 Good morning, and welcome to the fifth meeting in 2018 of the Finance and Constitution Committee. I can remind everybody present to switch off their mobile phones, at least put them into a mode that won't interfere with their proceedings. First item on agenda this morning is to take evidence on the Scottish Fiscal Commission's revised forecasts, which were produced following policy changes announced last week at stage one of the budget bill. We're joined for this session by Professor Alistair Smith, one of the commissioners, David Wilson, who's also a commissioner, John Arland, the chief executive, and David Stone, who's the head of economic and income tax forecasting. I warmly welcome our witnesses to the meeting, and Professor Alistair Smith, I think you want to make a short opening statement. Yes, thank you. Good morning. We're grateful to have this opportunity to hear this morning to discuss our updated income tax forecasts following last week's stage one debate. As you said, during that debate, the cabinet secretary announced a number of changes to the budget bill that had been based on the draft budget that was published in December. Those changes included a reduction to the high-rate threshold for income tax, an extension of the Government's public sector pay policy, and a number of additional expenditure commitments totaling £137.8 million in 2018-19. Last Wednesday, the Scottish Government also published a provisional estimate of the additional revenue of around £220 million in 2018-19 from the income tax policy. That's the income tax policy in its entirety. That includes an additional £55 million, which is associated with the reduction in the high-rate threshold. The Government noted that the commission would provide the official revenue estimate, and that's what we did yesterday afternoon, when we published a supplement to our December forecast. This timing was agreed with Parliament and the Government before Christmas. The written agreement was published on our website. The Government's final income tax policy is forecast by the commission to raise £219 million in 2018-19. That's £55 million more than the policy that was announced in December. In addition, the extension of the Government's public sector pay policy is forecast to raise a further £7 million in income tax revenues. We've been told that the Cabinet Secretary intends to put it on the record at stage 2 that additional spending will be funded from tax revenues plus a combination of Scotland reserve drawdown and underspends. The Government does not intend that the additional expenditure announced by the Cabinet Secretary will require additional borrowing or impact on the position of the non-domestic rates rating accounts, which is also known as the NDR pool. In the light of that announcement, we see no need to change our December assessment of the reasonableness of the Government's borrowing plans. Our next forecast will be published in the spring to accompany the proposed medium-term financial strategy, focusing on the longer-term sustainability of Scotland's public finances. In May, we will review both our assessment of the reasonableness of the Government's borrowing projections and its scope. Mr Chairman, that is all that I want to say by way of introduction, and we look forward to your questions. Thank you, Mr President. That was a very helpful introduction. I think that we are also very grateful for the Fiscal Commission's ability to turn around so quickly that your forecasting, given that it was only last week that we have the Budget Bill Stage 1, arrived at. Your report suggests that the extension to the public sector pay awards of 3 per cent, for those earning more than £38,000 per annum, to those earning less than £36,500 in future, is expected to generate an additional £7 million of tax revenues in 1819, rising to £8 million per annum by 2022-23. Can you explain to the committee how you arrived at that figure of £7 million? I asked David Stone to talk you through the detailed modelling. Our starting point for the forecast is the survey of personal incomes, its detailed income tax payer data sets. It allows us to identify individuals who we think are working in the public sector. We take the detail of the Government's extension to the public sector pay policy, and, using information provided to us by the Government, we work out the number of people who are in scope of that 3 per cent pay award and the number of people in scope of that 2 per cent pay award. We then have a specific adjustment for public sector pay in our income tax model. Using the information that we were given, we saw that in 2018-19, before the extension, public sector pay would have increased by an average of 3.2 per cent, with the extension that average increase is now 3.3 per cent. Running those two numbers through the model and seeing what the difference is gives us that £7 million figure. We increased the total amount of income tax liabilities in 2018-19 by that £7 million difference introduced by 3.3 per cent growth versus 3.2 per cent growth. Do you unwrap how you identify what you mean by public sector? For instance, does that include people in local government or those parts of the public sector that are not under the direct control of Scottish ministers? Or is it that the public sector is a whole that you identify? We have to use the data that we have, which is the survey of personal incomes. This allows us, this has a broad sectoral classification for each individual in that database, which can be things like healthcare worker, education, finance. We look at those list of sectors and work out for which sectors there will be primarily public sector workers or primarily private sector workers. That gives us our breakdown in our data set between public and private sector. For those sectors in the model that we identify as being primarily public sector workers, that is what we apply the public sector wage growth rates to, which we work out in a separate exercise based on the information that the Government gives us. I will delve a wee bit deeper into that then, because if we are looking at the public sector, and obviously this issue of the public sector pay award rising up to up to 3 per cent for those earning less than £36,500 can only really affect the core bits of the Scottish Government which they are responsible for. How do you account for the difference between that core group and the others in the public sector? How do you deal with it methodologically? The Government is very clear about who their pay policy covers. You are asking about local government and it does not cover local government apart from teachers. We use that information that the Government gives us on the scope and we can therefore make an appropriate estimate of the size of the coverage of the pay policy. I am still not sure that I quite followed the answer to Bruce Crawford's supplementary. Are you saying that you have made a judgment on who is directly covered in the Scottish Government's pay policy and that the £7 million projection of additional income tax revenue is about those people directly covered by the SGPay policy? That is correct. If we then assume that local government achieves a similar pay policy or perhaps even something better, that would again generate additional income tax revenues on top of that £7 million. We did not include them to be in the scope of this. That is really helpful. Thank you. I was going to go on to ask about the process that has gone over the last few days and the protocol. Let us go on to behaviour stuff first before we get there, Patrick. Let us try and get through all the issues about the numbers and then we can look at the process. Thank you, convener. I was really just a quick question. Were you surprised on behavioural response, what your feeling was about the 56, the cost of it is almost 20 per cent to the additional amount raised and whether there was an anomaly between the decreases from behavioural responses in the top two rates compared to when you say that the numbers of taxpayers in those rates are going to increase over the next five years? Is there anomaly in that that you have got whatever revenue reducing on that but numbers increasing? I just wondered how much, to find a bit of that, was how much in the response can be broken down into people managing their affairs differently but remaining within Scotland and how many people are actually leaving Scotland because of that? Some key things to emphasise. The approach that we have taken to costing the changed or the new approach by the Government announced at stage one is exactly the same as the approach that we took back in December, so it is the same overall approach. As you put it, it may look as though the behavioural impact on this change in policy is much less than the behavioural impact on the initial policy announced back in December. That reflects the particular nature of the announcement. What our overall approach recognises is that, when there is a change, for example, to the additional rate for very high tax payers, that is likely to be an incentive to adjust tax affairs for many people who might have the ability to do it. That is reflected in the modelling approach that leads to the reduction between the static, as we call it, impact and taking into account a behavioural impact. In terms of the new proposal and the adjustment in the personal allowance, that will affect a large number of people, but it will affect a large number of people in a relatively limited way. On the Government's numbers, it will, in effect, increase the tax payment by around about the £170 figure. We would not expect that to have a very significant behavioural impact compared to the initial policy. The incremental behavioural impact of the new proposal over what was announced in December, we would expect to be more modest based on the assessment that we have made. I would like to touch on the behavioural stuff very briefly. I may fall up on the issue of local government, because there is some clarity on that as well in the wider public pay impact. Thank you for coming along and for the work that you have done on this. It has been excellent. Just to clarify, I am looking at table 10. If I understand that correctly, what you are saying there is that you would have expected, on the static cost and with the changes that have just been made by the Government, the recent changes on the threshold to raise 61, but £5 million of that you are losing because of behavioural impact, so it is something less than 10 per cent. It is that correct. Just to again clarify the point that was made earlier, the reason for that being lower than you saw before is because it hits a number of people that are in that 43 to 44 range, but they are most likely people that are not in a position to be able to change their affairs dramatically. It hits a lot of other people, but it hits them to such a small degree that you do not expect it to drive any change in their behaviour. Is that correct? I think that it hits them to a fixed amount. It is not for somebody earning, for example, over £150,000, even if they reduced their time worked or if they just fared the maximum that they could save would be limited. There is a difference between an average tax and a marginal tax, so we