countries that's a broadly much more unaccepted feature of wage bargaining, certainly traditionally, so that may be under tension now, in fact, it may be subject to change. So it could have been done better here. I'm not actually advocating anything. What we were trying to do is just say what kinds of factors might influence the outcome here. I think if governments can successfully persuade unions and employers to think in those terms, then there are potential benefits to be gained from that, and this whole point of the ability to, which all of the proposals, all the pro-union proposals, even imply, is this ability to shift both tax and expenditure levels in a significant way, either towards the Scandinavian countries or towards the Baltic countries. I mean, this is really not a narrow economic choice, it's a choice about the nature of the society that we wish to live in, and it seems appropriate in that context that you would think in terms of a more collaborative view perhaps in terms of determining wage bargaining. I don't know how feasible that is, but I think, could it potentially, if it were implemented, have beneficial effects? I think it could, and I think that experienced saleswear suggests that it could, whether it's feasible in this case, I'm not sure. Okay, thank you. Well, that's concluded questions from members of the committee. I've got a couple of brief questions. The first one is just to Professor McCrone, really, and it's because he touched on welfare and he said, I don't see why a large part of the responsibility for welfare should not be transferred to the Scottish Government and Parliament now. Of course, some provisions have been transferred. Council tax benefit was transferred, but only 90 per cent of the revenue was transferred with the responsibility costing local government and the Scottish Government £40 million. We understand that bedroom tax may be devolved as well, which is the mitigation cost of 50 million, so I'll take it. If those have to be devolved, you believe that the money should follow the policy. Absolutely, absolutely. I think that housing benefit should be devolved. I think that carers allowance, attendance allowance, I think even disability living allowance, which is to be replaced with personal independence payment, I think that the winter fuel allowance, I think the TV licenses for people over 75, I think all of these things could perfectly well be devolved. And this is in a devolution context, not an independence context. Of course, if it's independence, then a whole lot goes. But if you did that, you would find that you were devolving about a third of what the Department of Work and Pensions presently spends, and if you add that to what the local authorities and the Scottish Government are presently responsible for, it would amount to about half of the social welfare cost in Scotland. I don't see any reason for not doing that. That seems to me to be an important advantage, because one of the things that people constantly say is that they would like more of welfare to be decided in Scotland, and there's no reason why rates on these things I've mentioned shouldn't be different from what they are in the rest of the country. Yes, as long as there's not an opportunity to cut a budget further by not actually funding them, though. No, no, exactly. The money's got to follow them. Okay. Now, this last question, I'm going to try and end on an optimistic note here now. We've heard about all the kind of uncertainties and risks in that, et cetera, with independence, but I'm thinking—and we also heard the time, you know, how would we grow the Scottish economy? Well, I'm going to just throw this open to you. You're all at professors of economics, so I imagine you've all got, you're all bristling with ideas in terms of how to make Scotland a more dynamic, prosperous and thriving nation. Assuming it is a yes in six months, and of course the opinion poll suggests it might not be, but assuming it is, what would each of you do to actually bring about that state of affairs so that, in 10 years from now, Scotland is that dynamic, thriving, prosperous nation that we all want to see? Don't all rush. Can we chance for this advice, sir? Sorry. Well, I mentioned two things. Well, three things, actually. I think that the training system needs to be beefed up so that we have really first-class vocational training and decent apprenticeships. I think that we need to look at takeovers and how they are decided and what the rules would be for examining takeovers. Norman Tebbitt, when he was Secretary of State for Trade and Industry after the Royal Bank of Fair, when the Royal Bank was being bid for by Hong Kong and Shanghai, and a standard charter, and I was very much involved in that at the time. But Norman Tebbitt changed the law because he was so against what was ultimately decided, which was to keep the Royal Bank as a separate entity. And he took the regional consideration out of the then monopolist commission's remit in looking at the effect of mergers. I would like to see that and go back in somewhere or other into the new legislation. And I also would like to see us look at how on earth we can promote entrepreneurship and small business more effectively than we have done in the past. I would, I mean, I guess I take, and I think this is where Gavin's coming from as well, a fairly traditional kind of economist view of this, that really in the long run, not that demand is not very important, but in the long run it's the supply side of the economy that we need to stimulate in order to stimulate growth. And that implies, you know, capital