would not expect the behavioural impact to be anything like as great as, for example, a change to the additional rate of tax. You have done that using the numbers that you gave us before for the ties, but it is point 35 up to point 75. It is the same approach, the same model. Thank you very much for clarifying that. Just briefly following up on the point that the convener and Patrick Harvie were asking, if your assumption of £7 million only applies to Scottish Government employees, then if you look at the broader public sector—I think that he said that teachers were included in that, but not others—if you apply that right across the piece in a local government and others gave those increases as well, could you quantify how much extra that would raise over and above the £7 million? We got advice from the Government on who would be in scope of this policy, and they told us who they believe would be aligned with that policy. They told us that that would include around 260,000 public sector workers. That would include NHS police, fire and teachers. It is up to the Government to clarify exactly who the pay award will cover, but that is the advice that we received. It is around 260 public sector workers in Scotland out of a total—I can't remember the total number, but—of 400,000 or 500,000. It applies to a fair chunk of all individuals in the public sector, and then we break down the increases and pay for that group. It sounds like it applies to roughly half. It does not apply to the local government, but it is excluded from that 260,000 figure. That £7 million will become a number that might double that. I am just trying to see whether you can quantify that number for us in any way, shape or form. We have not done that on quantification, because it is not a stated Government policy that is vital. However, the orders of magnitudes that you are talking about—if all local government employees were to receive that sort of level of pay award, it is those orders of magnitude numbers, but that is not a quantification that we have. That is clear, so it could be double, give or take. That whole process becomes even more difficult to make a judgment on because of the number of UK civil servants who are employed in Scotland that we do not know yet, where they will be in terms of the final pay position. They might not achieve the same levels as Scottish Government directly affected individuals if they are a UK civil servant, and therefore there is a pretty complicated picture at this stage, which is what I am really trying to suggest. Yes, it is a complicated picture. Estimates could be made, but it is not an estimate that we have made or would be in our broad remit to make an estimate of all that. Okay, go on. Patrick Stewart. Yes, still on the behavioural effects, you stated that the greatest behavioural response comes from those in the higher and top rate bands. In discussion with Ivan McKee, I think that you agreed that there was likely to be a larger effect at the highest end of the income scale, but you are still saying that the higher rate bands are included in the statement where the greatest effect is. What is the evidence base for the extent of the effect of behavioural changes around tax avoidance at the higher rate band? In particular, I am thinking about the bulk of higher rate taxpayers who may be at the bottom end of that range. What is the actual evidence base that you place your assumptions on? We have set out in our previous published papers in December, and we have published an earlier paper on our overall approach to forecasting income taxes. There is an academic literature that sets out the experience of countries and areas that have, in as far as it is possible, comparable variations in income tax, but that literature is far from comprehensive or far from definitive in terms of the conclusions that you can draw from it. The principal source of the best example that we draw on is the work that has been done by HMRC going through the experience of the change to the higher rate of tax in 2010-12 in the UK, where there was an increase to the 50-pence rate of tax, which was then subsequently removed. That experience has enabled people to assess the likely behavioural impact. HMRC published in March 2012 an assessment of that, which has been quite influential in the way that people have been thinking about behavioural impacts. Subsequently, the Institute for Physical Studies has produced assessments as well, but perhaps I quote from the HMRC study, which is quite informative. One of the key things that they say in their conclusions was that behavioural responses to tax changes are often large and highly uncertain. That is our starting point. We should expect, particularly for higher rate taxpayers, a large behavioural effect, but the precise level of that impact is inevitably going to be uncertain. That came out of that research study. What they drew from the assessment of that experience was that there was a considerable behavioural response and substantial amounts of forestalling. What we have attempted to do is take advantage of the work that has already been done, develop an overall approach that we have published and stated what our approach to both behavioural responses through tax income elasticity and our assessment of the way we think forestalling would work, depending on the particular policy option, set out our overall approach to it and have evaluated the stated Government policy against that background. That is our overall approach to that. On one final addition, we plan to publish some further information setting out our even more detailed approach to modelling of income tax, including behavioural responses, in a paper on 7 March. That would be helpful. I look forward to that. It will be a couple of years before we get the reconciliation between your projections and the reality. Is it going to be earlier than that when we know what the reality is? Are you going to be in a position to refine your projections for next year, based on information that you will gather during the coming financial year about the amount of tax revenue that is being generated and the amount of tax avoidance behaviour that is taking place? Two things. We will undertake a forecast evaluation. We will assess how well we have done or what we have missed on an annual basis, and we will publish a report setting that out. Yes, we will do that. If that suggests adjusting our overall approach or adjusting our elasticity or assessment, we will of course do that and set out the reasons why. One element of caution to that is inevitably in looking at the data and the outcomes as and when we get them. There will be a time delay. We will not get the comprehensive detail probably for—it will not be next year, it might be a subsequent year before we will get the detailed information. Disentangling the likely behavioural effect from the change in the tax, from all the other factors that are going on, whether it is economic change or wider change in the government policy, will be a challenging exercise to do, but we will seek to do it in the best we can and we will set out all the reasons and assessment that we make. I was going to ask a couple of things beyond behavioural effects. Was there anybody else you wanted to— I know, James, that you were interested in some of that area, but was it more of the process? It was more of the process. I think that we will just—we might as well patch on at this stage, but it just reminds me when you are talking here about what Robert Chote said to this committee about forecasting and about being like spot the ball if somebody is always moving the ball. No matter how good you want to try to make this in the exact science you can, you are never going to get this right. That is the reality. It is never going to be bang on. I am grateful for you seeing that as well as us. No, it is just a reality. I think that we will just go to the mind and remember ourselves on this when we get so close to the process that you are making best judgment that you can on the assumptions based on the information that comes in front of you. It is reassuring to know that we are all getting it wrong one way or the other by the end of the day. I just wanted to ask about thresholds. You said that there is an assumption that the higher-rate threshold will increase by inflation in the absence of any other policy change. That notion of increasing the higher-rate threshold by inflation is itself a policy decision. Am I understanding the commentary in your update report that that is a policy decision that the Scottish Government has informed you of and that you will work on the basis of that because of a decision that the Government has already made? I will give you a more specific answer on that. There is a distinction between official-stated policy for this year. To enable us to undertake five-year forecasts, we have to make an assumption about what might happen in the future. We looked at the Government to give us an indication of what their future approach would be, simply to enable us to do the assessment. The official-stated policy for this year is perhaps of a different order than the best assumption of what the policy might be going forward. I do not know if one of my colleagues wants to add to that. We need to make some assumption about what those thresholds will be in future years. We tried to make that assumption as neutral as possible so that we are not introducing policy changes. Leaving the thresholds fixed exactly where they are, that is not particularly realistic. We do not have the history in Scotland, but in the UK the higher-rate threshold has increased over the long-term in line with inflation if there have not been other policy decisions—the statutory indexation in the UK—that make sure that that happened. In discussion with the Government over time, we established that that neutral starting point for where those thresholds will end up over the next few years is to increase them in line with inflation and then to adjust policy around those thresholds on top of that. Can I add to that to be crystal clear about this, Mr Harvey? The paragraph 11 of our report says, therefore, while not a policy that the Scottish Government suggested as a set of assumptions for further years, it has been very clear that that is comfortable with our assumption, but it is not a Government policy. Presumably, it would be helpful for you if there was a policy intention. For example, if it became Government policy, year-on-year tax policy should reduce economic inequality rather than that it should continue to give stability. It would be helpful for you if that was a stated policy that you can base your longer-term assumptions on. I think that it is helpful in our forecasting that the Government is clear as possible about what its future policy is, whatever that policy is. I was also going to ask about the process and protocol. You would crack it out. I think that I will let James come in and process his stuff first, and then we will come back. In terms of the process, you published the report after the publication of the draft budget, and then the cabinet secretary announced changes last week. You have had to go through an interaction in order to produce that report. Can you describe the process between the announcement in the chamber last week and the subsequent publication of your report? Yes, I will do that. After the announcement last week, we were sent a formal notification by the Government of the policy, which contained the description of the policy. It also contained some background information about other aspects of what had happened, including expenditure, the expenditure announcement and how the Government intended to find the money to pay for the additional expenditure. We received that. We then turned around our costing and sent the Government preliminary results of the costing on Friday. On Monday, we sent the Government a near-final draft of our report for fact-checking. We offered the Government a challenge meeting, so it could discuss our costing with us and with the commissioners. The Government thought that it had enough conversation with us, so it did not take us up on that opportunity. Yesterday, we sent another version of the report for fact-checking by about 2 o'clock. We had a small number of comments back from the Government and published it at 3 o'clock. That is helpful. You mentioned that the option was offered of a challenge meeting, which the Government did not take up. Did that take place before the publication of the first report? The publication of the first report was a whole series of challenge meetings. On the commission's website, we published a protocol that described the interaction with the Government. There are a whole series of challenge meetings at which, looking at individual tax and the economic forecast, at various points we provided preliminary forecasts to the Government. They looked at the assumptions and came back with what they thought were methodological points about how we had our forecasting. That process is very clearly explained in the protocol. On table 9, you outline a position where the end behavioural impact is minus £56 million. If the Government arrived at a position where they disagreed with that, after all those discussions and challenge meetings, what were the Government able to use its own figure or are they legally bound by the figure that you have calculated? The Scottish Fiscal Commission Act requires that the Government uses our figures, but if they do not wish to use our figures, they need to write to Mr Crawford and explain why they have not used the figures. They have the ability not to use our forecast figures, but if they do go down that path, they have to write. I am pretty sure that Mr Crawford and I will explain why they have made that decision. Final question, convener. If we were to get to a position where the Cabinet Secretary again decided to make a change in terms of tax policy to say the weekend before the rate resolution debate on 20 February, how would you be able to deal with that in terms of going through the process that you have just described over the past week? We have had preliminary discussions with the Government about eventualities like that. We had those discussions a little earlier in the process. We have agreed a rough timetable with them for any further changes. I think that the next obvious point at which it could change is the Scottish rate resolution. If the Government intends to make a change at that point, it would need to tell us in advance when we would go through a similar process. Patrick, do you want to follow through on anything on the process stuff? Thank you. I was preparing for, believe it or not, a relatively consensual debate that we had yesterday afternoon about some aspects of the budget process. I was looking at how it used to be done—a six-month budget scrutiny process for what was a much simpler budget in those days. Thinking about that in comparison now with this process and my reaction when I read the protocol about stage one vote on Wednesday, then notification to the commission of policy changes by Thursday, amendment deadline Friday. Presumably, you are working over the weekend on your analysis, which comes to Government for a potential challenge meeting on Monday morning, followed by deadlines at one o'clock and two o'clock and then three o'clock for publication. It is a bit of a breakneck process, is it not? Can't we do anything to improve that and to ensure that we have a calmer reflection on what are non-trivial questions about the Scottish finances? I think that the way to think about that is that we, through the process that John described earlier, had an extended period of engagement with the Government in accordance with the protocol before the December announcements, the details of our income tax model are well understood by the Government, are clearly set out by us. A change in the Government's policy, announced to us last week, can actually be processed through a model that we understand and which the Government understands quite quickly. I looked at my colleagues on the left. It is done speedily and efficiently, I think that it wouldn't be fair to say that it's a breakneck process, that the people are walking under stress. It's the application of an established model to a change in the previously announced policy. I think that the really important thing is that we have sufficient time to do quality assurance. We didn't work over the weekend, I'm very grateful to say, but we made sure that we had sufficient time to do quality assurance. David and his colleagues were doing during that process of spending an awful lot of time checking the calculations. We checked them internally and against the Government analysts because they were using a similar model, so we could compare notes with how they had done this work. We also had a checking process within the commission that people weren't involved in this work and checked the numbers as well. We are pretty confident that the quality assurance process that we have in place and the time that we have is sufficient. To go to your wider point about the budget process, as you know, there was a budget process review group that worked during the course of last year and produced a report, which I think has got a number of recommendations, some of those including the work that we're doing, and also moving towards another second forecast by the commission in late spring May. As we work through those recommendations that are accepted or evolve, I think that that's going to change the whole nature of the process, in a way that elongates it. That's helpful. Getting the road and make last-minute decisions can make it difficult for you. The question should be for us. Can we make decisions a bit quicker? That would probably be the right way to think about this in the round, but I'm not asking you to comment that, because I'm going to go to Murdo Fraser. In your paper, paragraph 18, you have a calculation of the impact on income tax liabilities. You come to the conclusion that taxpayers with gross incomes below £26,000 will have a reduction in their tax liabilities up to £20 a year. Taxpayers with gross incomes above that threshold will have higher tax liabilities. The cut-off point that the Scottish Government has quoted is £33,000 a year, and you are quoting £26,000 a year. It would be helpful if you could explain why you arrive at the figure of £26,000. Considering the costing, we are comparing what taxpayers would have paid in 2018-19 in our baseline assumptions. We are going back to what we discussed before about how we grow the higher-aid threshold without any policy change, and we compare that to what happens with the policy change. When you look at tables 5 and 6 above paragraph 18, it shows that, in 2018-19, what the parameters would have been in that year, in 2018-19, what they are with the policy change, and that's the comparison that we're making. With that comparison, the cut-off point is £26,000. The £33,000 figure, I believe, is based on comparing what taxpayers paid in 2017-18 compared to 2018-19. That's where the difference comes from. I think that in the Scottish Government's income tax fact sheet that they published, they make that distinction as well. They've got both sets of figures there. Willie, have you still got questions on forecasting that have been exhausted? No, no, I wouldn't mind, Bruce. Hello, Llywydd. I wonder if I could ask you a couple of questions on your five-year forecast, which you've illustrated on table 12 in your paper. We can see from the figures that your estimate for tax take for the year ahead is £12 billion, but in year 5 it's around £14 billion. Could you first explain why such a significant rise between £12 billion and £14 billion is a significant jump in tax take in the five-year period? Reasons for that. Partly inflation will be impacting on an increase in the tax take, particularly in the current circumstances. That will be a factor in that. I think that the increasing tax take from the public sector pay increases will be a factor. Thirdly, there will be the increasing amount of tax received by virtue of the fact that, as thresholds change, there will be an increased tax take built into the tax system. Taking a number of factors like that and other ones would expect the overall tax take to be increasing to that degree. However, inflation is a big factor and a cumulative impact of the decisions that have been made by the Scottish Government this year and last year are contributing to that. Perhaps John, David, is there anything that you want to add to that? We are working on a growth of around 1 per cent a year that will add to income tax revenues as well. As people's incomes increase, income tax revenues will increase. Those numbers are in nominal terms and include the impact of inflation. That adds to people's incomes. I think that the main driving factor is that population growth will add to the number of people in employment. There are a lot of factors that will lead to an increase over time. Can I ask about the margins of error in forecasting? I know that it is difficult territory to get into. You are more on the cautious side and the optimistic side. Does this five-year forecast move through? Are we likely to see a divergence in your estimates compared to perhaps what the Government of the day might be producing for themselves? Are you more cautious than optimistic? I think that, as a general matter, our forecasts are central forecasts that are our best estimate of our best forecast of what we think the numbers are going to be. One is always careful not to do the assumptions that one makes, but they are not pushed downwards to be deliberately cautious. On forecast error, I think that people are quite used to seeing those ffand diagrams that show an opening degree of confidence in forecasts as they go through time. Because the fiscal commission has not been producing forecasts, this is our first set of forecasts. We do not have historical forecast error, so we cannot produce those ffand diagrams. When we have enough information about that forecast outturn, we will produce those so that you will get a much clearer sense of the confidence intervals. At the moment of what we have done in the December report, we produced a number of sensitivity analysis, so that you can have a look at that back to that December report and get a sense of what the impact on the income tax forecasts are if you move certain assumptions on the impact on the income