and investment. It implies the labour force, but not just the quantity of the labour force. That's important, and in Scotland we can influence that potentially through migration flows. But we can certainly influence the quality of it, and the Scottish Government does routinely do so through, I have to mention, higher education as a possibility here and the innovative activity. And actually, you are often higher education, and you know that it's innovation and the creation of knowledge that's emphasised that. And that's very important, but what's really crucially important is the graduates that we produce and the skills that they possess, and a large percentage of the graduates produced in Scotland actually remain in Scotland and contribute to the quality of the labour force. So education generally, training definitely, all of these augment the quality of the labour force, but again there's this other factor that is much more difficult to pin down, I think, and that's the entrepreneurial spirit, if you want to call it that, and ways of seeking to stimulate that, and possibly some things could be done there though, and by no means an expert on it. And the Scottish Government itself is sought to identify growth sectors. I think a number of these would probably be agreed across the parties, and there may be policies there that could help us. I mean, I know renewable energy has been an area that has, until fairly recently, had fairly widespread agreement has been a potentially growth area here, and I think that remains so. So I think there are a number of areas that people could look at sectorally, as well as the overall picture. I didn't drink bow sciences as well, I understand. Professor Key. I think a large proportion of these graduates do stay in Scotland, but equally a large proportion don't. And if we're emphasising business, and we should be emphasising business, it keeps striking me, and I had not known actually until the last few days that the chairman of Pfizer was actually a Scott, and it keeps coming up that there are people who have important positions in large international companies who originated in Scotland, and who have not been working in Scotland in the last 20 years. Even to get quite a small proportion of these people back in Scotland would make quite a difference, part of creating this vibrant business community we're talking about. But for me, the largest part of it is to understand that now the big cap in providing finance is actually funding to fund the start-up losses of new small businesses, and that's where funding is needed and where, if anything, banks have withdrawn as they withdrawn from everything, and venture capitalists have withdrawn as they've found it easier to make money by funding buyouts of established businesses and various kinds of financial engineering. Creating institutions there, which I think should have a mixture of angel-type funding, private money, with government funding, I suspect being directed more towards helping on the procurement side than actually providing the finance. It's better if that's privately done, seems to me key. But these are the kind of issues on which I think we should be concentrating, and it's that emphasis that Governor McRone and Peter have been talking about, of how do we create real effective small business and entrepreneurship in Scotland that is the biggest issue as to where we'll be in 10 years' time. When we set up the Scottish Development Agency, and I was involved in that at the time in the 1970s, one of the aims was to get it to help to provide finance for business start-ups and so on, and it does do that to an extent. But what one found then was that whenever a company failed, they were hauled before the Public Accounts Committee of the House of Commons and given a hell of a grilling, you have to expect that some of them will fail. It's in the nature of the thing, and we really need, I mean, I agree with John that it's better if the private sector does it, but the public sector has to be ready to lend a hand, it seems to me, until the private sector gets adequately geared up and stops lending so much on people's mortgages and rather more on promoting small business. That's why I think the private sector should be providing the investment and the public sector should help by the product. I have to say in terms of why so many Scots graduates leave out on the pharmaceutical industry and because it's all headquartered in the home counties, if you want progression in your career, you really have to move there whether it's an R&D, whether it's a management, and a lot of the management were Scots, I work for companies all Scots, because they were seen to be sociable and assertive at the same time, whereas in Ireland, because it was independent, they had the whole infrastructure, if you like, the same company in Ireland, but they did nothing in Scotland. Anyway, any further points anyone would like to make just before we wind up the session? The percentage of graduates who remain in Scotland is actually very high, it's of the order of 90%, I mean it's really high. Of course this export of human capital is very important, I don't deny it, and if we could retrieve some of that, great, but you know we've got a very high percent, I think it's certainly the highest of regions in the UK, so it's beneficial. Okay, well thank you very much actually for your evidence today, it's absolutely fascinating, and I'd like to thank colleagues around the table for their wider area of questions as well, so that being the end of that item, and I'll call the committee to a close exactly at 1pm.