tax forecasts are. I do not think that anyone else has identified themselves. I want to ask a question. I thank you very much for coming along this morning and providing us with evidence. We are very grateful for that. It has been helpful and provided some clarity. At this stage, I conclude and suspend this meeting for five minutes to allow a change over witnesses. The second item on our agenda today is to take evidence on the budget bill at stage 2. This is intended to allow the committee the opportunity to put questions on the bill and amendments to the cabinet secretary and officials before we turn to formal proceedings. We are joined for this item today by Derek Mackay, the cabinet secretary of finance and constitution. The cabinet secretary is joined for this item by Scottish Government officials John Nicholson, who is the deputy director of financial scrutiny and outcomes, Graham Onson, the head of local government finance, Jonathan Sewell, the head of income tax and tax strategy unit. I welcome our witnesses to the meeting and invite the cabinet secretary to make an opening statement. I welcome the finance and constitution's committee's report on the 18-19 draft budget. As it has informed Parliament last week, I will respond to the report in full in advance of the stage 3 debate on 21 February. Today's committee session will focus on the content of the budget bill itself, as approved in principle by the Scottish Parliament, in addition to the following spending changes that announced at stage 1 debate last week. There are also a number of amendments to the bill that the committee will need to consider. I would like to begin by focusing on some of the presentational differences that exist between the presentation of the draft budget that I published in December and the budget bill that was introduced on 25 January, and we are considering today. In order to assist the committee, I will explain the main differences with reference to table 1.2 on page 3 of the supporting document. Column H in table 1.2 sets out the draft budget spending plans, restated for the budget bill purposes. Columns B to G provide details of the specific adjustments that have been made, including the necessary statutory adjustments to meet the requirements of the parliamentary process. There is only one actual change to the spending plans outlined in the draft budget that I had wished to take the opportunity to highlight to the committee to ensure that budgets align with the latest available information. There is a decrease of £222.4 million to the AME budget provision for teachers and NHS pension schemes. The reflect HM treasury update, the discount rate, applied for post-employment benefits, announced on December 2017. The rate changes announced in December are used in preparing budget estimates but will have no effect on the current contributions paid out of salaries, neither by scheme members nor to current payments made to retirees. Another adjustment that is set out in table 1.2 includes the exclusion of £165.6 million of NDPB non-cash costs, which do not require parliamentary approval, and those are mainly in relation to depreciation and impairments for NDPBs. The exclusion of judicial salaries and Scottish Water loan repayments to the National Loans Fund and Public Works loans won't, which again do not require parliamentary approval. The inclusion of £5.4 million of police loan charges that need to be approved as part of the budget bill. Adjustments to portfolio budgets reflect a requirement that a number of direct, funded and external bodies require separate parliamentary approval. Those include the National Records of Scotland Forestry Commission, Food Standards Scotland, the Scottish Courts and Tribunials Service, the Office of the Scottish Charity Regulator, Scottish Housing Regulator, Revenue Scotland and Teachers in NHS Pension Schemes. At the restainment of local authorities' specific grants, including an overall 18, 19 local government settlement, is there to ensure that they are approved and under the control of the appropriate Cabinet Secretary with policy responsibility. Full details of all grants treated in this were included in the table on page 43 of the supporting document. Those are all the technical adjustments and do not change in any way the budget that has been scrutinised by this and other committees and approved and principled by the Parliament. I would also remind members that for the purposes of the budget bill, only spending that scores this capital on the Scottish Government's or direct funding bodies annual accounts is shown as capital. That means that capital grants are shown as operating expenditure on the budget bill supporting document. The full capital picture is shown on table 1.3 on page 4 and now turning to stage 2 amendments. The amendments that the committee is considering today give effect to the changes to spending plans that I announced to Parliament at the stage 1 debate last week and will be firmly moved later in this session. As I announced to Parliament last week, I have been providing a total uplift of £170 million to local government as part of the deal agreed with the Scottish Greens. The amendments that I am proposing today allocate £10.5 million to support inter-island ferries for Orkney and Shetland Isles and additional £125 million to local government in 1819, with the balance of £34.5 million being allocated in 1718. £2 million for fuel poverty, £200,000 to accelerate the delivery of our four marine protected areas and making available £70,000 in funding for the Scottish Sports Association. I have also agreed to make available up to £2 million for a local rail development fund, but this is not covered in these amendments as discussions on how that will be taken forward are still on going at this time. At these commitments will be funded through a combination of around £62 million in expected additional income tax revenues and around £110 million from a combination of anticipated underspend in 1718 and drawdown from the Scotland reserve. SFC, as you have just been hearing, has forecast that an additional £55 million will arise from the change in the higher rate threshold and a further £7 million of tax revenues due to the change in the pay policy threshold to £36,500. The final mix of underspend and reserve drawdown will be determined at the end of the financial year once there is greater certainty on the year-end financial position. I hope that those introductory remarks have provided committee with a useful explanation of some of the key aspects of the budget, Bill. I would be happy to now take any questions from members. I just want to pick up on one of the themes to begin with that I try to explore during the stage 1 report about some of the future challenges that we have around the budget. You will note from our draft budget that we highlight a potential risk to public finances if there is any significant forecast error in the future. We have also seen that we are looking for further details from the SFC on why, despite having lower economic growth forecasts per capita relative to the UK, the forecast that the income tax revenues per capita will grow at the same rate in Scotland as the rest of the UK. Given that uncertainty and volatility, can you provide the committee with some understanding of how the Scottish Government intends to address this challenge and avoid as much as possible that it can be done? Are there any unwelcome surprises that, when we eventually get the final out-turn data for income tax revenues in September 2020, it is just about what you are planning around that, I think that it would be helpful to know about? That is a good question, convener, and one that I know we will all be focused on. Obviously, we want forecasts to be as robust as possible. I was watching the evidence early, and I think that it is Patrick Harvie. I heard say on terms of economists that none of them get it exactly right, such as the nature of forecasts to the penny. Of course, we want the SFC forecast to be as robust as possible, but that said, there is a range of interventions that we can make. First of all, there is the reserve to help with smoothing from one year to the next, if that was required. The budget is substantial at £40 billion. There is obviously flexibility to accommodate some of that, but if the forecast error was in such a scale, there are the borrowing powers as part of the fiscal regime as well, if it was at that end of the scale of substantial and beyond our financial means to resolve that. In-year budgeting, managing the issue from one year to the next, the reserve and the overall approach in tax take, recognising that tax take, and, of course, the fiscal framework and the methodology that we have is tax to tax. In that regard, even though GDP growth is not what we would want it to be, wage growth in terms of that analysis was individually and specifically stronger. Range of actions from in-year management, use of reserves, all the tools that we have in the box, but if it was so substantial, there is provision to borrow if it was at that scale in accordance with the fiscal framework. Do you require a Treasury agreement if it was of a scale that the forecasts were so far out? Do you require a Treasury agreement to enter into that process of drawdown from borrowing powers to help to smooth it out? Yes, it would have to meet the necessary criteria and require their engagement. Adam, I think that you have questions about transparency. Thank you. Cabinet Secretary, do you agree that it is essential for effective parliamentary scrutiny of the budget process that the Scottish Government is as transparent as possible about its budget proposals? We haven't had the pleasure yet of your response to our report, published a couple of weeks ago, on the DAFT budget, but you'll see when you look at that report that there are a number of specific recommendations about transparency. Have you had a chance to reflect on those recommendations yet? Yes, and I think that it should be taken into account with the overall work around budget process review group as well, so should we consider all of that in the full in terms of process? Do you think that it is compatible with the principle of transparency that you said is essential to effective parliamentary scrutiny, or do you think that it is a breach of the principle of transparency that you have said is essential for you to produce more than £160 million of additional spending between the publication of the DAFT budget and the actual budget? No, I don't think that there's any breach at all. It's a substantial budget, there's obviously flexibility. Last time I appeared before the committee, I was asked about what financial resources the Government had, and I've repeatedly made the point that areas such as budget exchange and carryover can be determined as the process moves when you get to a year-end. What kind of transparency— I'm making the point, if I may, because it relates to this budget around the Scotland reserve as well. I've presented that information to Parliament also. On other matters such as the non-domestic rates pool, I've been perfectly clear on what the Government's plan is. I was going to ask you about that. Sorry, I thought you'd stopped, but I was going to ask you about the Scotland reserve. Can you give us a bit of transparency around the Scotland reserve? What was the size of it before you made the deal with the Scottish Green Party? What is the size of it after you've made the deal with the Scottish Green Party? As I've previously reported to Parliament—and I'm sure Adam Tomkins does actually know that—there are years that we contributed to the Scotland reserve. Consequence to the fiscal framework, there are parameters around budget exchange from one year to the next. Where we have generated tax revenues that could go into the Scotland reserve, that's wedded to the tune of £74 million reported to Parliament. That can be deployed now and future years. Of that £74 million, I've described the decisions that we can take around budget exchange—the year-end flexibility, the carry-over, if you like, and the use of the Scotland reserve. The tax change is to fund the proposition that will secure the passing of the budget. All stages have been forthcoming in the financial position of the Government. The tax reserve, if we were to use a balance of that, there will still be Scotland reserve resources available for next year. Perhaps the problem that we have is that we have different definitions of transparent, because I don't think that that was a very transparent answer with respect. I asked you what was the size of the Scotland reserve before you did the deal with the Scottish Green Party and what will be the size of the Scotland reserve after you have done the deal with the Scottish Green Party. You haven't answered either of those questions. I think that I have tried to answer the question, but it is around issues such as the statement. If you listen to what I am saying, the final determination on what is deployed will be determined by what is available in budget exchange. If there is more available for carry-over at the end of the year, we use less of the reserve. As it stands right now on current planning assumptions, we could use about £40 million of the Scotland reserve, so that would be £40 of the £74 million. However, that position may change as a consequence of what might be available in budget carry-over. In the interests of transparency, that figure is annually reported to the Parliament in terms of the reserve and any underspends that may arise. Normally, in the June outturn, which is what I have done since becoming finance secretary, there is an open and transparent way. In terms of the money that has been drawn from the underspend in the Scotland reserve, that is £110 million. That is a similar situation to last year, where there was £120 million drawn down from that. Is it not the case that what an effect you are doing as you have that block of money set aside there almost as a slush fund for your negotiations is part of the parliamentary process? I would not describe it as that, Mr Kelly. You can term it any way you want. What happened in previous years, of course, was any underspend at the end of the year might have been carried over and used through the course of the year. If you want to be fully transparent, I do not think that it is a bad thing to set out what that underspend might be and how the Government proposes to use it. In fact, if it is using in a way that is agreeing parliamentary support, I think that that is quite a good thing. I am sure that Mr Kelly would welcome that. I think that it is far more credible than the plans that I have seen from the Opposition Labour Party on how to fund a budget. However, I think that it is prudent, wise and transparent use of resource. The only thing that is fluid at this stage—and that is the point that I was trying to make—is how much exactly is available at the end of the financial year. Of course, we are getting to the end of the financial year, but that is still why there is finessing at the end of the year of a substantial multi-billion-pound budget. If you are really committed to transparency, as you have tried to reiterate in your answers to Mr Tomkins, would it not be better as part of when you published the draft budget to also publish at that time what the underspend figures are and what the Scotland reserve figures are, so that we then all know what you are taking into these negotiations? Just to double-check, the Scotland reserve figure is in the documentation. Sorry, Gimmyran. I will say table one as far as I can see here that the information is available. Yes, so that is in it. In terms of budget exchange, that is a moving figure, so whatever I put in the draft budget will be a point in time. As the committee considers its approach on budget process and financial planning, there can be requests for updates, but that is a moving position in terms of any underspend that might exist within the organisation. I accept that it is a moving position, but at December you must have a forecast of what you think the underspend is going to be at the end of the year. If that figure was available for all involved, we will get an idea of how much you might be looking to introduce at a further stage in the budget. I suppose that the point that I am trying to make is that you can make a judgment at a point in time. At the point in time, on 14 December, it set out the potential use of budget exchange at that point. Approximately £158 was in the budget, which is in the same table, so the point that I am making is that that figure will change until you get to the year end, because you cannot get expending exactly right. Of course, an important point here is to make sure that we can carry it forward. There are years in the past where carrying forward was lost to Scotland, but we have been deploying it. The difference in the past couple of years is that we have been able to, yes, use it as part of budget negotiations and deploy it. You could argue with the Will of Parliament in advance as to how that has deployed, because it may have been deployed over the course of the next financial year previously. I am absolutely sure of what we are talking about here. There is a table 1 in Annex to the draft budget document, which I think was submitted in December. That figure on the budget reserves for 2017-18 is 2003, and for 2018-19 was 158. It was from those figures that the amounts that you are talking about requiring flexibility to finance the arrangements with the greens is what you have taken the money from, or some of it? No, that was what was produced at that point in time as part of the budget. That is the snapshot of that point in time of where the budget exchange, the budget underspend, is expected to be at that point. That answers the question. Incidentally, that was an improvement from recommendations of previous years to put that table in to further explain in the draft budget as to how elements were being funded beyond the tax-raising and revenue-raising devices in the budget. That is an innovation to put that in. The point that I am trying to stress is that that number changes, because spending continues within the Scottish Government. Murdo, you have a good question in this area as well. I will get some clarity around that. The £110 million extra that you have quoted from underspend and reserves. You said and replied to Adam Tomkins that you expected that about £40 million of that would come from reserves, so we can assume that £70 million is coming from additional underspend. Is that fair? Yes, it is. When you came to the committee on 15 January when we met in Aberdeen, I asked you about the amount of money that was available in the budget in this area. You said that in relation to the budget exchange reserve, which was stated at £158 million. In the past, finance secretaries may have been able to hold on to that money for financial management reasons. For example, I have used the money up front for the purposes of budget negotiations. The figure is what it is because there is a very tight financial management, and that is the figure that officials think is most appropriate. That was on 15 January. When you presented your budget to Parliament on 31 January, which was 12 working days later, that figure of £158 million had gone up by £110 million. That is a 70 per cent increase in 12 working days. Is that reasonable? Yes, it is. The reason for that, if you want a deeper understanding as to why some of those issues emerge, is some of its demand-led budgets, some of its other factors that are out with our control, for example, treasury issues or other elements of funding. Those figures can change, so it is not unreasonable for me to use the best information that I have been given at the time to report to the committee and then take forward a budget. That will continue to be fluid until the end of the financial year. Cabinet Secretary, with respect, we are talking about a period of 12 working days, but when you give evidence of this committee, plan to conduct a budget scrutiny and then present your budget bill to Parliament, do you not think that it is holding this committee in contempt and the other committees of this Parliament in contempt trying to commit and carry out budget scrutiny when you are not providing full information to the committees? Absolutely not. I am sure that the Tories are just using colourful language here when what I have done is to present the information that I have, the official fiscal position of the Government, in a transparent and very productive way. I am happy if you want some official engagement on this as well in terms of why we arrive at the current underspend figure, if you wish. Let's have it out in all the information that we can just now. John Finchhan. I will go back to Mr Fraser's point. What Mr Mackay explained at the committee on 15 January was the rationale and reasons for which he arrived at the £158 million underspend figure that was printed in the draft budget. While the period between that being fixed and what we are talking about now is not 12 working days but is a longer period of that. No, no, no. Hold on. With respect, Mr Nicholson. I think that the further point that Mr Mackay put across was that in previous years, far less of the anticipated underspend had been allocated at the point of the draft budget and more was then secured as part of any final budget deal. Whereas this year, we have secured more of the underpinnings of the draft budget from our anticipated position on underspend at draft budget stage. The room for further movements since the draft budget was published is more restricted in this particular year. As Mr Kelly pointed out earlier, we have reached an end position where we were in broadly an equivalent position to last year in terms of the overall quantum that we are talking about. However, the movement between the draft budget and the budget bill is far smaller than it has been in previous years because there has been less additional resource available to allocate. I thank you for that response. Just to be clear, Mr Nicholson, what I was asking Mr Mackay about on 15 January was not what was in the draft budget. I was asking him quite specifically at that point, as you will see from the official report, how much additional money might be available. I was asking him about the position as at 15 January. The appropriate period is 12 working days. To be clear, that would have been an accurate answer at that time. It is as simple as that. I move on to a slightly different area now, Ash. I think that you had some questions on health. Thank you, convener. Yes. Obviously, it is the largest portfolio, but within it is an ongoing process of, I do not really like this word, modernisation and change. There is a line in that budget that is quite a big increase to the transformational change fund. I am just wondering if the cabinet secretary thinks that that strikes the right balance within that portfolio in the modernisation agenda, and also how that money will be allocated. That is a good question, because funding of the NHS is significant and important. There has been that real-terms uplift and that has been welcomed. The cabinet secretary for health is very clear that it is about investment and reform at the same time or transformation. If you do not like the term modernisation, it is transformation at the same time to try to support the kind of changes that will help to reduce demand, make the right interventions and be supportive around that transformation. Some of that might be about better use of technology and specific interventions around better performance. Of the figure is a mixture of that transformational and reform funding amounts around £126 million. That will also support the regional delivery plans, a once-for-scotland approach. Those national improvements fell to a more local level, supporting more sustainable models of care as well and have touched on the digital capability. The health agency is very clear with me that, although increasing demands on the health service, it has to go hand-in-hand with that transformation around better delivery of services and adapting services to be able to respond to those pressures. In addition to that, of course, there is more around mental health—that is good for preventative purposes—and more around social care to try to support the infrastructure community level. There has been good work around health and social care integration. Part of that package will support the territorial boards as well. It is absolutely about delivering change and transformation, improve performance at the same time as investing in a well-above inflation amount. I would also like to ask you about the low-carbon infrastructure. As part of that, there is a £2 million rail development fund. Do you have any more details on what that might look like? We are exploring that. Although there is a new stations fund, there is, frankly, the on-going issues around the rail settlement to Scotland. However, there is a need to support those who want to take forward feasibility studies and maybe get a sense of how they can progress the prospect of rail enhancements or rail stations in a local area. There are people with particular expertise on that that we will engage with to make sure that such a fund could be properly channeled. Not necessarily raising expectations that that means a new station might be coming down the line immediately, but it might be. It is to give the necessary support to take forward bids and the potential for that infrastructure to happen. It was identified through the course of the negotiations, frankly, as an issue that should be explored, and that is what we are doing. I have made a commitment to fund that. I think that we now get into government issues, Patrick. Thanks very much. Good morning. In addition to the low-carbon infrastructure investment and the significant and welcome shift of the Government's position on public sector pay, local government was a significant focus of our discussions. In the exchange of letters that are already in the public domain between us, it is very clear that we were focused on achieving that reversal of the cuts that spices have identified in the Scottish Government's funding to local government and that we put significant options to them in the way that they did that. It is the Scottish Government's decision to have funded that partly from reserves and underspend rather than additional tax changes. Are you satisfied that that—bearing in mind the earlier discussion about the importance of the reserve—are you satisfied that the tax changes and the other changes that are necessary are adequate to fund that complete reversal in the £157 million cut that spices are identified in local government funding? I do not agree with the terminology, because of course we were giving more cash, and there is a debate that we have had at this committee about what should be included in the figures. Anyway, the extra £170 million—yes, I am absolutely confident—will be provided for so much so when we move the local government settlement order and the redetermination. They get the money, so I am absolutely confident of that investment. You said in your opening statement that you drew attention to the fact that some of that overall £170 million package is coming from what would be an additional 2017-18 local government finance order. I would like to know when you expect that to be laid, when you expect that to be moved in Parliament and also just for the record a clear confirmation that you have certainty that councils will be in a position to move that additional 17-18 money into their budgets for 2018-19? Yes, they absolutely can carry it forward. There is no rigidity around that. They have welcomed that. On the redetermination order, it will be the 20th of January. That would be laid before the stage 3 debate on the budget itself. You will also be aware that we have had correspondence from COSLA who welcome the progress that has been made on supporting local government, but they have also drawn attention to the question of whether that change will be baseline for the future. That did ultimately happen to the change to the previous year's budget, but local government needs to have some degree of certainty for the future. They have clearly said that it is important for councils in setting the budgets to know whether or not that funding is recurring. They have asked the committee to raise that issue with them. What is your response to them? I will need to deal with that in the budget discussions in 2020. I have not set any portfolio budgets beyond this financial year. Yes, there is project funding, yes, there are multi-year commitments for elements such as housing, and that will come in childcare as well, city deals, swan and so forth. I am hoping to get the 2018-19 budget through Parliament successfully. I have not proposed to set out the baselines for 2020. I would not ordinarily do that. I am not proposing to do that because that would all be subject to discussion, budget preparation and negotiation for the next year. I absolutely understand the point that local government would want as much certainty as possible and would like it to be baseline, but I have not set that degree of certainty for any portfolio in the Scottish Government or part of a portfolio, as that would be in the communities. That would be for the planning for the next day budget year. Obviously, the purpose of the Scottish Government funding local government at all is to ensure that vital services can be delivered that people need in every community in Scotland. The point of having debate and discussion on the level of that support is to ensure that those services can meet people's needs. Even if you are not able to answer the question about baselining before stage 3 on the budget, surely you would accept that local government will be in a far better position to protect those services for the long term, for the future if you are able to give earlier clarity on that question this year than you did last year. It was left until very late in the current process to confirm whether last year's changes were baselined. Surely that needs to be done much earlier in the current process to give local government some clarity. It is a fair point and I understand it, but it is the nature of the process and the timescales, which I know we have touched upon as well. We can do all the scenario planning and all the assumptions that we like, but it has the impact of the UK Government budget and what follows in terms of our own process. I get the point, though, around giving local government as much certainty as possible. That would apply to every part of government, though I would say in terms of delivering transformation as well. The other unknown within that is the dynamic of what might be changing around provision of local services. What I mean by that is to take health and social care integration. If we make further progress on that, you do not know exactly what it means for financial reform to local government or to health. I just make the point that I understand the need for greater certainty. I do not think that local government minds that the extra £170 million has come a wee bit late in the day. I think that they welcomed the £170 million or certainly they have in the correspondence and council communications that I have seen in terms of that extra resource. I understand the point, but it relates to the nature of the relationship that we still have in terms of fiscal policy in Scotland. A large chunk of the spending decisions that affect the country and therefore determine what we have is still made by the chancellor and that drives the timescales that we have got. I throw to opposition parties the offer that if we were to have greater certainty at an earlier stage in the budget, I would welcome that more than anyone would tell you. However, if we had certainty from other parties—and that is certainly not a criticism of the Scottish Green Party—then maybe there can be earlier discussions on what the asks are and what outcomes might look like. However, the only sense of delay now for the local government figure is that that was clearly a point of negotiation and it improved to their benefit. Just one brief final point. We have just heard a few minutes ago from the Scottish Fiscal Commission that if the wider public sector is able to achieve a similar pay policy to the Scottish Government's pay policy, in particular local government, it will increase the extra income tax revenue beyond the £7 million that it has already projected. What will you use that for? I can say, Mr Harvey, that is the chearest news that I have heard all day in watching the evidence from the Fiscal Commission earlier on. If they factor that in, it is up to them to justify their forecast and for local government to determine their pay policy. It would be reasonable if local government managed to achieve a more generous pay policy that the extra income tax generated from that would benefit local government as well. That is not a proposition that I am making. I think that they have benefited very well out of the Government's tax policies and budget. I think that Neil had some questions in this area. After the revised funding for councils agreed with the Scottish Greens, many councils still believe that they will have to make significant cuts. With the revised funding and with a 3 per cent rising council tax across the board, do you believe that councils have enough funds to avoid making further cuts over the next year? Broadly, I think that that would leave them very well resourced indeed. It is an above inflation increase in the resources coming from the Scottish Government. In addition to that, they can raise the council tax, so I think that it puts local government in a very strong position. That is why COSLA has welcomed it and why a number of reasonable council leaders have welcomed it. Again, that is in the fiscal context of a reducing resource budget coming to Scotland, that of reduced front-line resources. We have been able to overturn that by using our tax powers to invest in services, whether that is the NHS or education or the uplift in the economy brief, and now local government has above inflation increase in their settlement from the Scottish Government, as well as all the other schemes that we are working in partnership with local government. They will be looking at expanding elements of service such as childcare, such as the city deals investment, such as housing. Those are hundreds of millions of pounds extra investment to support local economies and local services. Local authorities also have the ability to raise the council tax, so I believe that they put them in a very strong financial position. I know that some councils will have been consulting on what might have been seen as radical options. They do it every year. They did it when I was in local government. Sometimes, its officers are inspired as well. The elected members were not necessarily ever going to choose those options, but they are presented. It is good in a sense that it has that transparency, that there is dialogue and engagement and an understanding around that. Then, invariably every year, most of those decisions are not made and are not followed through. I would argue that the settlement to local government should address the number of concerns that Mr Bibby might have had. I think that many councils are still saying that they are going to have to make significant cuts over the coming year. Over recent months, as you have said, we have had councils all across Scotland to publish plans for cuts. You have said that that was before the revised budget settlement. As you know in Remfisher, for example, we have seen the prospect of day centre closures and proposals from the council to reduce grave-in collections, introduce parking charges and also plans to cut funding for family support services. Is it your position now that there is no financial necessity to make such cuts? That would be me determining what Remfisher councils should do with the extra resources that it will have. Do you think that Mr Bibby should check the official report on exactly what you asked me to do? Is there a financial necessity to make such cuts? I think that the enhancement to the settlement should allow councils to revisit the necessity of perceived or otherwise of some of the reductions that might have been consulted on. Let's just see how some of those proposals work out, but it's not for me to make those decisions. I'm no longer the leader of Remfisher Council and Neil Bibby is no longer a member of that council, sparing with me there either. Ivan, your issues are in pay. Thank you, convener, and welcome to the committee, cabinet secretary. It was to talk about the changes that you have made to the public sector pay increase and increased the level at which 3 per cent would apply from £30,000 up to, I think, £36,000 and a half thousand. It was really just to understand how many people you think are affected by that and what kinds of job roles are we talking about there? In terms of the figure, obviously, it helps with the whole spectrum, the lower pay taken up to £36,500, and my understanding is that it would cover more teachers and nurses. Recognising that teaching is very specific, there are tripartite negotiations around that, benefit a majority of the public sector workforce. Of course, we've touched on, well, those under our control, but we've touched on how it's a benchmark. It's a benchmark in health, and I've already said on 14 December that I would match anything that may come from the UK-wide review anyway, for the avoidance of doubt, and local government, in their discussions, were expressing a view that they would feel the pressure or the expectation that they would want to match Government policy entirely, a matter for them. Much of their workforce would be earning less than that figure of £36,500. It covers a great deal of public sector workers. Obviously, what has benefits to the Government in terms of tax take, but the way that we've done it in terms of capping at the top helps to tackle inequality by capping the increase at £80,000 and doing what we're doing around the threshold of £36,500. I know that there was some discussion as to what Government pay policy covers. It might be helpful if I supply the policy paper that's announced on 14 December, although the numbers have changed, but it's helpful if that's helpful as to exactly who it covers. I saw some debate in that earlier in our earlier evidence session. Anyone else? James, you've got a question still on this area. Funding that you announced last week, how much of it has specifically been allocated to cover the pay policy? That's a fair enough question. I don't separate out pay as a specific part of the Scottish budget. It's part of portfolio spending and part of the settlement to organisations, so it's deemed that organisations should follow the pay policy. That sets the parameters, but the funding is within the settlement. Bearing in mind that every portfolio, apart from Wreck, has a real-terms increase in the portfolio lines, Wreck is quite different because it's not necessarily about resource spending. Some of that is a switch to capital as well, so there's satisfactory funding within the overall budget because we've used our tax powers, because we've made the investments to fund the pay policy. Prior to a following publication of the draft budget report, space analysis established that there was a £200 million shortfall in terms of what was in the budget and what was needed to cover the full extent of the pay policy. In addition to that, you've announced an extension to that policy last week to cover those up to £36,500. I put it to you that the policy is not fully funded in the budget. I would simply reply that it is in terms of the overall settlement to portfolios. All Bar Wreck has had a real-terms increase in their budget line, and there is the provision there to deliver that. The Cabinet is clear that the pay policy should be delivered, so I would argue that the resources should be honoured. In terms of the extension of the policy that was announced last week, what is the additional cost of that and how is it budgeted for? That specific element is £25 million extra. How is it budgeted for out of the £170 million? It's all part of the overall budget, as I've expressed. I don't separate outlines. It's all part of the overall settlement portfolios to live within their settlement and deliver the pay policies outlined. It sounds to me as if you've announced an additional £25 million commitment, but you haven't provided the funding for stakeholders and budget holders to be able to cover that. I'm simply trying to state, convener, that it's already within the settlement to portfolios. If Cabinet secretaries who lead departments and services felt that they couldn't deliver it, they would say so to me, and they haven't. It's in agreed position that they would deliver the pay policy and it's within the resources that have been set out, which is in the context of growing resources as a consequence of the decisions that the Government has taken. Willie, I might have missed out on you earlier on if I did. Forgive me, but I think that you've still got a question. I just wanted to ask a wee supplementary on local government, cabinet secretary. You've said that it's an above inflation increase, and from the figures that have been provided to us, I can see that East Asia is certainly my authority due to gaining another £3.6 million out of your amendments to the budget, which is very welcome in that part of Asia. Have you got any indication, cabinet secretary, on whether the other authorities are going to exercise their discretion on the 3 per cent council tax? We know last year that some, despite asking you to give them more money, refused to raise any more money locally themselves. If memory serves me correctly, they were all Labour councils. Have you got any indication of whether all the councils will use the discretion this year or whether they're hedging their bets? It's a very good question, convener. Mr Coffey's recollection is correct in terms of those who didn't use their ability to raise the council tax last year. I don't know if it aligns with electoral cycles, but I can't give a Government a view. I can only tell you the intelligence that I have is that most councils appear to be telling me that they are planning to use that function and use the ability to raise the council tax by up to 3 per cent entirely for them, whether they do that or not, of course. We'll see how their budget cycles pan out in light of the extra resources that have been allocated to local government, which gives them a real-terms increase in resource and capital, a substantial increase in capital. You said that COSLA has written and welcomed the proposals that you've made? On the stage 1 budget debate, a press release was issued by COSLA, yes. Don't get me wrong, local government will always ask for more money. I certainly would when I was a council leader as well. They have recognised and given credit where it's due, but their words are not mine in terms of the extra resources that have been given. We engage on partnership on the areas of joint priorities, which is important to us all, but, of course, they have welcomed the extra resources. Neil Hamilton, you had a question on child poverty. Given the concerns that have been raised about child poverty during the budget process, budget debate, is it still the case that the children's and family budget is facing a reduction? I don't have that budget line in front of me. I can speak about the overall approach. As I did do at committee on a range of interventions on equalities, on welfare, on social security, housing, the child poverty fund, the ending homelessness together fund, the fact that the child poverty action plan will be coming out as well this year, and then the new mechanisms will have with social security. I don't have that line in front of me. The evidence session on budget at stage 2. We now turn to agenda item 3, which is the formal proceedings at stage 2 of the budget Scotland bill. Everyone should have a copy of the bill that is introduced to the martial list of amendments that was published on Monday, and the groupings amendments that set out the amendments in order in which they will be debated. We begin that process. The question is that section 1 be agreed or we all agreed. I call amendment 1 in the name of the cabinet secretary, group with amendments 2, 3, 4, 5 and 6. Cabinet secretary, move, and to speak to all amendments in the group. Amendments 1 to 6 relate to the authorisation to use resources that provide the form schedule 1 of the bill and will adjust individual portfolio allocations within the budget to reflect the spending announcements that were made at stage 1 of the budget bill. Amendment 1 adds £70,000 to the health and sport portfolio for the Scottish Sports Association. Amendment 2 allocates an additional £200,000 to accelerate delivery of the four marine protected areas in the environment, climate change and land reform portfolio. I am talking through them all. Amendment 3 allocates an additional £10.5 million for funding of the interisland ferries for the Orkney and Shetland Islands. Allocated as a specific grant to local government to the rural economy and connectivity portfolio. Amendment 4 allocates an additional £127 million to the communities and social security portfolio, £125 million for local government and £2 million for fuel poverty. Amendment 5 increases the total allocation of resources for the Scottish Administration by the net uplift of £137.7 million. Amendment 6 increases the overall cash funding authorisation for the Scottish Administration under section 4, subsection 2 of the bill by £137.7 million in line with the additional spending announced at stage 1 and moved the amendment. Any other members who wish to comment on the stage? Thank you, convener. I wish to indicate support for the amendments that have been brought forward on the basis that they do it. They introduced additional monies into the budget, which is welcome. However, in terms of the overall budget package, I believe that it is still not fit for purpose. The discussions that we have had in the previous session around local government and pay still illustrate that local government is underfunded, particularly on the back of £1.5 billion of accumulated cuts since 2011. I think that the pay in tent announced by the Cabinet Secretary is transparent and fully funded. I also believe that other areas of the budget, including the NHS and action to tackle child poverty, do not go far enough. Therefore, although the Scottish Labour will support those amendments in this group, we do not support the overall approach to the budget and will continue to oppose it. I thank you very much for putting on record my support for those amendments. I think that it is very positive that we have, for a second year in a row, managed to prevent additional cuts to core funding for local government. However, I would say that James Kelly makes a fair point that local government has in previous years suffered significant cuts and we have not yet repaired the past damage. I sincerely hope that this is the last time that the Scottish Government's budget process ends up as a rearguard action against local government cuts. We need to ensure that local government in the future is in a far stronger position to make its own financial decisions. I hope that that is a discussion that the Scottish Government engages in positively over the months ahead. I conclude by saying that the amendments reflect the announcements at stage 1. I appreciate the engagement of the committee. Since it has been raised, the settlement to local government is a real-terms increase for local government even before they have the option of deploying their council tax powers. The settlement has been very well received and the other amendments reflect the constructive deal that has been done with the Scottish Green Party. I encourage all political parties, including the Labour Party, to engage more constructively in the future if they want to help to shape future budgets. That means that amendment 1 will be agreed or we all agreed. We are agreed. I call amendments 2, 3, 4 and 5, all in the name of the cabinet secretary and all previously debated. I invite the cabinet secretary to move amendments 2 to 5 on block. I ask any member if they object to a single question being put on amendments 2 to 5 on block. There is no objection being notified. The question is that the amendments 2 to 5 are agreed to or will be agreed. We are agreed. The question is that the section 1 be agreed to or will be agreed. The question is that section 2, 2, 3 and 3 be agreed or we all agreed. I call amendment 6 on the name of the cabinet secretary, already debated with amendment 1. The question is that amendment 6 be agreed or we all agreed. We agreed. The question is that section 4 be agreed or we are all agreed. The question is that section 5 to 11 be agreed or we are all agreed. The question is that long title be agreed or we all agreed. That concludes stage 2 of the budget bill. I now suspend for five minutes just to allow change of our witnesses, etc. The final piece of business on our agenda today is to take evidence on the lands and buildings transaction tax relief from additional amounts. Scotland Bill at stage one from Derek Mackay, the Cabinet Secretary for Finance and Constitution. The Cabinet Secretary is joined by officials Ewan Cameron Nielsen from the Finance Directorate in John St Clair, the senior principal legal officer in the Scottish Government. Members have received copies of all their evidence received along with a spiced briefing, but before we go to questions, I invite the cabinet secretary to make an opening statement. The bill aims to give retrospective effect to an order that is considered by this committee in June 2017. That order in this bill considers the treatment of economic units. That is a term given to married couples, civil partners and cohabitants, those living as if married couple and the Land and Build Transaction Tax Amendment Act 2016. In 2016, the additional dwelling supplement, a 3 per cent tax additional rate of tax, was introduced. That applies where, at the end of the day, it is the effective date of a transaction, a buyer owns more than one dwelling and the buyer is not replacing a main residence. Replacing a main residence in context of legislation means selling the previous main residence and buying a new main residence. It is the Scottish Government's intention that, when the additional dwelling supplement is paid, it can be reclaimed when a main residence is being replaced and the sale of the previous main residence occurs within 18 months of the purchase of what then becomes the current main residence. As the ADS has been in operation, it has become clear that in practice the legislation has not worked as it was intended to in relation to economic units and the ability to reclaim the tax paid after a former main residence has been sold. That has been corrected for all transactions occurring after the order came into force in June 2017. Members of this committee and stakeholders highlighted a desire to secure retrospectivity of that relief to the qualifying couples. The Scottish Government agrees with that view and it is therefore bringing forward primary legislation for your consideration to enable that relief to apply retrospectively. That would mean that qualifying buyers could claim a repayment of the ADS in instances where they had to pay the additional amount despite disposing of the previous main residence in 18 months prior to the effective date or they would not otherwise have been able to reclaim the additional amount after disposing of the previous main residence in 18 months after the effective date. I look forward to hearing committee's views on that matter. Thank you, cabinet secretary. I think that Ivan McKee would have a question about groups. Yes, thanks, convener, and welcome again, cabinet secretary. Yes, you will have seen from some of the submissions we received that there were some comments of law society and others around about other changes that they wish to see to the LBTT tax regime and also some comments on the process whereby Revenue Scotland and the Government interacted and were involved in reviewing and making minor changes as required. I do not know if you had a chance to look at those and if you had any comments on any of those areas. I am aware of some of those issues, but I just want to be really clear that the scope of the bill is really tight to just give effect to that which we know we need to fix, and that is why the scope is tight, the purchase is clear and that is what I want to achieve. Other people have then engaged in other matters in relation to land and build and transaction tax. There are wider issues, but it would be nice to have a finance bill that exists in Westminster to be able to do a lot of tidying up exercises where there might be unintended consequences or anomalies or refinement that might be required. I think that that would be a great place for that kind of issue in the future. To issues such as the group shares issue in some other matters, it is not part of the bill. On that very specific issue, I think that I have a remedy that helps with it, but I will write to the committee before I announce anything and won't pregear or preview that now. There are other matters, but they are not relevant to the purpose of this piece of legislation. However, I will reconsider the light of engagement through the course of class. Thank you very much. Thank you, convener. I should remind members of my interests that I am a member of the Law Society of Scotland. Before I ask my question, I thank the cabinet secretary for bringing this forward. He will recall what I wrote to him on this issue some time ago, raising an issue with constituents who were caught by this particular loophole. I am delighted that the cabinet secretary has acted to try and find out what we can do when we want to. Isn't it marvellous? We should do more of it, cabinet secretary. The question that I was going to ask was in relation to a comment made by the Law Society in their evidence that they have submitted to the committee. They welcome the bill as it is brought forward. The point that they make—which is quite an important one—is that this measure is one that will be required to be given wide publicity once the legislation is enacted to ensure that taxpayers who have been caught out are aware of the change in the law and if they have paid ADS are able to reclaim that. Can you tell us, cabinet secretary, what proposals does the Scottish Government have to publicise this legislation assuming Parliament in exit? I am not sure that a mass publicity campaign is the most proportionate or effective or targeted intervention. Revenue Scotland will have a very clear function. It has been aware of our desire to remedy that. I think that it will engage with Revenue Scotland to go back through and see how it approaches it. I am happy to write or have Revenue—it is not for me—but have Revenue Scotland engaged with the committee. If the legislation has successfully passed, how it will then contact people to ensure that they are entitled to reclaim it. I am sure that constituency members will also get back positively to cases that have been raised. We have estimates of cost and how many people should affect it. That is all in the financial memorandum. I think that trying to identify them is a fair point. All the transactions that are done by solicitors will be cascaded out of solicitors. In any event, the legal world will be well aware of that. It will raise publicity, but it is a good question for Revenue Scotland. It was just for the sake of completeness. I am on the record to remind the committee to refer to my register of interests with respect to residential property. I have nobody else who has identified that they wish to ask a question at this stage. The clerks will now produce a report for the stage 1 process. I close this particular meeting of the French committee.